Second slump looming?

2010-07-10 00:00

THE global economy’s chickens are coming home to roost and the “commodities demand” that fuelled South Africa’s pre- and post-recession growth could very well be tapering off, leaving the country exposed to a second slump.

We have deliberated over just about every possible economic scenario over the past two-and-a-half years. We added new phrases along the way: the V-shaped recession versus the U-shaped or W-shaped one; the emergence of green shoots; the PIGS (Portugal, Ireland, Greece and Spain) countries and their debt crises; and now the potential double-dip.

Economists warn that as stimulus packages draw to a close, the U.S. economy will become vulnerable to another slump.

The eurozone debt crisis means that some countries in this region will be forced to implement austerity measures — leaving South Africa’s export sector vulnerable to reduced demand from major trading partners. China is heavily exposed to this debt and if some of its debtors default, growth will moderate in this stalwart of the global economy. The Chinese engine will not require as much of SA’s commodities, and growth will then suffer.

Although SA’s manufacturing production and export demand — which are central to local employment growth — remain fairly robust, sustained growth is in jeopardy.

A rebound in employment creation to, at the very least, levels last seen prior to the recession is one of the keys to a sustainable recovery — but this remains very sluggish.

Consumer demand and consequently retail, services and the financial sector could all remain sluggish. The construction sector is taking strain. Few sectors of the economy have outstanding growth prospects.

The latest statistics indicate that many businesses and individuals in KZN are still under strain in mid-2010, although the economy emerged from the recession several quarters ago.

The number of civil cases for debt in Pietermaritzburg in April 2010 surged by 38,5% year on year to 1 944 cases and the number in Durban in the same month grew by 4,5% year on year to 7 668 cases.

There are many more local businesses facing possible closure.

What is perhaps more worrying is that if a second dip does materialise, many of these local businesses will fold. Employment levels will not return to pre-recession levels and we will suffer further job losses — which the local economy can ill afford.

It seems we will have a clear picture only later in the year. While risk factors relating to a potential double-dip have increased, policymakers have taken bold action to address the debt crisis, and the Chinese engine could still keep up its momentum.

Most economists predict that the global and local economies will most likely move into a period of sustained slow growth — a much more palatable option than a second slump.


IN August 2007, when BNP Paribas of France and other European banks announced that they could not value the assets held by certain hedge funds, those in the know almost instinctively sensed that something big was about to hit the global economy. The world became aware of the sub-prime crisis following the U.S. housing downturn. Central banks injected liquidity into the credit markets, but problems persisted. Lending markets remained fragile and interest rates were lowered across the world. What followed was a wave of government bailouts and massive stimulus plans.

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