Uncertainty

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By Cees Bruggemans, Chief Economist FNB.

There lingers a deep uncertainty in the world at large, as much here as abroad, in financial markets as among policymakers, touching investors, consumers, boardrooms.

Periodically such uncertainty and associated anxiety can be observed rippling through the everyday surface, for a while threatening to disruptively colour events before subsiding anew.

Much uncertainty continues to originate in the Great Financial Crisis of 2007-2008 and the manner in which governments and central banks have responded to head off what could have potentially been the ultimate calamity.

The aggressive monetary expansionism of central banks still feeds daily rumours of future inflation, thereby effortlessly underwriting precious metal prospects (though so far not noticeably derailing global bond prices and yields).

Similarly, the fiscal aggression of governments easily doubling national debt burdens within a matter of years feeds other forms of anxiety.

Such increased debt burdens are seen as meaning decades of constrained social spending. It may also mean higher taxes. Belated willingness to address such ballooning debt may lead to market dislocations and further feed inflationary outcomes. It could feed into risk if sovereign default becomes plausible. It leads to currency realignments.

And what if governments have to rein in their fiscal support and private demand doesn’t re-engage fully, as it remains intend on deleveraging and private confidence in any case not being sufficiently there?

Could the depression threat still re-materialise if there were to be a sufficient post-crisis relapse?

China is recognized as a major linchpin in the global recovery. But China’s magic is partly built on generous liquidity provisioning to banks and aggressive fiscal stimulus. Could China stumble? And the world with it?

Are new asset bubbles forming, especially in emerging equity markets? Will they eventually be pricked, too, setting in motion new deflationary forces? And would by then the public arsenal be bare of weaponry to address such a new global crisis, bringing on the real next Great Depression?

If these ongoing global concerns weren’t enough in their own right, South Africans have a few very own demons to struggle with on an average day.

Looming are what effectively could be crippling electricity tariff increases these next two years, as much as nearly tripling electricity costs. Coming on top of steeply increasing municipal charges and the spreading incidence of road tolls from next year (also requiring license plates to be replaced, costing R800 per car), the average urban middle class consumer in South Africa is facing a big bite out of his after-tax income.

Never mind increases in tax burden if the Minister of Finance were to address his now very large budget deficit the traditional hard way (not by constraining public spending but by increasing middle class tax burdens, for instance by granting consumers only limited inflation-adjustment this year and next)?

Then there is the business fallout from such electricity and transport cost increases, with certain businesses losing viability, giving rise to employment losses, potentially as much as a few hundred thousand, on a par with what was already lost during the recent recession, putting further downward pressure on business prospects.

In addition, the country’s inflation rate is being kept elevated by these high public sector tariff increases, preventing the SARB from lowering interest rates further, something the weak economy could do with, unnecessarily accepting yet more growth sacrifice on account of the electricity issue.

The SARB apparently still faces more specific demons of its own, with last week’s Monetary Policy Committee statement again mentioning the always present risk of sharp capital flow reversals, so-called sudden stops. If such an event were to materialize, the country would be subjected to yet another severe shock, something the SARB should always allow for in its contingency planning.

For middle class South African consumers today, as for their American counterparts, anxiety is closely tied up with wealth loss (the reduction in house values these past two years, and in our case a stock market still over 20% below its 2008 peak), job losses (our formal employment being at least 4% down from its cyclical 2008 peak and probably still to bottom), real income losses (shrunken bonuses, dividends, rents) and whatever else is still to come.

All this in addition to disturbing daily rumours of a social or political nature, the reality of urban and rural crime, and the deeply serious ideological clashes regarding the future direction of economic policy – to remain orthodox (favouring old-fashioned stability and remaining market oriented) or to become more proactive socialist.

For company managements, boards and shareholders all the above are in active play, shaping expectations about future sales potential, likely costs, possible disruptions and the myriad difficulties of turning a fair and acceptable profit for effort provided and risk taken.

Thus we find many investors, policymakers, consumers and businesses united in their deep concerns about events, preferring to limit risk-taking, rather playing safe, not extending exposure too much, and in the process accepting a more stagnant reality rather than the frenetic ‘gung ho’ pace of exuberant risk-taking, expansion and growth that marked the middle of the ‘nasty noughties’ decade.

Will we ever shake this lethargic caution again, reacquiring a greater daring to try out the future?

I dare say we will, granted more friendly accommodating circumstances. For the moment, though, generalized ostrich tactics prevail, as we collectively prefer to have our heads mostly deep in the sand, away from all danger, rather than proudly in the air, defiantly staring down all comers (if you know your average ostrich, especially when in heat).

Uncertainty will always be with us, but at present it still has a particular pungent quality, keeping us cautious and reticent, and apparently too willing to hear what the downside is in any proposition.

Upside will presumably come around again sometime, but apparently only some fine distant day. Too much uncertainty for now for it to be otherwise, with nobody really knowing how to overcome this mindset, except that time often takes care of everything in the very long run.

Meanwhile it means much opportunity loss. The true cost of being uncertain and doubly cautious (for you can never know what could still go wrong).

Source: Cees Bruggemans, FNB, February 1, 2010

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