Export-dependent SA would be hard hit by any double-dip dramatics

29th January 2010 By: Terence Creamer - Creamer Media Editor

The World Bank expects the South African economy, which slumped into its first recession in 17 years during 2009, leading to an estimated 1,8% contraction in gross domestic product (GDP), to grow by 2% during 2010 and 2,7% in 2011 – however, a ‘double-dip’ recession would severely undermine the pace and strength of the anticipated recovery.

The forecast is well below the country’s now abandoned aspiration for economic growth of more than 6% from 2010, which was also seen as a necessary condition for curbing South Africa’s extremely high unemployment rate and growing levels of inequality.

Africa’s largest economy shed nearly one-million jobs during 2009, raising the official unemployment figure to 24,5% by the third quarter, while the broader definition of joblessness still comfortably exceeds the 30% level. And, on the inequality front, the country’s Gini coefficient of income inequality is, at 58, the worst in a peer group assembled by Standard & Poor’s, consisting of China, Hungary, Mexico, Poland, Russia and Thailand.

The World Bank’s growth forecasts for South Africa are more or less in line with the country’s own Medium-Term Budget Policy Statement forecasts, released in October, which anticipate growth of 1,5% in 2010/11, follow-ed by 2,7% in 2011/12 and 3,2% in 2012/13. Finance Minister Pravin Gordhan will update these forecasts on February 17, when he delivers his Budget address to Parliament.

In its ‘Global Economic Prospects 2010’ report, the World Bank indicates that South Africa’s economic recovery, as will be the case across sub-Saharan Africa, will be fuelled by a recovery in private demand, exports, and investment, with the largest contribution expected to come from exports.

Therefore, the strength of the recovery will depend on the growth performance in key export markets, such as the US, the European Union and China. The projected rebound in growth in these economies should improve demand for sub-Saharan African exports, and should trigger a modest recovery in investment flows.

“However, growth in external demand is expected to wane in the second half of 2010, as the growth impact of the inventory restocking cycle and fiscal stimulus wanes,” the report notes, adding that the recovery in the region will, thus, remain “modest and fragile”.

Further, the region will be extremely vulner- able in the event that the global economy experiences a ‘double-dip’ recession and/or economic stagnation.

“The major risk facing the sub-Saharan economies is that the world economy could experience a double dip or economic stag- nation,” the study says.

This, in turn, would undermine the recovery in external demand for the sub-Saharan African economies and would put pressure on commodity prices, constrain government revenues and possibly push debt to unsustainable levels. Governments may then be forced to implement procyclical fiscal cuts, increase taxation, or both, with adverse implications for poverty, health, education and long-term growth prospects, the bank states.

Further, the study forecasts that the fallout from the crisis will change the landscape for finance and growth over the next decade. “Over the next five to ten years, increased risk aversion, a more prudent regulatory stance and the need to curb some of the riskier lending practices during the boom period that preceded the crisis can be expected to result in scarcer, more expensive capital for developing countries.”

Pace of Growth Curtailed
The pace of growth in sub-Saharan Africa will, therefore, be well below the 6% yearly levels recorded during the boom years between 2003 and 2007, as a result of lower real commodity prices and slower global growth.

Regional GDP is estimated to have increased by only 1,1% last year, with oil exporters and middle-income countries having been hit more severely than low-income, fragile and less integrated countries. Countries in the territory felt the crisis through trade, foreign direct investment, tourism, remittances and official assistance channels.

In 2010, GDP is expected to grow by 4,8% in sub-Saharan African countries, excluding South Africa, with growth of 4,2% in fragile countries and 4,8% in low-income countries.

“The overall regional outlook remains uncertain and the strength of the recovery will largely depend on demand from key export markets,” the report states, adding that, despite the return to positive growth, it will take several years before economies recoup the losses already incurred.

The report estimates that global GDP, which declined by 2,2% in 2009, is expected to grow by 2,7% this year and 3,2% in 2011, with developing countries expected to grow by 5,2% this year and 5,8% in 2011, from 1,2% in 2009.

GDP in rich countries, which declined by 3,3% in 2009, is expected to recover less quickly, at 1,8% this year and 2,3% in 2011.

World trade volumes, which fell 14,4% in 2009, are projected to expand by 4,3% and 6,2% in 2010 and 2011 respectively.