Europe's current economic woes could spell disaster for South Africa.
The prospect of financial gloom morphing into outright doom has been driven home by warnings from economists, as well as from the finance ministry itself, all of whom agree that the worst is yet to come.
“It is important to clearly understand the developments unfolding in the world, particularly in Europe, and what potential impact they could have on the South African economy,” Finance Minister Pravin Gordhan told Parliament on Tuesday.
As bland as Gordhan’s assessment of the situation sounds, Dawie Roodt, chief economist at Efficient Group, put it into context: “The question isn’t whether the situation in Europe is going to affect South Africa. The question is how bad it’s going to be. Is this going to be simply a bad dream or a horrible nightmare?,” he told the Mail & Guardian.
The European economy is at a crossroads. Political jockeying continues over the strategies the region will employ to combat stagnant growth, as more debt-laden economies buckle under the pressure.
The latest growth figures don’t inspire optimism. Gross domestic product (GDP) in the region flatlined at 0.00% for the first quarter of 2012, after it decreased by 0.3% during the fourth quarter of 2011.
While this is not nearly as dire as the back-to-back GDP contractions of 1.9% and 2.5% in the last quarter of 2008 and first quarter of 2009 respectively, there are serious concerns that the slack growth is the harbinger of another recession.
Knock-on effect
South Africa could experience a sharp decline in trade with the EU region if another financial meltdown, similar to the one in 2008, arises.
In the financial year following that global financial crisis, South African exports to the EU plummeted by 35%, from €16.3-billion in 2008 to €10.4-billion in 2009. The knock-on effect for the South African economy was a lag in GDP growth from 5.1% in the first quarter of 2008 to -2.7% in the third quarter of 2009.
This led to a spike in unemployment. Thousands lost their jobs and businesses had to shut their doors as South Africa struggled to come to terms with the snowballing economic deterioration of the country’s second biggest trading partner.
The country is still battling to recover from that round of financial chaos. While export levels have recovered, marginally, the South African economy is still not insulated from similar setbacks, should the European economy take another dive.
For Gordhan it’s simple: If Europe falters, South Africa is in trouble. “There could be further negative impacts on revenue collection in the coming year if Europe does not sort out its problems, and there is no evidence that it would recover faster than it has been able to do up to this point,” Gordhan said.
His anxiety was echoed by Kevin Lings, chief economist at Stanlib, who said the effects of financial turmoil in Europe was already taking hold in South Africa. “Weakness in Europe has already affected us and it will get worse if any deepening of the recession that the region is currently experiencing occurs,” Lings told the M&G.
No way out
While the EU is no longer South Africa’s largest trading partner – with China overtaking the region after the 2008 financial downturn – there are no mechanisms to deal with a downturn.
Indications are that the downturn in Europe is already being felt on local shores. The latest Adcorp employment index showed an annualised slump of 3.1% in unemployment for May 2012, after registering growth for four successive months. The indicator also showed unemployment could easily grow as the number of temporary jobs currently totalled 3.93-million, which equates to 30.2% of the country’s workforce, are rescinded.
Further adding to the potential of financial hardship, is the serious threat of strike action currently in the pipeline. Public sector unions are resolute in their collective rejection of government’s current wage offer, which would see salaries in the public service increase by 6.5% and the housing allowance by R100.
Unions have demanded an 8% increase and R700 in housing allowances. The 14 negotiating unions have vowed not to accept the government’s offer unless it was revised.
To further complicate matters, the sector has just received a fresh political master in the newly appointed minister of public service and administration, Lindiwe Sisulu. Known for her steely demeanour and no-nonsense attitude, it is predicted Sisulu won’t back down to union demands, meaning strike action is more than likely inevitable.
“The last thing we need at the moment is a strike. Anything that will adversely affect our productivity won’t only jeopardise already threatened exports, but also severely pressurise our ability for sustainable job growth,” Chris Hart, chief economist at Investment Solutions told the M&G.