THE DAVID GLEASON COLUMN
Believe me when I tell you that, for small businesspeople, the thing that counts most is the interest rate. I wrote about this last week, but it is such an important matter it needs to be addressed again.
Interest rates determine how consumers behave; they set the pattern of spending. If you’re in business and selling something, how people spend is critical. This year is going to be dreadful for retailers. What few seem to realise is that the time lag between falling interest rates and increased consumer spending is about 12 months.
Brokering house Merrill Lynch economist Jos Gerson says the worst point in the retail cycle will be reached about mid-year (the worst point in the interest rate cycle was about mid-1998). Therefore, retailers can expect some relief from the second half of 1999.
Meanwhile, Gerson expects a fairly dramatic fall in interest rates (he predicts prime of 16% by the year end). We need about 12% nominal if we are to get the economy moving again at the growth rate we so desperately require. Gerson says we will get there, but won’t hazard a guess when.
Of course the joker in the South African pack is the price of our commodities abroad. And determining the patterns of demand and price means examining how the world economy must be expected to develop.
The only big economy doing well is that of the United States. (Paradoxically, it is performing excellently because most other countries are doing so badly.)
Demand everywhere is at a low, and the spectre of inflation has now turned to a fear of pervasive disinflation. This is why the US is able to keep pumping up domestic demand without concern that the bogey of inflation will return to haunt it.
Another feature is that, while the rest of the world labours with idle capacity, its money has found its way into the US. An important reason for this movement is that its owners see the US as a “safe haven”. (Surely the sharp lesson for all countries must be that if they want to attract and retain capital, they must ensure that investors know their money will be well treated.)
This flood of cash into the US goes some way to explaining why the New York Stock Exchange has enjoyed such a wonderful party for so long.
As the rest of the world begins to pick up its economic activity, so money will flow to destinations other than the US, partly because it will be needed to finance the process of bringing idle capacity back into production. The dollar will begin to weaken and, as it does, imports into the US will begin to tail off, partly because of falling US demand for higher priced goods and partly because the same goods will find renewed demand elsewhere.
A general world recovery will be good for American companies which have production capacity outside the US. Interestingly, the revenue stream for 30% of the Standard & Poors 500 index is sourced externally.
The result of all this could be that liquidity will tighten and interest rates everywhere will begin to rise again. In the process, the famous Wall Street bubble will finally burst, or at least the balloon will start leaking some of its hot air. This will be accompanied by a retreat in US domestic spending and a narrowing of the gap in its current account (not before time – last year the US used $300-billion of other people’s money, up from $100-billion three years earlier).
And this is where the trap for South Africa and other countries that rely heavily on commodity sales becomes apparent. If US domestic demand collapses quickly, the effect will be to knock the rest of the world, then barely beginning to stage a little recovery, right off its collective feet.
Gerson calls this the “double-dip” scenario because, having experienced a long period in the economic wilderness, the world will have begun the long climb back only to be knocked down again.
Recovery from such a circumstance – if this is what happens – will be further delayed. The problem is that the distortions in the US economy are now so substantial and its Wall Street bubble so big that it is difficult to imagine how it can be pricked in a way that ensures it subsides gently.
The message to South Africans ought to be that the recovery we may start enjoying in the demand for and prices of our commodities may be short-lived. It would be wise to use any modest economic improvement as the opportunity to add to reserves rather than to begin spending.