An unexpectedly prolonged war in Iraq could trigger a world recession that would bite into South African export prospects — but the local economy should withstand the turbulence reasonably well. This is the view of economists interviewed in the first week of April.
Central to the issue is the United States economy. “If the war drags on long enough, it could trigger a global recession,” says Rand Merchant Bank economist Rudolf Gouws, pointing to the “twin deficit” of the US as the major threat.
The US has a $300-billion budget deficit as well as a trade deficit of $500-billion. These are, respectively, 3% and 5% of its $10-trillion-a-year gross domestic product.
“Foreign investments will be needed to bridge these, and at the moment no one is attracted to make them,” says Gouws, who expects the dollar to weaken in the foreseeable future. Concurring, Standard Corporate & Merchant Bank senior economist Goolam Ballim notes: “The dollar’s hegemony is being eroded.”
Ballim points out the woes of the US were deep-seated, originating in the period of the first Gulf War. “The excesses of the 1990s bubble years are far from fully erased.”
From the mid-1990s to 2000 the US accounted for 50% of cumulative world growth. Now the economy is saddled with high levels of consumer debt and low savings. Moreover, the minute fillip that the economy had experienced since the 2001 recession had been “credit-inspired”, as people took advantage of low interest rates and rising house prices to draw equity and spend it.
“As people realise their jobs and future income are insecure, they’ll shy away from spending — and the pillar supporting the economy will fall away,” says Ballim.
In February 308 000 American workers lost their jobs. Between 2001 and 2002, 1,8-million jobs were shed, an average of 75 000 a month.
The ripple effects of the world’s growth engine are being felt throughout Europe. This week the Reuters Eurozone Purchasing Managers Index, which measures manufacturing activity, dipped from 48,4 to 50,1. A figure below 50 is a contraction.
In France, consumer confidence was reported to be at its lowest level in six years. Ballim reads sluggish growth in Europe as a bad omen. Demand for imports is slowing, and 50% of South Africa’s exports find their way to European consumers.
Last year South African export volume fell by 4%. This year, with the added drawback of a strengthening rand, the outlook is even gloomier. But Nico Vermeulen, director of the National Association of Automobile Manufacturers of South Africa, downplays concerns over plummeting exports.
“Any talk of what effect the war will have is an exercise in hypothesis,” he says. He expects the impact of prolonged hostilities on the local auto industry to be “insignificant”, adding “it will be indirect more than direct, and dependent on growth in influential regions”.
Last year the industry exported 125 000 of the 350 000 vehicles it manufactured. But Vermeulen points out that exports were based on established contracts.
Michael McDonald, a Steel and Engineering Industries Federation economist, is concerned about the strengthening rand, describing it as “overvalued from an exporters’ point of view” costing the country and some comparative advantage.
McDonald points to the lead time in export behaviour, implying the effects of war will not kick in immediately. Much depends on how prolonged the conflict becomes. But he is concerned about a drop in demand in the US, where South African steel enjoys an exemption from a 30% tariff on imports.
Locally, consumers are expected to beef up the economy with a mildly robust increase in spending in the second half of the year. Ballim attributes this projected increase to a steep decline in inflation and “fairly charitable salary increases”.
Last year these averaged 9%, with sectors like financial services awarding 15%. The R13,3-billion in tax cuts in the Budget are also expected to boost spending. Market commentators expect interest rates to be cut in June, but Ballim now expects the Reserve Bank to “break the back of inflation expectations” and hold off a cut to September.
This is in view of the fact that organised labour expects CPIX — the targeted component of inflation — to be 10,4% next year and 10,5% the year after — 4% more than the upper limit of the government’s 3% to 6% inflation target range.
Gold is expected to retain its current safe-haven status. This is largely because the euro and yen are not viable alternatives to the dollar at present. This week gold traded at $330 an ounce, with analysts who were canvassed not expecting it to approach anything near its $250 low of two years ago.
Oil prices are expected to maintain the general downward trend manifested since the start of the war, especially if supply interruptions do not spread through the Middle East, and other producers, like Venezuela, maintain their current output.
Ballim does not expect the price to dip below $20. In the first week of April, the Brent crude price embarked on a brief upward trend to reach $27 a barrel on Wednesday.