Beware those downside risks

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The September issue of the World Economic Outlook of the International Monetary Fund (IMF) opens by saying that “the global economy is in a dangerous new phase”. Growth expectations have weakened, confidence has fallen and downside risks are growing.

Last year, it was believed that countries were clever enough to spend themselves out of recession.
But as farmers know, it’s impossible to spend yourself out of trouble. Before long, you’ll have to cut back again and reduce debt. The same is true for countries.

Unfortunately, many believed they could postpone the day of reckoning indefinitely. The current Greek tragedy is a prime example.

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People in Greece who lived beyond their means refused to accept the EU’s proposed disciplinary measures. At the time of writing, the outcome of Greece’s financial crisis is still unknown.

Growth outlook
The quick recovery after the recession was not sustainable. Government debt and banking problems in the Euro bloc are worse than originally thought, while the Japanese tsunami and unrest in North Africa have contributed to the problem.

Global economic growth is expected to slow down to 4% during 2012, down from the 5% experienced in 2010. In the developed world, growth of between 1,5% and 2% is expected.

This is based on the assumption that the EU will manage to solve the problems in Greece and elsewhere, and that US policymakers will be able to support the economy and reduce debt at the same time. Policy changes to address the economic problems of the US are bogged down by a highly complicated legislative system.

The country’s economy is further plagued by a weak housing market and deteriorating financial conditions.

Expectations for the developing world are more positive, although also much lower than estimated last year. Lack of capacity, tighter monetary policies and slowdown in demand from the developed world will dampen growth in many developing countries. Growth has decreased from 7% in the first half of 2011 to estimated growth of 6,4% in 2011 and 6,1% in 2012.

In spite of the downside risks to economic growth, several factors may increase growth in the near term. The Japanese economy has shown signs of rapid recovery after the earthquake and tsunami. And oil prices peaked at about US0 by the end of April, decreased to US0 by the end of the second quarter and currently trade at US0.

While these factors may encourage economic growth, the slow pace of recovery in consumer demand is a major problem.

Unemployment will probably stay high for some time and may even increase. Corporate profits were improved by low wage increases, which in turn have kept consumer income under pressure.

Downside risks
The IMF identifies three major downside risks to its growth estimates: high government and banking sector debt, the inability of governments to respond forcibly to the crisis, and concerns about the stability of emerging market economies.

Thus, while the IMF predicts a global growth of 4% for 2012, it estimates a range of between 3% and 5% at a 50% confidence level and a range of between 1,5% and 5,5% at 90% confidence.

Inflation outlook
Inflation pressure is still high, especially in developing economies. The direction of price changes will be determined by energy and food prices, capacity utilisation in the various economies, and policy decisions. While higher food and energy prices have added to inflation, this pressure has eased somewhat. The UN’s Food and Agriculture Organisation food price index peaked in February 2010 and has since decreased by 3%. However, the food price index is still 8% above its 2008 record level.

This is also true for meat prices (+35%), while dairy, grain and oilseed process are slightly below the 2008 peak. Food prices have decreased slowly since the beginning of 2011, as global economic growth has slowed and unemployment has remained high.

In South Africa, the weaker rand will probably soon push inflation to above the 6% mark. This could result in higher interest rates next year, especially if the rand continues to decrease in value. However, the Reserve Bank will be careful not to put brakes on the still uncertain economic recovery.

In summary, although there is global financial uncertainty, the food supply and demand situation remains favourable, and farmers can expect product prices at current or higher levels in the coming year. However, downside risks remain and have to be taken into account in all strategic plans.

Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and don’t reflect MPO policy.