Threatening recession in SA no one-dimensional issue
Is another recession expected?
In The Herald on Monday March 13, a reader’s views appeared under the heading: “World is heading towards disastrous recession in 2023: here’s why.”
SA statistics released during the previous week showed that the output of the economy shrank in the last quarter of 2022; should a shrinkage be reported for the first quarter of 2023, the people of the country would experience a recession.
At least two points in the reader’s view warrant some further perspectives.
The first one: “The culprit is... the Federal Reserve the central bank of the US.
The second one is at the end of the article: “Many economists... highlighted that geopolitical tensions, energy imbalances, high inflation numbers and rising interest rates could be the result for economic recessions...” (does the author perhaps mean “...the cause of economic recessions…” ?)
The Federal Reserve and its counterparts in other countries are faced by a dilemma that arose in 1970s, when the oil price sent shock waves through the economies of oilimporting countries.
Unknown up to that time was the coexistence of high inflation and stagnation, the result in the world of terminology, a new word, stagflation.
The two were always seen as a matter of one at a time, also when John Maynard Keynes published his General Theory of Employment, Interest and Money in 1936.
Keynes offered a theory and policy measures to deal with either a recession or prosperity that leads to inflation when the supply side of the economy can no longer deal with what is coming from the demand side a recession being the opposite.
Keynes died in 1946, and could not be consulted in the 1970s.
Many volumes of new theories and empirical studies were published.
At least nine such schools of thought can be identified.
When inflation rates became worrisome, in some countries earlier than others, in SA in the 1980s, here certainly not caused by a single factor though the politics of the time are high on the list,
the search for an appropriate policy mix culminated in inflation targeting.
We removed the main political factor in 1994, and the way became paved for adopting inflation targeting together with other countries in the
2000s. Just as we thought we had that bug under control the Great Recession circa 2007 was upon the world.
Most countries, ours included, kept to inflation targeting, the monetary policy strategy, and reverted to fiscal policy, call a spade a spade, government budget deficits, to overcome the recession side.
Fiscal policy soon hit a stumbling block caused by lavish government spending in the prosperous years, the public debt.
Governments landed themselves in a situation where they had no free hand to apply Keynes’s 1936 ideas
the credit ratings agencies were watching them and lenders built risk premiums into their lending rates, like private sector banks differentiate among different borrowers.
The threatening recession in SA is once more not a onedimensional issue, not in a time of the central bank’s interest rate policy, load-shedding, the war in Ukraine, to name a few.
Instead, it is a case to appreciate Keynes’s writing of 1936:
“The object of our analysis is, not to provide a machine, or method of blind manipulation, which will furnish an infallible answer, but to provide ourselves with an organised and orderly method of thinking out particular problems; and, after we have reached a provisional conclusion by isolating the complicating factors one by one, we then have to go back on ourselves and allow, as well as we can for the probable interactions of the factors among themselves.”