Global Economic Watch

Sense of despondency grips global economy


 South Africa’s economy will be largely dependent on home-grown solutions to survive uncertain times, as a sense of near-despondency grips the global economy.

The global economy has been on a bumpy road ever since the onset of the financial crisis in late 2007. Sustained recovery remains as elusive as ever, while more and more expert opinions surface that monetary and fiscal authorities are running out of instruments to turn the situation around.

At least one expert, Turkish economist T Sabri Öncü, in an article on the somewhat anti-establishment website Information Clearance House, posed the question: “Has the Crash of the Global Financial Markets Begun?”

On it was put in even stronger language: “Is the World Economy Trapped in a 'Death Spiral'?”

But even on usually conservative establishment platforms like The Economist and key institutions like the World Bank, rating agencies, the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) the message has been all but bullish lately.

“Eight years after the financial crisis, the world is coming to grips with an unpleasant realization: serious weaknesses still plague the global economy, and emergency help may not be on the way,” Associated Press reported last week.

Sources of almost despondent messages about the state of global marketplace include:

  • The Economist, writing last week: “One fear above all stalks the markets: that the rich world’s weapon against economic weakness no longer works.” It concludes that central bankers have run out of ‘ammo’ with low or negative interest rates effectively coming to naught and governments now having to come to the party;
  • The OECD, one-time strong supporter of deficit reduction, which has now called for its rich-country members to ease up on austerity and collectively agree to spend more on infrastructure projects to boost flagging growth, and warned that low interest rates and money creation by central banks were no longer enough for a lasting recovery;
  • Ratings agency Moody’s in its latest quarterly Global Macro Outlook, warning that risks to global growth have increased since November and that world leaders have little left in their fiscal and monetary arsenals to mitigate the threat; and
  • New York Stock Exchange listed global banking group Citigroup Inc’s Jonathan Stubbs in a recent report chronicling “a circular reference death spiral”, caused by a strong dollar, weaker oil/commodity prices, recession and serious equity problems. It is not just a single sequence of these factors that is happening, but a downward succession of recurring factors that call to mind the death spiral metaphor.

The collective message emanating is probably best summarised by an article by David McHugh and Paul Wiseman on the website. They wrote: “Sinking stock prices, flat inflation, and the bizarre phenomenon of negative interest rates have coupled with a downturn in emerging markets to raise worries that the economy is being stalked by threats that central banks – the saviours during the crisis – may struggle to cope with.”

What’s to do?

This does not mean that South Africa just has to sit and wait for things to happen elsewhere in the global market to determine its economic future.

There are indeed some hints in some of the reports referred to above as to some approaches South Africa could follow. And some groundwork for it, together with the acknowledgement of some danger factors, was included in President Zuma’s reply last week to the State of the Nation Address debate in parliament.

Instead of embarking on austerity – to be distinguished from cutting wasteful costs – the case for locking in long-term funding to finance multi-year programmes to rebuild and improve tatty public roads and other infrastructure has never been more powerful.

If holistically embarked on, it would not only stimulate various sectors of the domestic economy, but could create jobs and prepare the country for competitive participation in the global economy when the upswing eventually comes.

In this regard, the government might find it instructive to study the job creation programmes for poor whites after the Great Depression in the 1930s, which among other things, laid the foundation for an efficient national roads network.

As article in The Economist put it: “A fiscal boost would pack more of a punch if it was coupled with structural reforms that work with the grain of the stimulus.”

In this regard the creation of a single capital for the country – provided that it is properly planned and not just a case of robbing Peter (read Cape Town) to pay Paul (read Gauteng) for short-term political gain – could make a long-term positive contribution. In short, it should be planned, sold to the population and executed as part of a broad national economic development plan.

Deregulation and a proper implementation of plans announced by Mr Zuma for impact assessments of future legislation, prior to adoption, could go a long way to stimulate and broaden economic activity. The path for new entrants into the formal economy should be simplified.

A strategy of deregulation should, however, also cover the terrain of labour relations, which often is a prohibitive hurdle for small, and to a lesser extent, medium-sized businesses.

Populist politics

While economic plans are being made, Mr Zuma and his cabinet should keep in mind some of the events in parliament during the SONA and during protests in our streets against another danger contained in The Economist article: “The greatest worry is that falling markets and stagnant economies hand political power to the populists who have grown strong on the back of the crisis of 2007-08.”

They should avoid the temptation/miscalculation to try and beat at their own game the populists who, again in the words of the already quoted article, “have their own solutions to economic hardship, which include protectionist tariffs, windfall taxes, nationalisation and any number of ruinous schemes”.

by Eve van Basten

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