The global economy, including the South African economy, seemed to be moving into strong head winds on a number of fronts. Europe’s leading economies appear to be moving into another recession, the United States’ debt burden is increasingly becoming unsustainable, a hard landing for the Chinese economy looks inevitable and world trade agreements could come under the pressure of protectionist policies in some countries.
A just-published Interim Economic Assessment of G7 nations by the Organisation for Economic Cooperation and Development (OECD) warned that the global economy has weakened over the last six months and that the euro crisis is having global effects. Eurozone countries must act quickly to prevent a worsening downward spiral, it said.
The organisation examined the economic situation of the seven biggest industrial nations, including the United States, Japan, Germany, France, Italy, Britain and Canada. Russia, which is a member of the G8, is not part of the OECD.
With the release of the report, the OECD deputy secretary-general and chief economist, Pier Carlo Padoan warned that the global slowdown will persist unless the main cause of this deterioration, the continuing crisis in the euro area, is addressed.
He also warned that unemployment, already at high levels, would continue to rise. “Resolving the euro area's banking, fiscal and competitiveness problems is still the key to recovery."
Over the last six months, business investment growth has also been slowing, except in Japan where post-disaster (at Fukushima) reconstruction continues. In the euro area, weakness in the periphery is spilling over and even Germany seems to be heading towards a recession.
With the euro area crisis still the most important risk for the global economy, further policy action is needed to instil more confidence in the monetary union, the report states.
Not just Europe
But Europe is not the only region of the globe where there is trouble brewing. The US federal government's fiscal health prompted Canadian prime minister, Stephen Harper, to make an unprecedented public call for action.
While Europe’s problems are the biggest threat to the global economy, the US is still the world's biggest economy and single most important customer for Canada. Harper ranked the US federal government's inability to deal with its growing debt and annual deficits as his second-bigest concern concern.
"The longer-term context... is that the United States must get a grip on its fiscal situation. The United States' fiscal situation is very bad. The trajectory is very bad. So I would hope that after the [presidential] elections [in November] are concluded that there will be some focus on that particular issue in the United States," he said.
Commentators like CEO and chief global strategist of Euro Pacific Capital Inc, Peter Schiff predict that the US will be back on a gold standard “in a year or two”.
“I would have expected a [financial] collapse to have already happened,” he said and warned that “at this point I’m going to assume there is no more stay of execution and we are going to have our crisis coming up right after Europe,” he said in a radio interview with King World News
For South Africa, besides what is happening in Europe as an important export destination, the biggest threat emanates from China. Not only is China, with a skewed balance of payment relationship, a risk factor for the local economy, it is increasingly crowding South Africa out of its 'natural' markets in Africa.
A report by the University of East Anglia in the UK recently found that South Africa has lost out on $900 million in trade with sub-Saharan Africa because of increased Chinese imports, costing the country more than 77 000 jobs over the last decade.
This threat is likely to increase in the immediate future as China’s export markets in Europe and the US remain under pressure.
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recently wrote: “The Chinese will definitely attempt to pump more stimulus into the Middle Kingdom, but without a US and/or European market for cheap Chinese goods, any hope for a soft landing is doubtful.
And, China might be sitting on a massive debt bomb of its own. Since early 2009 until June this year, Chinese banks have issued about $5.4 trillion, equal to 73% of its GDP in new loans mostly as part of a stimulus package. Unlike Western deficit-financed stimulus packages, China's colossal stimulus package of 2009 was funded mainly by bank credit (at least 60%) and not government borrowing.
China’s excessive loose credit fuelled a property bubble, funded the profligacy of state-owned enterprises, and underwritten ill-conceived infrastructure investments by local governments. In the process years of painstaking efforts to strengthen the Chinese banking system were undone as new bad loans began to build up inside the financial sector.
Nobel prize winning economist Nouriel Roubini recently said that 60 years of data shows that over-investment leads to hard landings, using the Soviet Union in the 1960s and 1970s, and East Asia before the 1997 financial crisis as examples. China seems to be heading the same way.
From Argentina comes an indication of the sort of trade tensions and pressures on world trade agreements that can be expected in the immediate future.
Argentina registered a trade surplus of $1.64 billion in August, more than double that of a year ago, according to President Cristina Fernandez de Kirchner.
The trade surplus is increasing as a result of the Argentine government’s protectionist policies to control imports. While Argentina claims its policies protect domestic jobs, it has annoyed its trading partners to the point where complaints have been filed at the World Trade Organisation.
In the meantime the United Nations Food and Agriculture Organisation (FAO) has just reported that although world food prices stabilised in August at levels close to those reached in the food crisis of 2008, global grain stocks are likely to shrink this year as cereal crop output falls short of what is needed.
Although the food price index was below a peak of 238 points in February 2011, when high food prices helped drive the Arab Spring uprisings in the Middle East and North Africa, it is still close to levels during the food price crisis in 2008.
Swift international action could still prevent a catastrophe from developing, the FAO said. It urges countries to review their biofuel mandates and also warned against panic buying and restrictions on exports.