/ 12 January 2001

Reading Alan Greenspan’s mind

Rather like a large and menacing asteroid, an imminent United States recession has emerged in the collective consciousness, looming in the space of possibility.

The question now is whether it will collide with North America and what the secondary effects on the rest of the world and South Africa will be. Economics being far less precise a science than astronomy, we are unlikely to know until mere moments before tidal waves of panicked traders actually hit us.

How would a US recession affect South Africa? Exports to the US amount to approximately 10% of the South African total. But total South African exports have been growing strongly over the past few years, despite sluggish domestic growth. It is the secondary effects of a US recession, on other markets and local sentiment, which are of concern.

Unfortunately, since the US has roared along at a magnificent 7% to 8% pace for more than a year, anything much less may feel like a recession, even if growth remains positive. And what feels like a recession for the US will not be comfortable for the world. Already, the Organisation for Economic Co-operation and Development expects that world growth will slow this year to 4% from a projected 4,75%. But averages may conceal a multitude of agonies.

What are the variables for the US? A lower oil price, possibly averaging $20 for the year, augurs well. President-elect George W Bush might well wangle some tax cuts. He, or his puppeteers, have proposed a $1,3- trillion cut (43% of which is targeted at his campaign contributors, the top 3% of US earners).

But retail sales in the US were well down over Christmas and international forecaster WEFA projects an 8,6% downturn in car sales in the US for the coming year. December saw the loss of 54 000 jobs in the US manufacturing sector alone. Last week’s 50-basis point (0,5%) interest rate cut by US Federal Reserve Bank chair Alan Greenspan is remarkable for two reasons.

Firstly, it was announced in between the two-monthly meetings of the Federal Open Markets Committee, with which Greenspan usually consults before making interest rate announcements. Secondly, it was the only the second time in 13 years that he has ever made a 50-point adjustment to interest rates. What, the markets are asking, does Greenspan know that we don’t?

At least one of the factors driving the rate cut was the vestigial 2,2% gross domestic product growth rate registered by the US in the last quarter of last year. At any rate, financial analyst Ray Brand of Savings & Poor Money Market Services points out, the US rate cut helps South Africa the bigger the differential between US rates and SA rates, the more attractive our money markets are to offshore investors.

A key indicator of possible recession is the antics of the oil price over the past 18 months. In both the Seventies and early Nineties oil price hikes preceded global recession. Whatever its proportions, a US slowdown could well see the dollar sliding against the euro and the rand.

“Dollar strength” was the constant refrain of economists asked last year why the rand was suffering. If they were correct, and if Zimbabwean President Robert Mugabe keeps a low profile, that dollar weakness might provoke a modest recovery in the rand, which hit a new record low of R7,92 to the dollar on Wednesday. A stronger euro, however, will put some pressure on the rand, as it will increase the cost of many imports.

A US slowdown will not help emerging markets, which invest-ment house Merrill Lynch believes will see testing times during the first six months of the year at least. Brand also points to rumours that

Chinese banks are carrying a considerable proportion of bad debt up to 40%, potentially another 1998 Asian crisis in the making. There is no reason to expect that the price of gold, an export staple, will recover much this year.

According to Brand, the current price hardly warrants digging it out of the ground. Demand still outstrips supply, but this is counter-balanced somewhat by European central banks continuing to sell off their reserves. But there is good news.

The combined effects of lower import costs, particularly of oil, and lower food prices will help the Reserve Bank in meeting its inflation targets for the year, heading for between 3% and 6% of CPIX (inflation less mortgage costs) by 2002. Oil prices are expected by some analysts to swing as low as $15 over the next year.

Brand believes interest rate cuts by the Reserve Bank are unlikely early in the year, but it’s reasonable to expect a cut by mid-year, unless the rand weakens substantially.

Cees Bruggemans of First Rand points out that so far this summer the outlook for a key sector agriculture looks good. But he worries that we’re not attracting sufficient foreign capital, pointing out that privatisation benefits are only likely to begin flowing later in the year, with the proposed sale of an expected 20% of Telkom. But there are now doubts as to whether the government and Telkom will manage a listing this year. A failure to list will probably have a dire effect on both local and international sentiment.

Economist Nico Czypionka of Socit Gnrale argues that one of the most crucial factors this year will be whether our politicians behave themselves, in the eyes of international markets. If they do, privatisation could begin to provide a formidable stream of foreign investment at least R40-billion over three years.

Then South Africa should manage at the very least to continue its current rate of growth, estimated at slightly more than 3% by Statistics South Africa last December.