Never before has the term ‘global economy’ been more relevant. Reverberations from booms and shrapnel from blasts are felt the world over. South Africa is as tied up in it as anyone, notes David Mayfield.
This has become even more obvious over the past few months. Here in South Africa, conditions can deteriorate sharply as critical components of the economy are either seen to be – or really are – out of kilter.
Not long ago, people were cautiously optimistic about South Africa’s immediate economic future, but the outlook has rapidly transformed into one with meaningful downside risks.
The electricity crisis, the currency’s sharp depreciation and a sudden spell of global risk aversion have exposed the economy’s supply constraints, inflation concerns and current account deficit.
Global growth is likely to slow from 5.1% last year to around 4% in 2008 and the slowdown could be more protracted than previously thought.
One worrying concern is that the logjam in financial markets will take longer to free up than expected. Risk premiums – the price that investors demand for buying bonds, for example – will remain high. And the slightest bit of bad news will continue to send stock markets tumbling. Also, there are concerns that inflation will stay high and prevent central banks around the world from injecting liquidity (effectively printing money, which adds to inflation) into money markets during this time of global nervousness.
Meanwhile, consumer spending is fragile in most advanced economies due to rising prices, falling asset values and tougher borrowing conditions.
The extent of the slowdown will depend on how the global economy responds to the credit squeeze and to recession in the US. This makes emerging markets even more important than they already were. While their growth should ease this year, emerging markets will still be the global growth engine in 2008.