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On absurd predictions of a recession of the SA economy

The ailing US economy and collapse of leading financial institutions have driven global markets into a collective panic. The ills of globalisation are manifesting themselves in a most spectacular fashion. The interconnectedness of world economies is delivering not the promises of sustainable prosperity, but rather reversing the gains of protracted periods of imprudence.

The price of misjudgments, imprudence and irrational exuberance has been staggering. Global markets gasped in collective relief and found their rhythm when the US House of Representatives approved the $700 billion rescue package; but such reassurance was momentary as markets soon came to the realisation that the financials crisis is much more overwhelming.

Europe is considering a similar rescue plan in order to contain the contagion effect and reform the depressed banking sector. However, European Union leaders have opposing ideas on what shape and form the intervention by member states should be. South Africa has thus far not suffered greatly from this global financial turmoil.

No bank has failed and none of the top major banks appear to be significantly exposed to the US market. The burden of regulatory oversight appears to be most appreciated during these testing times. The restrictive exchange controls have protected local banks from the current financial turmoil by limiting the amount that can be held in foreign assets. But is our economy facing imminent and certain danger of recession as is the case with other global economies? Surely, we do not exist in isolation.

The most recent economic recession was in 1988, which continued until 1993, the longest in South Africa’s history. The political climate at the time largely attributed to the poor health of the economy, particularly in the main sectors, agriculture, mining and manufacturing. Per capita growth rates had been declining, unemployment growth consistently deteriorating, inequality deepening along racial lines, disparities in access to basic services worsening, business confidence had dipped and foreign currency reserves were dismal.

We are perhaps in a more favourable position since 1994 as the resilience of the economy was put to the test during the 1998 financial crisis and emerged unshakeable.

The South African economy has been characterised by fiscal discipline, although arms deal critics would like us to believe otherwise, and has been accompanied by increased investment. Consistent GDP growth and declining unemployment levels bear testimony to the strength of our economic fundamentals.

Infrastructure expenditure by government is continuing and serves to bolster private companies, which would otherwise have been experiencing depression as a result of the downturn in the global economy. Rising inflation, in spite of successive interest rates increases, is indicative of the robustness of the private and public consumption spending, which has kept the economy afloat.

GDP growth for the second quarter of 2008 was an impressive 4.9% given the global downturn cycle. A recession would mean that economic growth falling below 0% and continuing in the negative for successive periods. Underperformance in the agricultural sector is being complemented by buoyant performance in the other sectors of the economy, including the financial sector. The inflationary outlook is positive.

Oil prices, which have been primary contributors to inflation, have dropped considerably to below $100 per barrel when in earlier 2008 there were growing fears of them skyrocketing to $200. The rand is at its weakest against major currencies, particularly against the US dollar, which bodes well for exporters and both the tourism and mining sectors. Fears of a recession appear alarmist, baseless and unwarranted.

Credit rating agencies have come out with conflicting forecasts, which further impairs their already questionable integrity. Standard & Poors correctly forecasted that the economy may slow down but is not likely to head into a recession, while Moodys on the other hand made an absurd prediction about a recession. Even more shocking is the prediction by some prominent economists that recession is imminent and indubitable.

Cees Bruggemans of First National Bank in July 2008 predicted full recession by October 2008 and Mike Schussler of T-Sec partially shared this absurd view, although in typical economist repose, he assumed 50% probability of occurrence. The macro economic factor models that these economists are utilising need to be relegated to the rubbish bin of economic history. Perhaps it is the case of rubbish-in, rubbish-out; but this further proves the uselessness of economists in the greater scheme of things.

The continued economic growth is largely dependent on economic policies to be pursued by the incumbent Jacob Zuma administration and the behaviour of local participants going forward. Zuma, as well as President Motlanthe, have given assurances that no changes in economic policies are anticipated; but these are politicians speaking. None of these assurances can be assumed as solid until post the 2009 elections. In spite of the uncertainty associated with the populist Zuma administration, nothing, including the global financial turmoil, suggests that our economy is about to go belly-up. South Africans need not panic.

Author

  • Sentletse Diakanyo

    Sentletse Diakanyo's blogs may contain views on any subject which may upset sensitive readers. Parental guidance is strongly advised.