The world economy is entering a major downturn in the face of the biggest financial shock since the 1930s.
Global growth is projected to slow substantially but, assuming the crisis responds to the unprecedented range of policy measures being thrown at it, a modest recovery may begin late in 2009.
At the time of writing late in 2008, the situation remains uncertain, with global equity markets taking huge hits on a daily basis. The rand has dropped to R11,30/US$; the JSE is down 38% since 2008's peak, and economists are revising their growth prospects for SA downwards.
According to the IMF's latest World Economic Outlook, global growth is expected to moderate to 2,2% in 2009 - officially a world recession. Emerging-country growth is expected to slow to 5% while advanced economies are predicted to achieve only -0,3%% - the first full-year contraction since World War 2. The expected recovery late in 2009 is likely to be "exceptionally gradual" by past standards.
Sanlam Investment Management economist Arthur Kamp predicts disinflation, if not deflation, will become the key economic theme in 2009.
Kamp notes that the US has a structural problem that will have to be worked out of the system over the next few years after a decade of dissaving by US consumers. "The consumer-led slowdown will intensify even further because the wealth effects were so important on the up leg. They are now faced with not only declining house prices, but also sharply lower equity markets."
For the world to recover, developed markets will have to go through a painful period of recapitalisation and deleveraging. The US housing market will need to stabilise, with delinquencies peaking and housing inventory levels declining. And global credit markets will need to return to normal.
A key question for SA is whether Asia's robust growth so far will continue or whether the decoupling myth is about to be disproved.
Recent Chinese economic data, as well as the government's decision to cut interest rates and introduce a huge stimulatory fiscal package, all suggest that authorities are concerned about the prospects of an economic slowdown. But ultimately China's prospects will depend on how protracted and deep a US and European recession turns out to be. The same holds for SA.
"SA economic growth has so far held up reasonably well in the face of the global slowdown. However, the full effect of some moderation in trade and more uncertain capital inflows is still to be felt," warns Nedbank chief economist Dennis Dykes. "The household sector remains stressed by relatively high debt and the significant rise in interest rates over the past two years. A recovery in agriculture and strong fixed capital formation spending will continue to help the economy avoid recession, but slower growth until the second half of 2009 looks inevitable."
Pan-African Capital Holdings CEO Iraj Abedian doesn't expect SA's growth to fall below 3% next year, based on the likelihood of ongoing fixed investment, a pick-up in some exports (because of the weak rand), a reduction in imports, and lower interest rates, which will fuel a slow recovery in consumer spending.
But he cautions that no economy can perform well when three areas are not pinned down: the global economic environment; the domestic political environment; and domestic economic productivity. "Any one of the three could affect our performance considerably and right now two out of three are up in the air," he says. "If the political situation gets out of hand and if the rand falls way below the current level and stays there... these are the two jokers that could upset the pack very quickly."
Jeff Gable, head of research at Absa Capital, has revised down his growth forecasts for 2009 from the upper 3% range to around 2%, in line with the deteriorating global growth outlook, sliding commodity prices and the falling rand.
On the upside, 2009 is likely to bring the beginning of a turnaround in the interest-rate cycle, though it may be delayed by as much as a quarter if rand weakness persists above R8,50, he says.
The rand has depreciated by around 45% against the US dollar since the start of the year. The impact on inflation will depend on the extent to which these levels are sustained. Gable feels that rand weakness is likely to continue since it is driven by a rise in global risk aversion that is hammering many emerging-market currencies. Dykes also warns that a sudden, sharp collapse in the rand is not unlikely, given rising risk aversion, weaker commodity prices, and SA's large current-account deficit combined with political and policy uncertainty.
Views vary on how much interest rates are likely to come down next year. Most expect rates to fall by 200-250 basis points, depending on when the Reserve Bank starts cutting. The markets are expecting the first cut in February 2009. This should prompt a mild recovery in consumer spending over the course of 2009, assisted by rising wage settlements. "This won't reignite a consumer spending boom, but it should at least lift the consumer off the bottom," says Gable.
But if the rand matters, so too does the deficit. Even once the immediate crisis recedes, countries with large deficits will find it much harder to finance themselves. Rand Merchant Bank economist Ettienne le Roux fears that the downside risks to SA's economic outlook are mounting and warns that the longer the credit crunch lasts, the harsher the domestic downturn will be. But he identifies four factors that argue against extreme pessimism about the domestic growth outlook.
First, investment in public infrastructure is growing strongly and there is little to suggest that this trend is about to reverse.
Second, social safety nets are expanding, which should limit the downturn in consumer expenditure.
Third, thanks to falling oil and food prices, inflation has peaked and the prospect of looser monetary policy is appearing.
Finally, the self-correcting mechanism of a free-floating exchange rate means that the weaker rand should aid exporters and import-competing companies.
"The bottom line," says Le Roux, "is that though growth is likely to slip to around 2,8% in 2009, SA's longer-term prospects remain favourable. We are looking for growth to return to a level of around 4% in 2010."
By the fourth quarter of 2009, the outlook should be much brighter, agrees Investec Asset Management's John Stopford. "Inflation will have fallen back, helped by the fall in commodity prices, and the credit crunch should also be easing... the cost of funds will be lower than today, helped by a decline in mortgage rates in the US and looser monetary policy across the world."
Investec strategist Michael Power also urges SA to see the light at the end of the tunnel.
"It is the end of the world as we know it, but that just means we're coming into a new world, one dominated by Asia, which will be far more favourable to resource-rich countries like SA than the Western-dominated world we're moving from," he says.
In any event, for the past 25 years, most of SA's demand growth has been coming from the East. A world order centred on Asia will, therefore, play much more to SA's strengths. And while in the short term there will be demand destruction out of the West and China's growth rate will slow, Power expects it to accelerate again by the middle of next year.
