Opinionista Chris Gilmour 9 July 2010

Marcus and the dreaded double-dip

At a recent presentation in Johannesburg, SA Reserve Bank Governor Gill Marcus warned of the dire implications for South Africa were Europe to descend into a so-called “double-dip” recession. The governor is a canny observer of financial markets so her warning should be heeded closely. But there are reasons to be more cheerful.

Provided one can see through all the financial markets’ doom and gloom, the first point is that the chances of a global double-dip recession seem remote, if for no other reason than that the Asian economies of China, India and a variety of others are all growing rapidly. Additionally, other large emerging economies such as Russia’s and Brazil’s are also growing strongly with no signs of falling back into recession. The world’s largest economy, the US, is growing in a very patchy fashion, but it looks like it will stay on a recovery path.

What seems to be concerning many observers is that unemployment in the US remains stubbornly high leading them to the view that this will be a jobless recovery. They would do well to look at the time lapses between recoveries beginning in the US and employment growth really taking off. Since the mid-1940s, these have become increasingly longer. The US recovery only officially began last year, so it seems premature to suggest that its recovery is genuinely a jobless one. Provided the economy keeps growing, firms will have to hire more people, as there is a limit to how productive any firm can become.

So this effectively leaves Europe – and there genuine concerns about a double-dip recession do appear to be materialising.

The current concerns about Europe are two-fold; economic and financial. The economic concerns revolve around the ability of certain countries – notably the so-called “PIGIS” (Portugal, Ireland, Greece, Italy and Spain) to reduce both their budget deficits and debt-to-GDP ratios. The main financial concern is that European banks may be over-exposed to one or more of these countries and could conceivably lose massive amounts of money if any of these countries were to either default or alternatively only pay back a portion of the loans owing to the banks. This latter action is known colloquially as taking a “haircut”.

But there are nascent signs that Greece may, slowly but surely, be getting on top of its horrendous budget deficit. This may appear incongruous amid the near-anarchic scenes of protestors in Athens, but the EU and IMF have recently issued statements that suggest the deficit may indeed be reducing.

One should also not forget that the Greek economy is relatively small, at about $300 billion. The really large European economies, such as France and Germany, are doing comparatively well. Germany is enjoying something of an export boom, ironically aided by the weak euro, which in turn was caused by the unfolding Greek tragedy.

Across the English Channel, UK chancellor George Osborne’s recent emergency budget has been well received by markets as evidence that the Brits, too, have the will and the ability to tackle their budget deficit.

Most economists agree that global GDP growth will bounce back significantly in 2010 from last year’s recession and that 2011 will also show growth, with both years above 4%. Even developed economies should show steady, if somewhat anaemic, growth, but at least it should be positive and not representative of a double-dip recession.

Marcus’ concerns may revolve around the fact that Europe is still our largest single trading bloc partner and, if growth there is slacking off, it may well have a ripple effect into South Africa. And while this is undoubtedly a genuine concern, it neglects the impact of internally generated growth here.

Most high-frequency economic indicators in South Africa point to a sustained economic recovery, and growth this year should probably come in around 3.3%. There are a couple of possible hiccups, notably in the form of the weaker-than-expected Purchasing Managers Index figure which went back into a contractionary phase in June. But retail sales growth is picking up momentum, augmenting the recovery seen in manufacturing, for example.

It is reassuring that Marcus is concerned about the possibility of a global double-dip recession impacting negatively on South Africa. Hopefully her concerns will prove to be unfounded and a close examination of global economic fundamentals suggests this may be the case. Even arch-bear Nouriel Roubini reckons Europe won’t suffer a double-dip recession and that a more likely outcome is barely positive growth.

The governor’s job is especially difficult at this time. She has to balance all the various forces clamouring for a cut in interest rates with the fundamental economic statistics that suggest our economy is recovering well. But she is highly visible, presenting in a clear and rational fashion the elements with which she has to contend. We all wait with baited breath to see what she and her monetary policy committee do about interest rates on 22 July.

(Gilmour is an analyst with Absa Asset Management Private Clients)


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