Debt weighs on third world as recovery hopes grow elsewhere
A WEE DRAM
Amid all the doom and gloom about the Sars-CoV-2 virus pandemic, there are reasons to be optimistic that the world is well on its way to exiting its worst aspects and that strong economic growth is in prospect over the next few years.
This recovery is likely to be patchy, and will be predicated on an initial surge in consumer spending as lockdown restrictions are lifted and removed entirely. In the longer term it should be due to a boom in commodity prices accompanying a global commitment to infrastructure development. However, much of this optimism will be contained in the developed world, as the developing world, hobbled with unsustainable debt levels, struggles to even pay its interest bills.
Many observers confidently predict a rerun of the “Roaring Twenties” as the pandemic subsides and eventually disappears. From 1918 to 1920, citizens struggled to come to terms with an unseen enemy, the H1N1 influenza virus or Spanish Flu, that killed more than 50-million people worldwide and infected almost 30% of the global population. This had arisen towards the end of World War 1 and so the population was understandably fed-up with war and disease by the time the virus had gone. Little wonder that they went on a global spending spree in an attempt to erase the deprivations of war and Spanish Flu from their minds.
A similar pattern appears to be materialising now, as the world sees the pandemic through and catches a glimpse of the “sunlit uplands” of normality again, as British prime minister Boris Johnson so aptly put it recently.
In the developed world, the vaccine rollout is moving at pace and if we use Britain as a proxy for that rollout, about a third of the entire adult population has now received a first dose, with the entire adult population being offered a vaccination by July. Europe is more fragmented but the US has got into top gear and is moving very rapidly. Death rates from Covid-19 are plummeting in the developed world.
Developed country consumers have rarely had it so good. Flush with cash from multitrillion-dollar stimulus programmes and with very few avenues in which to spend it thanks to lockdown restrictions, these consumers are itching to embark on all sorts of spending sprees once lockdown restrictions have been lifted. Two of the first areas to benefit are likely to be leisure travel and clothing & footwear purchases. Eating out, too, will become popular again once social distancing and mask-wearing is no longer mandatory.
But accompanying this improvement in spending is a return to inflation, which has been largely conspicuous by its absence in recent years. Interest rates, as proxied by the US long bond yield, are rising as well.
The developing world is not so fortunate. Relief programmes have largely run out and vaccination rollout is slow or nonexistent. Structural unemployment levels are high and rising and only those consumers fortunate enough to have retained their jobs will have any real sense of relief, not to mention disposable income. Additionally, developing countries are saddled with unsustainable debt levels and as interest rates rise globally, so too does the cost of servicing this debt.
Developing countries that have large piles of commodity wealth underground may be in for a bonanza as a new commodity supercycle gets under way. This is being stoked by two sources — the infrastructure drive in China and the move from fossilfuelled vehicles to electric vehicles. Both sources require large quantities of base metals and minerals such as copper and iron ore. As the infrastructure drive intensifies globally, as more and more developed world countries embark upon much-needed infrastructure development, the demand of commodities should grow in tandem.
SA largely missed out on the previous commodity supercycle of a decade or so ago, thanks in part due to logistical bottlenecks at Transnet and thus it is even more important not to make the same mistake this time around.