Dr Adrian Saville, CIO of Cannon Asset Managers, looks at the chances of a double-dip recession in South Africa and the best investment opportunities given the economic outlook…
South Africa has a reasonable chance of the economy witnessing a double-dip recession but, if we were to experience this, I think it would be relatively shallow and short compared to a similar occurrence in Western Europe and the United States.
Given the openness of the South African economy, and the relationship that we have with advanced economies in general and the US in particular, the answer must depend on the prospects for those economies. As things stand, I would place the chance of the US going back into recession in 2011 at 75 percent or better. The prospect for Western Europe, on balance, is better than for the US, but the possibility for that region going back into recession next year is at about an even chance.
If that happens the implications for the SA economy are negative. To start, South African firms will have to deal with a fresh wave of material headwinds for our export markets. The implications for investment flows, currency stability and capital markets also will be negative.
In this event, while our economic growth would be notably lower than it otherwise would have been, it would nonetheless be supported by a number of structural factors which are coming into play.
Firstly, we are part of the growing South-South relations. Secondly, our geographic proximity to sub-Saharan Africa is beneficial. The region is growing as fast as India and with 750-million people the impact is substantial. Thirdly, there is ongoing investment taking place in South African infrastructure, in particular water, roads, education and healthcare facilities and electricity. This also is supported by the fact that SA has a very strong balance sheet and a capacity to grow much faster than has been the case historically.
In considering our prospects we need to look carefully at the European economy which has a material impact on South Africa: the region represents our major trading partner (a third of SA’s exports are headed there) and is an important contributor of foreign investment. A setback in Europe would definitely be a setback for us. Given that Europe’s woes are deep and structural; to improve the prospects for South Africa we must seek opportunities outside of our traditional markets. Sub-Saharan Africa, the Indian sub-continent and parts of South America, including Argentina and Brazil, represent extraordinary opportunities in this regard.
First World took wrong medicine
There has been considerable debate that withdrawing stimulus measures in the UK and US could prompt another recession in these regions. However, in my opinion, it was a great error to believe that aggressive and liberal fiscal and monetary policies carried the cures for the financial crisis and the ensuing economic fallout.
Governments should have refrained from aggressive fiscal and monetary stimulus, especially when they were already over-borrowed. A better route would have been to opt for monetary discipline, instead of reaching for zero percent interest rate policies and ballooning money supplies to bail out companies that should have failed.
To underline this, the US government has stimulated the economy to the tune of about $4-trillion in the past three years, and the economy is smaller today than it was at the start of the stimulus. In other words, they have borrowed to go backwards. While we don’t know what would have happened without the rescue packages, I am of the view that the stimulus packages have deepened, rather than alleviated, the structural problems in the advanced economies. In short, they’ve taken the wrong medicine.
South Africa’s growth likely to be muted, but positive
As far as South Africa is concerned, I don’t think that we will see the six percent economic growth that was targeted for the 2010 to 2014 period. We arguably require a major external stimulus to achieve that type of growth, which implies that we are leaving our fate to others. For South Africa to achieve sustained growth of this order we must first address the internal education crisis and deal with other ingrained problems, including the infrastructure deficit, labour market rigidity and overly-concentrated product markets.
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