Pseudo pre­dic­tions

Com­par­ing cur­rent fi­nan­cial times with Great De­pres­sion is non­sense

Finweek English Edition - - Property Compass - HOWARD PREECE howardp@fin­week.co.za

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.

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