‘Absolutely clear financial markets need discipline’
THE GLOBAL ECONOMY seems to have avoided – as I always took for granted it would – the Armageddon scenarios that were being so widely touted only a few days ago. But there are hefty costs to be paid, directly and indirectly, for that escape.
South Africa will have to pay some of those bills, even though this country has emerged relatively unscathed from the immediate turmoil. Overall, world economic growth – however it’s measured – will be appreciably less over the next couple of years than was still generally expected just three to six months ago. In large part that’s the hangover consequence after the excessive binge on credit and consumer spending.
True, while the world still totters near the edge of multi-faced recession – or at any rate, is believed to be – there will also be some scope for interest rate cuts. That will be seen in SA.
But the name of the international game now is prudent restraint. In fact, Jean-Claude Trichet, president of the European Central Bank, has even gone so far as to suggest: “Perhaps what we need is to go back to the first Bretton Woods system, to go back to discipline.”
Trichet says: “It’s absolutely clear the financial markets need discipline: macroeconomic discipline, monetary discipline, market discipline.”
Some commentators argue that central banks should be charged only with inflation control, within tight limits. They shouldn’t have to be influenced, as the US Federal Reserve vitally is, and so also the SA Reserve Bank (among many others), to try and balance the short-term needs of economic growth as well as price restraint.
Of course, there’s an inevitable tendency to overact in one direction after patent errors the other way. That position can later significantly unwind.
But tight fiscal and monetary policies will surely take priority over the immediate outlook for growth in most economies in the coming couple of years as some version of normality returns.
That may well, on recent experience, be for the best. However, it means there’s hardly going to be any great scope for fiscal and monetary economic stimulation worldwide. That especially includes SA, with its weak rand, massive deficit on its current account of the balance of payments and greatly excessive inflation.
Globally, that attitude will be necessarily negative for the outlook for commodity prices. That’s another important minus for SA. This country has, along with virtually all other economies heavily reliant on production of raw materials, always been especially dependent on trends in growth in international real gross domestic product (GDP). That factor has been invariably important also to SA’s manufacturing sector.
Further, it’s all too painfully evident that those who absurdly believed the overall global economy had “decoupled” from the United States have been proved dismally wrong. A popular view was that Asia, led by China, had supplanted the US as the dominant influence on the world economy.
On that assumption, it was repeatedly claimed in SA, this country could hitch itself increasingly surely to Asia.
The traditional economic/financial linkages between SA and both Western Europe and the US were steadily losing relevance in the new “Asian era”, that argument continued. There’s much potential truth in that approach from a long-term standpoint. However, over the near and medium term there are major flaws.
The London Financial Times noted in a leading editorial comment on 14 October: “Asia’s economic model for the past decade has been straightforward: make stuff, sell it to the US, use the profits to fund investment and repeat. It has worked well.”
But the newspaper added: “ The financial crisis has left the US and other export markets in bad shape. Export-led growth has served Asia well and can continue to do so. But export-led growth that relied on the US to run a vast trade deficit was always unsustainable, however, and vulnerable to precisely the kind of reversal that has now happened.”
The FT concluded: “Asia’s exporters should, belatedly, encourage domestic consumption and provide some demand both for themselves and their struggling partners.”
That’s very much in line with the attitude taken by this column for the past 10 years. It also matches the prescient caution a decade ago of Larry Summers, US Treasury Secretary. He warned the world economy could not fly indefinitely on one engine, permanently hooked to the US as “ultimate importer of last resort”.
That time has now arrived. Peter Foster, in the London Daily Telegraph of 11 October, reported: “Despite initial resilience to credit crunch woes in the West, India’s economy is wobbling.” China still prospers handsomely, but it has some big socio-political worries.
Ahead, SA must count primarily on its own efforts. ¤
HOWARD PREECE email@example.com