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Green shoots killed 
by early frost

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Green shoots killed 
by early frost

4th December 2009

By: Seeraj Mohamed

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The South African media seemed overeager to celebrate an economic recovery last week. There was very little to celebrate in the South African economy. When one considers the news coming from the US and elsewhere, it seems that we have to look forward to more economic bad news next year – unless the World Cup stimulates the economy enough to raise economic growth to positive levels. Hopefully, soccer fans will not cancel their trips if the global economy takes another beating next year.

I am concerned about the focus on gross domestic product (GDP) growth alone. At a time when US and European mainstream rags are running stories about the possibility of a lost generation of college graduates in the US and Europe, the South African media have done inadequate reporting on the social impacts of our employment crisis.

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When about 6% of the jobs of an economy that has unemployment of over 20% are lost in less than a year, there is more than a crisis. 
Perhaps, the hopelessness of the situation has caused the South African media to clutch at straws and to report that a 0,2% quarter-
on-quarter growth is a sign of economic 
recovery. Very little attention was paid to the fact that year-on-year growth for this quarter was actually 2,1% lower than that for the corresponding quarter last year.

I believe that we still have to watch the US economy to get a sense of where the 
global economy will go next year. There is a lot of pessimism in the mainstream US media about the US economy next year. The Wall Street Journal ran a story on November 24 that was headlined ‘One in Four Borrowers is under Water’. 
The story stated that nearly 25% of US homeowners owed more on their mortgages than their houses are worth. Nearly half of the homeowners owed more than 20% than the value of their homes and more than half a million had received a notice of default on their homes.

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The US housing market, banks and holders of toxic financial assets are in for more trouble. 
USA Today reported on November 19 
that “about seven-million properties are destined to go into foreclosure, according to a September study by Amherst Securities Group, compared with 1,27-million properties in early 2005”. 

The New York Times ran a story on November 22 headlined ‘Wave of Debt Pay-ments Facing US Government’. The story explained that the US government had been receiving very cheap financing for its huge increases in borrowing.

However, the US will face higher 
interest rates soon, with large parts of the US government’s short-term debt due for repayment next year. The interest rates paid by the US government will have an impact on the stimulus and bail-outs it can afford in the future. If there is another financial collapse within the next few years, the scale of
the US response may not be as large as its 
response to the current financial crisis.

The Financial Times also ran a story on November 22 showing the distress on developed-country governments with the headline ‘Bets Rise on Rich-Country Bond Defaults’. It said: “The mounting level of debt in the industrialised world is prompting a growing number of investors to use the derivatives market to bet on the chance of rich governments defaulting on bonds.”

The recent increase in the gold price is also seen as a response to economic distress in 
industrialised countries, particularly the US.


South African policymakers should avoid ‘overconfidence’ in the economy again. They should focus on job losses, not on tiny gains in GDP growth. 
And they should watch events in the world economy and in financial markets with a growing sense of dread. 
My recommendation is that they should emulate the Asian economies (and Brazil) by increasing capital and exchange controls to reduce the impact of hot money flows and to protect the economy from the possibility of further contagion from financial crises.

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