Crisis high jump or business as usual
By Cees Bruggemans, Chief Economist of FNB.
Is South African stability about to become disturbed by another major overseas crisis on a par with 2008 or 1998?
Or will we be able to keep cruising within existing Rand, inflation, prime interest rate, JSE share prices and GDP growth parameters as seen so far this year?
Do we keep the Rand 6.70-8.70:$ bound, CPI inflation peaks in 6.3%-6.7% territory after which subsiding anew to within target, prime stays unchanged at 9% (low-for-long though not forever), and the JSE All Share index remains 30–33000 bound even with corporate earnings gaining another 15%-20%?
If so, this would likely keep us on a 3% GDP trajectory through 2012.
Or do we repeat crisis stations like in those earlier crisis years?
If so, do we see the Rand shock-like lose 50% to 10-15:$, CPI inflation peak nearer 12%, prime interest rate lifted by 2%-3% to 10%-12%, and the JSE nose-diving to 20 000?
With export volumes falling off steeply, and households and business defensiveness causing spending to hiccup, GDP might even go negative for a few quarters?
It has happened before and could happen again.
In the past 18 years such rude shock interruptions have been linked only to foreign crises. Our economy is performing below potential with manufacturing capacity utilisation only 80%, office vacancies over 10% and formal labour not fully deployed. No chance of a domestic overheating triggering policy restraint and recession.
So it has to come from the outside, if it were to happen. Here we encounter the usual suspects.
There’s deep suspicion about US political gridlock in a Presidential election year forcing severe fiscal consolidation even with its building and construction industries still out for the count.
This could outweigh the natural recuperation powers of US households and businesses, keeping US growth low, making it vulnerable to global shocks tipping into recession.
Here, Europe, China and Middle East oil come into focus, in their own right capable of havoc and as tipping point for other weak regions, with Americans anxious about banking channels (and European havoc), and the Middle East particularly unstable.
Our policymakers appear deeply perturbed about Europe.
Europe has accumulated too much public debt. It is in deep disagreement about the way forward. Its banks are short of capital and have difficulties funding. It has lost most of its internal growth dynamic. And bond investors have lost trust, draining away in droves and causing a liquidity crisis, with the ECB wishing to stick to its purity and Germany sticking to its guns.
Even the greatest optimists are holding their breath as long-term skeptics merely hold their noses, given the rottenness they observe daily.
So it isn’t too difficult to see a final EU crisis moment approaching, in which markets cause asset prices to collapse and there isn’t sufficient public support to keep things afloat, never mind reform and regain market trust. And that moment, by all omens, may be neigh.
So 2012 could for us be another 2008 or 1998, as an EU disruption would also sideswipe us.
Then again, nothing ever happens in Europe without a little pressure in the right places. Given the creative institutional innovations required and the political resistance to be overcome, this isn’t just your average walk in the park.
It isn’t a given that Europe can’t find the historic compromise needed to make political changes and put their common show back on the road. But it is for them to show this is possible, and so far all we have are deepening sovereign and bank funding problems, governments being replaced, growth a lost dynamic, and despair a general currency (except in Germany, which may well be what matters most).
So, yes, there could be a severe European crisis moment, but it may also prove able to overcome its troubles, in which case there need not be a deepening crisis.
We could still see a severe Chinese slowing (in which case oil prices could halve), but there could also still be a Middle Eastern political disruption (in which case oil prices could double).
Then again, the Chinese slowdown has been minimal and on cue they are starting to reboot, easing monetary policy.
Iran is still some years off nuclear, while the Islamic Arab Spring aftermath may take time evolving, possibly creating more imponderables than greater certainties.
The only certainty appears to be US political gridlock in 2012 because its political elite seem to think this worthwhile, a rather fascinating calculation.
But a little slower growth in the US (say 1.5% instead of 2.5%) or a mild EU recession (say -1.5% instead of +1.5%) isn’t going to torpedo the world or us.
Still, Europe is the real crisis key for 2012, yet it might well surprise with its calculated machinations.
This gives the 2012 prospect a sense of comfort, like an old shoe, something you have known for years and of which you have the full measure.
That gives a Rand of 7-9:$, CPI inflation above 6% and then dropping back, prime at 9% (or thereabouts), the JSE in the early 30s and GDP growth near 3%.
But no year goes by without major surprises. The Big Ones for 2012 still need to show and their consequences fully estimated. Until then, comfort prevails.
Source: Cees Bruggemans, FNB, November 28. 2011.