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South Africa’s domestic recession is not as bad as the global norm, and policy responses in different countries will differ according to own circumstances. The macro-economic and regulatory landscapes, however, will never be the same again, writes Elna Moolman.
The South African economy entered a technical recession in the first quarter of 2009 when it registered the second consecutive quarter of real gross domestic product (GDP) contraction (-6.4% quarter-on-quarter growth on a seasonally adjusted and annualised basis in the first quarter of 2009, -1.8% in the fourth quarter of 2009).
For parts of the economy, such as the steel and motor manufacturers that are facing double-digit production contractions, the question may have changed from whether they are in recession, to whether they are
in depression.
Nevertheless, the severity of the domestic recession pales in comparison with the global norm, with South Africa’s forecast -1.7% growth in 2009 still miles ahead of the contractions expected in, for example, the United States, United Kingdom and Japan.
Of course, relative comparisons hardly provide comfort for the estimated 300 000 South African workers who will lose their jobs as a consequence of the worst domestic recession since the early 1990s.
The picture is equally bleak when viewed from the perspective of per capita GDP growth or when seen relative to the economy’s potential growth rate (the so-called output gap).
Simply put, when the population growth rate exceeds the rate of economic expansion as is likely this year, the country’s dire poverty and unemployment challenges intensify.
The responses of policy-makers in different countries should differ depending on factors such as the nature of each country’s problems as well as the policy framework and the starting point for each country.
In advanced economies, policy-makers generally had to deal with completely dysfunctional financial markets after the bursting of the credit and housing bubbles last year.
Clearly, under these circumstances, authorities needed to pull out all stops to resuscitate financial markets, and the banking system in particular, as quickly as possible.
Advanced economy central banks cut rates to record lows before many of them embarked on innovative ways of quantitative easing.
Governments meanwhile announced ambitious fiscal spending packages that included bail-out packages to selected industries and firms.
Even though there has always been concern about the ultimate cost of the bailout and fiscal stimulus packages announced since late 2008, and the possible inflationary problems that may eventually stem from aggressive monetary and fiscal stimuli, there was never any doubt that failure to revive the financial system would be far more costly.
This lesson was dearly learnt from policy mistakes during the 1930s Great Depression.
While the extent to which countries had to intervene in their financial markets differed depending on their health and the extent of excess before the bubble burst, nobody escaped the indirect impact via reduced and more expensive credit and a retreat in global demand (exports).
In emerging markets, the situation was generally aggravated by the inflationary consequences of currencies that depreciated when global liquidity and capital flows all but disappeared; this limited the extent to which monetary policy could be eased.
South Africa at least avoided the direct impact of the credit crisis via a healthy financial and banking sector, prudent banking sector regulation (including the National Credit Act) and disciplined fiscal and monetary policy in the years preceding the crisis.
Low debt (and in particular foreign debt) levels mean that South Africa can escalate fiscal stimulus without pushing the fiscal metrics into unsustainable territory, as most countries have been doing.
The economy also reaped the direct and indirect benefits of the infrastructure spending programme already under way (a further R787 billion will be spent by the public sector on infrastructure in the next three years).
While there are some question marks over some of the fiscal packages announced internationally, domestic programmes were well under way before the crisis and hence generally better planned and geared not only toward alleviating the short-term slump, but increasing the economy’s long-term growth potential by alleviating the most pertinent growth bottlenecks.
The domestic bail-out packages to selected industries, with a clear focus on productivity improvement, also appear to be far more pragmatic than some of the global rescue packages.
Can we do more?
Our analysis suggests that the South African Reserve Bank has already cut interest rates by far more than it would have done under normal circumstances; in other words, it increased the weight attached to economic growth in its decisions.
Nedlac’s Framework for SA’s Response to the International Economic Crisis report and the May 2009 State of the Nation address put its faith in an enlarged Expanded Public Works Programme, expansion of the public work force, the existing infrastructure spending programme, enlargement of the Development Finance Institutions’ balance sheets, an emergency food programme, and selected sector-specific assistance programmes.
The new Minister of Trade and Industry Rob Davies appears ready to reciprocate protectionist trade policy measures implemented by his global peers; selective tariff changes may therefore form part of South Africa’s response to the global crisis.
President Zuma promised a detailed five-year Medium-Term Strategic Framework with comprehensive and tangible objectives soon that should provide more information about how the government plans to counter the impact of the global recession and achieve its ambitious aims in respect of poverty alleviation.
The government appears to recognise the importance of preserving a prudent and stable macro-economic policy framework in order to secure the global capital inflows needed to fund the infrastructure programme and current account deficit. This goes a long way towards allaying fears about an excessive leftward policy shift by the new political leadership.
The distance of countries from the heart of the crisis plays an important role in their balancing act between short- and longer term considerations.
Countries like South Africa, whose financial markets remained functional, have to carefully balance the need for cyclical stimulus with the need to preserve sustainable settings in the longer term.
Fortunately, South Africa had a healthy point of departure, with very prudent and disciplined fiscal and monetary policy stances. Very low national (foreign) debt levels created a cushion for the collapse in revenues and expansion of expenditure in the face of the recession.
There is even scope for some discretionary fiscal stimulus in the form of assistance to industries such as textiles and clothing, which is already under way, and possibly a couple of other targeted industries such as motor manufacturing.
It is critical that a distinction is made between cyclical stimulus and stimulus that increases the structural (permanent) burden on the fiscus. So far, the government has largely applied cyclical stimuli, but it is worthwhile keeping an eye on the structural fiscal burden, and in particular the impact of the continuous growth in social grants.
There are tentative signs that the stimulus provided by global authorities is paying off and that the pace of economic contraction is at least slowing. At this stage, BJM’s composite global leading indicators tentatively support the consensus view that the global economy will trough before the end of the year.
In turn, this, combined with the domestic policy stimulus, underpin the expectation that the South African economy will follow suit. However, the risk of a ‘W-shaped’ recovery, in which there is a dip after the lift from policy stimulus before demand really starts recovering, cannot be ruled out entirely; following an initial pricing out of an Armageddon scenario for the global economy, markets will likely remain somewhat nervous until there is complete certainty about the sustainability of the recovery.
Once the global recovery has a strong footing, policy-makers are likely to turn their focus to policy reform. These reforms will deal not only with the causes of the bubbles and crisis, but also likely look at policy changes that could assist in preventing future imbalances.
For example, while there is ambiguity about the extent to which monetary policy is to blame for the bubbles and their bursting, there seems to be agreement that a more holistic and flexible monetary policy approach than strict inflation targeting may play a role in preventing bubbles.
Increased regulation of financial markets seems inevitable, while ‘macroprudential regulation’ seems to be on the cards.
The macro-economic and regulatory landscapes will never be the same again.
