THE INTERNATIONAL MONETARY FUND (IMF) publishes two world economic outlook reports a year – one in July and one in October. The October IMF World Economic Outlook takes cognisance of the devastating US/global financial crises and gives a more balanced view than the contrasting articles that have lately appeared in newspaper reports. The last four years were boom years for the global economy.
It grew on average by 5% per year. Emerging markets were responsible for more than 75% of the total growth. Over the past year, growth has slowed down as the crisis in financial markets deepened, the housing boom in developed economies turned into a housing slump and commodity prices increased sharply. Two main events triggered the current crisis – the US subprime mortgage crisis in August 2007 and the September 2008 series of bankruptcies and forced mergers. The latter resulted in a complete loss of confidence in the banking sector and a freeze-up of the system. World economic growth slowed down. Global economic growth during the period from the fourth quarter of 2007 to the second quarter of 2008 was down to 1% compared to 2,5% in the preceding three quarters. The IMF expects the downturn to continue.
Meanwhile, business and consumer confidence in the US and Euro area are very low. The financial crisis has also impacted on developing economies. Growth decreased from 8% in the first three quarters of 2007 to 7,5% in the following three quarters. Domestic demand, especially for business investment decreased and business activity indicators show that the slowdown will continue. Lower growth did not result in lower inflation, however. It was pushed up by the sharp increase in food and fuel prices. Inflation increased more sharply in emerging economies that spend more on food and were hit hard by increased world food prices. Developing countries are also more vulnerable for second-round effects of inflation, as the high importance of food prices puts more pressure on real wages.
Table 1 shows IMF projections of economic growth and inflation indicators for 2008 and 2009. World economic growth is expected to slow down in 2008 and 2009. While emerging countries will still maintain a relatively high growth of 6% in 2009, the developed world will face a sharp downturn in growth to 0,5% in 2009. The same trend is evident in international trade. Imports by developed countries increased by 7,5% in 2006. This will slow down to 1,1% in 2009. Export growth in developed countries (8,4% in 2006) will decrease to 2,5% by 2009.
Emerging countries will fare better. Import growth will slow down to a still high 10,5%, while export growth will decrease from 11% to 7,4%. The current financial crisis is described as the worst since the Great Depression. Talks of a recovery within days of the US approval of the US$700 billion (over R7 trillion) aid package were clearly premature. The crisis has a negative effect on emerging markets such as South Africa. Risk aversion, less money available for investing in risky markets and lower emerging market growth prospects leads to a movement of capital away from the emerging markets into more mature markets. According to the IMF, banking-related financial crises are more severe and continue for longer than those crises not associated with the sector. The current crisis will continue into 2009 and probably even to 2010.
South Africa will be less severely affected than the major developed countries. Luckily our financial system is not as integrated with the US, UK and EU economies as some others. Lower international commodity prices are a mixed blessing. Lower oil prices can help to moderate the impact of imported inflation. Lower commodity prices will result in lower earnings of foreign exchange for the mining and agricultural sectors. The weaker currency as capital flees the emerging markets, will help to isolate us against the lower commodity prices.
Unfortunately, it will also isolate us from the lower oil prices. We can expect more rand weakness as the crisis plays out over the next year or two. The weaker rand will limit the expected decrease in inflation. If inflation doesn’t slow down as expected, the Reserve Bank may postpone the expected decrease in interest rates to mid-2009 or later. Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy. |fw