Dire situation ahead
But technical recession should be avoided
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