Dire sit­u­a­tion ahead

But tech­ni­cal re­ces­sion should be avoided

Finweek English Edition - - Economic Trends & Analysis - Hugo Pien­aar GRETA STEYN

WHEN FI­NANCE MIN­IS­TER Trevor Manuel made his eco­nomic growth pro­jec­tions for next year in his re­cent mini-Bud­get, he as­sumed what he called a “more be­nign set of as­sump­tions” for the global econ­omy. Many economists dis­agree with Manuel’s as­sump­tions on the world econ­omy and on growth in South Africa.

On his as­sump­tions for the global econ­omy, Manuel said one pos­si­ble sce­nario was a deep re­ces­sion and lin­ger­ing fi­nan­cial un­cer­tainty in the de­vel­oped economies, re­sult­ing in a re­duc­tion in in­ter­na­tional trade. There would be a con­comi­tant de­cline of eco­nomic growth in emerg­ing mar­kets. In such a sce­nario, SA could ex­pect a pro­longed pe­riod of much slower growth.

How­ever, that wasn’t the sce­nario Manuel had as­sumed. He said a sec­ond and more hope­ful sce­nario was that in­ter­na­tional gov­ern­ments’ pol­icy ac­tions re­sulted in a pe­riod of global eco­nomic ad­just­ments, fol­lowed by more bal­anced growth. “Our cur­rent eco­nomic fore­cast re­flects this more be­nign set of as­sump­tions,” Manuel said.

Manuel’s growth fore­cast for next year has been re­vised sub­stan­tially down­wards, from 4,2% in the Fe­bru­ary Bud­get to 3%. While that’s way down on the 5% growth seen be­tween 2004 and 2007, the key point is that it’s still far from a re­ces­sion and the type of growth that SA used to be lucky to achieve.

How­ever, Manuel is still far more op­ti­mistic than many pri­vate sec­tor economists. They point to re­cent news from the in­ter­na­tional econ­omy that shows a dra­matic slow­down in growth in some cases and the start of re­ces­sion in the rich coun­tries, such as Bri­tain and the United States.

In sec­ond quar­ter 2008, US gross do­mes­tic prod­uct fell by 0,3%. Though that was slightly bet­ter than ex­pected, the fig­ure is still wor­ry­ing. As a re­ces­sion is de­fined as three con­sec­u­tive quar­ters of neg­a­tive growth, that num­ber could sig­nal the start cri­sis hit, many an­a­lysts ar­gued ma­jor emerg­ing mar­kets – such as China – would de­cou­ple from the rich­est coun­tries and pro­vide an en­gine for growth for the rest of the world. But that hasn’t been the case. In China, lat­est statis­tics on the health of its man­u­fac­tur­ing sec­tor showed the pur­chas­ing man­agers’ in­dex (PMI) fell to a sea­son­ally ad­justed 44,6 last month from 51,2 in Septem­ber. A level be­low 50 in­di­cates con­trac­tion in the sec­tor.

Bureau for Eco­nomic Re­search (BER) econ­o­mist Hugo Pien­aar says it’s re­vised down­wards its growth fore­casts for SA to just 2,1% for 2009. This coun­try won’t be in a tech­ni­cal re­ces­sion but the sit­u­a­tion will be dire.

Says Pien­aar: “We’ve ad­justed our as­sump­tions on ex­ports. It looks as if the Group of Seven coun­tries will be in a deep re­ces­sion – along the lines of what hap­pened at the start of the Eight­ies af­ter an oil price shock. We’re also pes­simistic about con­sumer spending and pri­vate sec­tor fixed in­vest­ment due to the lagged ef­fects of high in­ter­est rates.” Pien­aar says even if SA’s in­ter­est rates are cut from April next year, the ef­fects will only be felt with a lag in 2010. He ex­pects house­hold con­sump­tion ex­pen­di­ture to grow by only 1,8% in 2009 af­ter 2,6% in 2008. In­ter­e­strate sen­si­tive spending is ex­pected to fall by 2,5% next year.

Pien­aar says though much has been made of the fact that pub­lic sec­tor cap­i­tal ex­pen­di­ture will help SA’s econ­omy, it has to be borne in mind that pri­vate sec­tor cap­i­tal ex­pen­di­ture makes up a much big­ger pro­por­tion of to­tal capex. He ex­pects pri­vate fixed in­vest­ment to fall by around 3% in 2009. That will luck­ily be off­set by a jump of 7,5% in pub­lic sec­tor in­vest­ment, re­sult­ing in 2,4% growth in over­all fixed in­vest­ment next year.

San­lam econ­o­mist Jac Laub­scher sees growth next year of 2% to 2,5%. He warns the next set of quar­terly growth fig­ures (for third quar­ter 2006) might show neg­a­tive growth. “But we’ll prob­a­bly avoid a tech­ni­cal re­ces­sion.”

Ned­bank says in its lat­est Guide to the Econ­omy that SA’s ex­porters are likely to strug­gle for the rest of this year and much of next year. “Weaker global de­mand will con­tain growth in ex­port vol­umes and prices. The world eco­nomic out­look looks ten­u­ous at best.” The bank ex­pects an SA growth rate of 2,6%. of a re­ces­sion in the US.

US con­sumer con­fi­dence fell to its low­est level on record in Oc­to­ber, as the deep­en­ing of the eco­nomic cri­sis made Amer­i­cans sud­denly much more pes­simistic about their cur­rent sit­u­a­tion and prospects.

In Bri­tain, GDP shrank by a larger-thanex­pected 0,5% in the third quar­ter – the first quar­terly con­trac­tion since sec­ond quar­ter 1992. That could also be the first quar­ter of two quar­ters of neg­a­tive growth. A sim­i­lar sit­u­a­tion ex­ists in the Eu­ro­zone, where sec­ond-quar­ter GDP shrank 0,2%.

Be­fore the full brunt of the fi­nan­cial

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