Comparing current financial times with Great Depression is nonsense
THE WORLD IS NOW trapped apparently in the greatest non-war crisis since the Great Depression of 1929 to 1931. The global economy – nearly all of it, anyway – is widely believed to be tottering on the edge of severe collapse. That at least is the story proclaimed in most of the headlines every day, maybe even every hour.
Well, I don’t dispute that the world overall has faced – and still does – a very real financial crisis. That naturally has taken a particularly nasty toll on South Africa, which as ever is hugely reliant on broad world economic growth generally and the implications for commodity markets in particular.
However, I’m confident that over the medium-term future – say, two to three years at most – the current gloom will largely have passed away. By then I expect the global economy will again be back on a firm upward growth path.
But I don’t foresee economic growth worldwide soon back to the surging levels of between 2002 and 2007. The latest mainline forecasts from the Organisation for Economic Co-operation and Development support that view. However, the OECD is more inclined to look for gloom than cheer.
It comments: “The OECD area economy appears to have entered recession, and unemployment is now rising in many member countries. OECD projections point to a protracted downturn.”
Sure, that does sound cause for great unhappiness. The OECD has all the major industrial economies as members. Those have been joined by some newly industrialised or leading emerging market nations. Further, some other semi-industrial countries – including SA – now have a kind of associate status.
But look at the outlines of this latest OECD forecast (the full document will be published on 25 November).
Those predictions are hardly the stuff nightmares are made of. Scores of commentators now glibly make comparisons between the contemporary economy – globally or, specifically, in the United States and Western Europe – and the Great Depression. What nonsense.
In the US manufacturing output slumped well above 50% between 1929 and 1932, while total unemployment soared to between 25% and 30%. By 1933, 11 000 out of 25 000 US banks had gone bust. Jobless totals soared elsewhere. For example, hitting 25% in Germany in 1932 and opening the way for Adolf Hitler’s accession to power.
Against that the OECD sees positive growth – admittedly only marginally so for the US and Europe between 2008 and 2010 in aggregate. That’s disappointing. But comparisons with the Great Depression are ludicrously absurd.
The world economy generally has experienced much stronger growth over the past 50 years than in the whole of the previous 2000 years. If that’s “systemic failure” let’s have a lot more of it. But whether SA will easily regain the handsome rates of increase in real gross domestic product experienced between 2003 and 2007 – the average rise was 5,1%/year – is another matter.
For starters, we still don’t know what government will be in power in SA from next year – and, vitally, just what economic policies it will pursue. Some economists have already warned SA’s hard left that populist sloganeering can cause this country great harm. So has the most important member of the ANC administration – Finance Minister Trevor Manuel.
SA has made itself crucially dependent on massive and ongoing foreign capital inflows to fill the gap created by totally inadequate levels of domestic savings. But those inflows can’t be counted on to keep pouring in if foreign investors – currently nervous enough about most emerging market nations anyway – see SA headed down a strongly socialist direction. However, SA won’t soon see a re-run of the boom conditions of 2003 to 2007 even if the leftist rhetoric is sharply toned down.
The global economy will, I repeat, be on a modest recovery path over 2009/2010, But there will definitely be some big constraints. The emergency rescue packages now being put in place in the US, Western Europe, Japan and many other nations will – barring further major shocks – gradually do their work. Crucially, confidence among both lenders and borrowers in the leading traditional financial centres will increasingly be restored.
But there are accompanying hefty bills internationally that will have to also be paid – over the near/medium term. The key current concern, rightly, is that the financial crisis could turn into recessionary deflation. However, as that battle is gradually won, critical attention will then have to be paid to preventing an inflationary crisis from arising from the very pump-priming measures being taken to combat deflation.