Like president elect Barack Obama, president in waiting Jacob Zuma will be inheriting a significantly different economy to the one over which his predecessor presided.
As United States commentators have pointed out, the timing of Obama’s election could be his undoing. His administration did not cause the problem, but it will be blamed if it is unable to fix it.
Zuma is now expected to take the helm with the world economy disintegrating and South Africa being sucked into the vortex.
Tax revenues are likely to fall in line with economic growth while unemployment is growing.
This is the crux of the negative reviews by two rating agencies earlier this week. Both Standard & Poor’s and Fitch revised their outlook on South Africa’s sovereign credit from stable to negative.
The government, however, does not seem to share these concerns. Despite the biggest financial and economic meltdown in decades, South African authorities have clung to the idea that South Africa will survive this tsunami relatively unscathed.
The official view is that our economy will continue to grow, albeit at the slightly lower rate of 3% next year. It has also taken the view that inflation, not a global economic Armageddon or a 23% unemployment rate (and growing), remains our biggest problem.
They should tell that to the 74 000 people who joined the five million unemployed last quarter and the many more tens of thousands if not hundreds of thousands of people whose jobs will be on the line in the next year as companies start to announce their “rationalisation” plans.
Government needs to be reminded that South Africa is a business selling goods to the world and when one’s customers can’t afford to buy those goods, your business risks failure. Right now the risk to economic growth is on the downside as three sets of figures released this week confirmed, all surprising on the downside.
Last month manufacturing production, which makes up 17% of our GDP, declined by 0,6% compared with the previous month. Expectations were for it to remain unchanged. Nedbank Capital says the sector has been hurt by crimped domestic demand as domestic economic activity slows, with high interest rates and elevated inflation squeezing consumers’ discretionary income.
The local economic slowdown has been exacerbated by slowing foreign demand as major developed economies enter recession, particularly the Euro Zone, South Africa’s major trading partner.
Nedbank Capital adds that all exporting sectors will be pressured by the recessionary conditions in the global economy, as the effect of the global financial crisis continues to hit home.
Retail sales fell in September by a massive 5% in real terms compared with last year. The market was expecting a contraction of 3,5%. Retail sales will decline for 2008 as a whole, putting the sector officially in recession.
The South African Chamber of Commerce and Industry (Sacci) released the SA Trade Activity Index which declined in September to 45 index points compared with 57 points a year ago. Nedbank Capital says the looming global recession reduces international demand for goods from South Africa, while domestic consumer over-indebtedness also reduces trade prospects.
According to Sacci current and prospective employment figures both remained in contraction, with employees being retrenched as employers struggle to reduce costs as demand and production decline. Trade expectations for the next six months also fell attributed to the weak domestic economic outlook and high interest rates.
South Africa stands alone as one of the few countries that has not acted immediately to stave off a severe economic downturn despite a request from the International Monetary Fund this week which urged developed and developing economies to use fiscal and monetary policies to stimulate economic growth as demand declines dramatically and it becomes clear that no country will withstand the onslaught.
In the past week the UK slashed rates a further 150 basis points despite the fact that inflation is more than double its target range and China has announced a $586-billion stimulus plan.
China with Brazil, Russia and India have planned coordinated measures to increase capital and trade among the Bric countries. The Bank of England (BoE) decided to cut rates despite the highest inflation figures since the 1990s. Driven by the recession it has projected that inflation will come off its current highs of 5,4% back to the 2% range as food and oil prices fall.
However, in South Africa — despite a clear signal that inflation has started to decline and forecasts that it will come back in range by the end of next year (or the following year depending on whether you believe the national treasury or Reserve Bank) — our conservative monetary policy suggests a wait-and-see approach.
The problem for the economy is that the first cut of an interest rate cycle has the biggest impact and a delay will have a measurable effect on both confidence levels and the economy. If our government has been too optimistic about the growth forecast, a delayed cut will be a missed opportunity to get the economy back on its feet sooner.
Zuma will inherit the consequences of the decisions made now by policymakers. Hopefully he is taking a keen interest in what decisions are being made, and will be made, after the global heads of state meeting in Washington next week.
South Africa has had the luxury of not having to give a knee-jerk response to the crisis as our banks held firm, but recent inflation data combined with a serious economic outlook will allow the Reserve Bank to give a measured response. Money markets have already factored in a 90% possibility of a rate cut in December.
The rest of our competitors have moved quickly to avert an economic crisis and South Africa runs the risk of being left behind.
With a 23% unemployment rate, we cannot afford to miss the boat.