Are we in for a second round of the economic crisis?

14th May 2010 By: Seeraj Mohamed

South African economic data shows that, while economic growth is positive, this country has still not completely moved out of the economic downturn.

Many households face severe hardships in terms of unemployment and loss of income and too much debt. Many firms face continued hardship because of the continued destruction from the global financial and economic crisis. The response by government should be to keep in place support measures developed at the start of the crisis. Further, government should be introducing additional measures for distressed firms and households.

Special measures to help unemployed and poor people facing debt problems are required. The urgency for new support measures should be considered within the context of recent events in the global economy. We may have moved into the ‘second dip’ of the predicted double dip of the global crisis.

At times like this, we must look beyond the performance of financial markets. Financial market performance may be a result of volatile short-term capital inflows and a liquidity preference in the domestic market. The liquidity preference may indicate fears of a further downturn in the real economy.

At present, there seems to be a recovery in the global demand for mining products. However, we cannot expect this recovery to be of much help to recovery in employment, value-added manufacturing and consumption in the rest of our economy. We are losing thousands of jobs. Our official unemployment rate is now back to over 25%. The National Credit Regulator tells us that over 10-million people, nearly half of all ‘credit active’ people in the country, have accounts that are in arrears for three months or more. A significant proportion of South African households of all classes are struggling in silence.

The financial woes of Greece and the charges against Goldman Sachs give me reason to believe that we are entering the ‘second dip’. Firstly, financial markets around the globe are still fragile and have not completed a significant portion of the debt writedowns required for a recovery in debt markets. Secondly, households in the US and many other countries are still hugely indebted.

They have to further cut consumption and save to get themselves out of the debt hole. Thirdly, government-led bail-outs and stimuli prevented a worsening of the finan- cial crisis and kept the economic crisis from getting worse but did not clean up the mess. At the same time, government budget deficits have grown immensely.

The possible turning point leading to the second dip of this crisis was not the US Securities and Exchange Commission’s decision to go after Goldman Sachs, but the revelation last week that there will be much closer scrutiny of the deals made by financial institutions.

Further, there could be many more investigations of fraudulent behavior by other US financial institutions. Much closer regulatory scrutiny of financial institutions could cause a rapid drying up of credit markets and prolong the drought in global debt markets.

Another indicator that we may be in for a second dip is that, recently, Greek debt problems reached a point where there was contagion to other countries. This contagion could easily spread through global markets where most countries still have fragile financial institutions and huge private and government debt.

There is huge uncertainty about the global economy in the coming months. We can definitely expect domestic and global economic and employment recovery to be muted and slow. What is scary is that we may face the possibility of another round of crisis that will threaten the survival of many firms and make financial conditions even tougher for our already strained households. Government should act now to help firms and poor households that are struggling because economic conditions can get worse.