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Dr Adrian Saville
07 Oct 2010 12:17
South Africa has a reasonable chance of the economy witnessing a double-dip recession, but if we were to experience this, I think it would be relatively shallow and short compared to a similar occurrence in Western Europe and the United States.
Given the openness of the South African economy, and the relationship that we have with advanced economies in general and the US in particular, the answer must depend on the prospects for those economies.
As things stand, I would place the chance of the US going back into recession in 2011 at 75% or better.
The prospect for Western Europe, on balance, is better than for the US, but the possibility for that region going back into recession next year is at about an even chance.
If that happens, the implications for the SA economy are negative. To start with, South African firms will have to deal with a fresh wave of material headwinds for our export markets.
The implications for investment flows, currency stability and capital markets also will be negative.
In this event, while our economic growth would be notably lower than it otherwise would have been, it would nonetheless be supported by a number of structural factors which are coming into play.
First, we are part of the growing South-South relations with South America for example. Second, our geographic proximity to sub-Saharan Africa is beneficial. The region is growing as fast as India and with 750 million people the impact is substantial. Third, there is ongoing investment taking place in South African infrastructure, in particular water, roads, education and healthcare facilities and electricity.
This also is supported by the fact that SA has a very strong balance sheet and a capacity to grow much faster than has been the case historically.
In considering our prospects we need to look carefully at the European economy which has a material impact on South Africa: the region represents our major trading partner (a third of SA’s exports are headed there) and is an important contributor of foreign investment. A setback in Europe would definitely be a setback for us.
Given that Europe’s woes are deep and structural, to improve the prospects for South Africa, we must seek opportunities outside of our traditional markets. Sub-Saharan Africa, the Indian sub-continent and parts of South America, including Argentina and Brazil, represent extraordinary opportunities in this regard.
There has been considerable debate that withdrawing stimulus measures in the UK and US could prompt another recession in these regions.
However, in my opinion, it was a great error to believe that aggressive and liberal fiscal and monetary policies carried the cures for the financial crisis and the ensuing economic fallout.
Governments should have refrained from aggressive fiscal and monetary stimulus, especially when they were already over-borrowed.
A better route would have been to opt for monetary discipline, instead of reaching for zero percent interest rate policies and ballooning money supplies to bail out companies that should have failed.
To underline this, the US government has stimulated the economy to the tune of about $4 trillion in the past three years, and the economy is smaller today than it was at the start of the stimulus. In other words, they have borrowed to go backwards.
While we don’t know what would have happened without the rescue packages, I am of the view that the stimulus packages have deepened, rather than alleviated, the structural problems in the advanced economies. In short, they’ve taken the wrong medicine.
South Africa’s growth likely to be muted, but positive
As far as South Africa is concerned, I don’t think that we will see the 6% economic growth that was targeted for the 2010 to 2014 period. We arguably require a major external stimulus to achieve that type of growth, which implies that we are leaving our fate to others.
For South Africa to achieve sustained growth of this order, we must first address the internal education crisis and deal with other ingrained problems, including the infrastructure deficit, labour market rigidity and overly-concentrated product markets.
Advanced economies represent about two-thirds of global GDP, with the more dynamic, but still emerging, economies contributing the balance. If we assume structural growth of 4% in emerging countries, the advanced economies would have to shrink by 2% to take global growth to 0% overall, which represents recession as formally defined by economists. There is a reasonable prospect that this can happen.
However, in this definition of recession, economists make the mistake of measuring a recession by looking at the GDP change on a quarter-on-quarter basis. In so doing, they overlook the fact that populations continue to grow over the same period.
Thus, even if GDP stood still, personal income would be falling as the same economy is shared amongst more people.
If you accept this argument, it follows that we need a growth rate of at least 2% for GDP growth to match global population growth and to keep per capita incomes static. Anything less than 2% sees people’s incomes falling, on average.
Given this reading, the chances of global recession in terms of personal income are high.
Based on this outlook, investment opportunities lie with equities and property
In the listed asset environment, the two best opportunities at present are in the listed property market and the listed equity market. The bond market, in particular government bonds, is unattractive relative to the aforementioned asset classes.
For the foreseeable future interest rates are likely to remain flat, and possibly even go lower, which implies a muted outlook for cash.
In my investment management career, the past 15 years have included a number of different crises, including the Asian and Russian crises, the technology collapse, the Rand crisis of 2001 and the recent financial meltdown, as well as periods of very buoyant markets, including the bull market of the mid-Noughties.
Over this period, my experience is that the best opportunities reside away from popular sentiment and that, regardless of the prevailing environment, opportunities are always available to a greater or lesser extent.
Investors should construct portfolios which represent their risk tolerance and that are consistent with their financial needs.
Ideally, these portfolios will be invested with investment managers who have sound philosophies, sound processes and good track records that represent repeatable performance. Combining those ingredients provides the cocktail for achieving long-term financial security.
Adrian Saville is CIO of Cannon Asset Managers and he holds a Visiting Professorship in Economics and Finance at the Gordon Institute of Business Science. Visit Adrian’s blog at //www.adriansaville. com
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