Is South Africa failing where the US is succeeding?

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By Cees Bruggemans, Chief Economist of FNB.

It is an arresting thought, expressed by Jim O’Neill of Goldman Sachs. Could the US in certain respects actually have benefited from its great financial crisis of 2008?

The reasoning is that pre-crisis the US was on an unsustainable trajectory. Its households were inclined (indeed ‘persuaded’) to save minimally, leverage up on debt and over-consume.

Thus consumption-driven, the US became excessively debt-dependent and deficit-riddled (fiscal and trade) and less inclined towards fixed investment and exports. Also, more dependent on global suppliers of goods and capital.

The 2007-2009 Financial Crisis changed all that (though the jury will be out for a long time as to how durably).

US households have boosted their savings rate by some 4% (towards 6%). In the process, consumption and debt are taking a backseat, with the opportunity of re-attaining greater emphasis on fixed investment and exports in a rapidly (5%) growing world economy.

This will erode some of the dependencies, though it will take time reducing fiscal and trade deficit exposures.

Ideally, according to O’Neill, the US savings rate would double up yet more towards 8%-10% on a permanent basis.

But that for now seems a bridge too far. The US adjustment seems to have stabilized late last year, with US households not necessarily sufficiently motivated to keep pushing their savings rate even higher.

Besides, producers are working over time, trying to ‘persuade’ consumers to once again forgo abstinence.

But even only half the full distance in changed saving and consumption behaviour may be enough to fundamentally reposition the US growth performance and its longer term viability.

———————

In contrast, South Africa seems to be mostly failing on all these fronts.

Throughout the exuberant boom of the past decade, South African households had steadily reduced their savings rate, to the point of turning dissavers.

According to SARB estimates, our household savings rate dipped from +2% in 1997, +1% in 2000 and to +0.1% in 2005. Thereafter it turned negative, reaching -1% in 2007-2008. Since this low point, it improved by just over 0.5% to still only -0.4% by 3Q2010.

Also, our household indebtedness changed only marginally towards 78.5% of disposable incomes in 3Q2010 compared to 82% in 1H2008.

When recovery came in 4Q2009, it was inventory-led. But once this short-term distortion was out of the way household consumption was clearly back in the lead, with car sales roaring 25%, retail sales volumes doing 7% and overall consumption reaching towards 3% in 2010.

In contrast, fixed investment fell by some 4% last year compared to 2009, still dropping in some areas though stabilizing in others, while export volumes struggled to recover from the global recessionary hit.

So no, South Africans have probably not deleveraged or boosted their savings or restrained their consumption as much as Americans, nor are our fixed investment and exports efforts doing the running as much as they are in the US this past year (or will be in coming years).

And although we mystically mutter about the cycle, in terms of which income and consumption lead and fixed investment invariably follows, and exports are a second-order afterthought, this may not be quite good enough.

The budget deficit is nicely running down towards 3% of GDP in 2012 (trust the Minister of Finance), but the current account deficit reached its recession-induced low of 2.5% of GDP in 2Q2010, picked up to 3% in 3Q2010 and is probably already approaching 4%, with 5% not far off down the road, very much a structural phenomenon.

That’s a function of uninhibited consumption and stagnating savings behaviour once the fixed investment effort starts to stir once again.

The US growth effort may become much more balanced and less externally dependent from here onward.

In our case, we seem to be stuck with a consumption preference rather than having re-attained a producer orientation that would ensure fixed investment and exports having their proper role in our development effort, and more dependably financed from own savings rather than outside dependencies, with all the exposures this brings in its wake.

Reference

Jim O’Neill, “This will be the year that the US makes its comeback”, Financial Times 11 January 2011.

Source: Cees Bruggemans, January 19, 2011.

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