According to Johann Els, senior economist at OMIGSA’s Economic Research Unit, South African’s need to brace themselves for yet another year of unbridled market volatility as global events emanating from the north, west and east continue to impact locally.
Says Els, ‘We have identified three key global risks that will determine how events play out on the world stage, and that will inevitably affect us locally.’
He says that the Eurozone is the darkest cloud on the horizon and that the drivers of this multi-national debt crisis continue to be poor decisions by policymakers, and investor sentiment. This means that each time new policy measures are under discussion, markets respond with hope, yet it has become almost a pattern for the eventual outcomes to fall short of expectations, causing a renewed sell-off.
He continues, ‘Whichever way you look at it, there will be pretty acute pain felt across the board for the foreseeable future. It already appears that parts of the Eurozone have fallen into recession – how wide it will spread and how severe it will be remains uncertain. Moreover, it may even worsen the debt problem once again, as recessions tend to be deadly for government tax revenues. ‘
The way out is an unappetising troika of measures: fiscal austerity; further International Monetary Fund (IMF), European Financial Stability Facility (EFSF) and Central Bank (ECB) financing (effectively shifting public debt out of private holders’ hands to public sector institutions); and fiscal union. ‘These,’ he says, ‘need to progress simultaneously, but progress is and will be slow, and there is still much that can go wrong.’
Yet, despite the painfully slow policy progress, worsening economies and panicky investors, he doesn’t think the Eurozone will disintegrate because, economically and politically, there is just too much at stake. The most recent credit ratings downgrades might be a positive in disguise if they refocus policymakers’ attention on the need for further urgent reforms.
‘We remain hopeful that further progress will be made in 2012 and that eventually the Eurozone debacle will cease to be key driving force in financial markets.’
Looking west, while recent data out of the US has allayed fears that the economy is sinking back into recession, Els says that many challenges lie ahead in 2012, key of which is how to slow the recent rapid growth in the governments’ pile of debt, now almost $15 trillion which is the size of the entire US economy.
That this is an election year is a further threat, as those in positions of influence will be less likely to have the needs of the nation or the global economy at heart, and will more likely be making politically-motivated decisions aimed at re-election. So politicking, combined with the recurrent indecision of lawmakers, suggests that there may be more shocks to global markets flowing from the US. In fact, a further downgrade for the USA is not unthinkable if policymakers fail to make decisive progress in addressing the massive budget deficit.
Looking east, while things may have slowed down somewhat in China, Els says he is fairly upbeat about the situation and foresees a soft landing for the world’s largest growing economy. ‘The biggest concern at the moment,’ he says, ‘is that Chinese GDP will slow far more than the consensus call of ±8% for 2012. However, the list of forces that could trigger such a deeper-than-expected slowdown is long, and investors’ worries well justified.
‘But China is good at engineering soft landings, and could ease monetary policy considerably if needed, a process which has indeed already started. Also, their fiscal position is healthy with a low deficit:GDP ratio and a relatively modest government debt stock.’
He points out that the Chinese authorities are keen to maintain social stability and, with inflation finally easing, policy attention will, and already has, turned to sustaining economic growth. While he does not want to underplay the macro risks in China, he believes a Chinese economic slump is not a key threat to the world in 2012.
But, aside from investment volatility, what does this all mean for South Africans? Els explains that while the future is not exactly rosy, nor is it bleak. He says, ‘Aside from the global threats, which will affect SA negatively via foreign trade (volumes and prices) and capital flows, rising inflation is the biggest menace to the economy. Yet, I expect it to peak between 6% and 7%, before gradually declining later in the year – that is if there is no further significant rand weakness or another surge in oil and food prices.’
Seemingly, the only real light is that subdued growth and slow job creation, together with sustained low rates globally, will likely mean that local interest rates will remain low for some time to come. In fact Els believes that they will probably remain unchanged throughout all of 2012.
Els’ long-term view for SA is that unless the government undertakes wide-ranging structural economic reforms, growth may remain stuck at about 3% per annum, which is way too low to make any meaningful dent in the unemployment rate.
‘Looking ahead, the combination of global troubles and local structural impediments do not auger well for rapid growth in SA any time soon. Yet, there is also no reason to be unduly pessimistic. But we can, and should, do better.
‘I also believe that for the savvy investor, there is opportunity to be found amidst volatility. There are bound to be all sorts of surprises in 2012, generating attractive investment opportunities,’ he concludes.
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