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Friday, 27 July 2012

GLOBAL ECONOMIES RECOVERING IN ICU


GLOBAL ECONOMIES RECOVERING IN ICU

It would appear that the worst is over; however we are not out of the woods yet. In the later part of 2007 beginning of 2008 the global economies had to crash land their economies. When the US crash landed its economy in the Hudson River it coursed a Tsunami that coursed floods all over the world, with South Africa only being hit with the tail end of the Tsunami towards the latter part of 2008 beginning 2009. South Africans have been VERY fortunate that we were not hit with the full force of the global economic melt down. The immediate response of the major economies was to reduce interest rates to its lowest level ever to kick start their economies, in panic all the banks stopped borrowing money to each other and hence to the general public. South Africa again was one of the last countries to lower its interest rates.




The USA like most other countries immediately turbo boosted government spending to mitigate the job losses. This coursed government debt to spiral in some cases beyond repair as the US printing presses could not print US$ fast enough. Tax revenues plummeted as company profits dropped like rocks and thousands of companies and banks filed for bankruptcy. Printing money with no fiscal backing will certainly come back and bite these economies in the form of spiralling inflation.
US inventories dropped as production and demand literally evaporated into thin air. However, the silver lining is the fact that inventories that were depleted are now being replenished hence the start up of production plants again. This might take time but at least it has started
US production hit rock bottom in middle 2009 and are now at recovering levels. One of the main contributors of the spectacular collapse of the US economy was the inevitable property bubble that was created in the US. 

This was fuelled by cheap and easy money in the US through the creation of the most bizarre and greed fuelled systems of the secondary bond market ever that was started in the US and spilt over into other countries. The saddest part is that the greedy bankers went home with HUGE ANNUAL BONUSES during the bubble phase, but when the “crap hit the fan” the tax payers had to bail them out through the bail-out packages. As we can see below the US property market is now in a fragile recovery phase.There has been much criticism for the bail-out packages however; it looks like it starting to work. With the help of the drop in interest rates, printing of money, the bail-outs, cash injection into economies and government help, global economies are starting to recover. 

As was said that the major economies are in the recovery wards but many are still in ICU. The critical issue now is to get these economies to stand on its own by removing the life support as listed in the slide below. The example used, “the most critical period of an aeroplane’s flight is when it’s taking-off” if anything goes wrong during this time we know the consequences.
One of the major concerns is the national debt of the US. Some say that the national debt of the US is so high that they will never be able to repay it. Does this mean that we will be seeing many more wars?

The same goes for the US’s Siamese twin the UK.... What we see happening is that the US consumer confidence is slowly returning, even though they not spending yet as they are still in too much debt. Consumer spending recovery will be a VERY slow process. Hence, the question WHO is buying the production of the Chinese as the US was one of the biggest consumers of Chinese production. Is this another bubble in the making….? Did you ever think that this was possible; the general US household debt is at its highest ever peaking at 135% of personal disposable income. How the US consumer will get itself out of this will be very interesting. A definite positive sign albeit early is the SLOW recovery in the job market in the US. At least the loss in jobs have almost come to a halt. Now let’s look at South Africa. As I said earlier SA was one of the last countries to have dropped interest rates, the latest being the beginning of April 2010. With prime now being at 9.5%, the lowest it’s been in a very…very long time.

With our economy battling and many fiscal indicators pointing the wrong direction there is a strong case for another rate cut this year. Good news for us is that production has definitely turned the corner and as we know that car sales have moved in positive territory for the first time in 3years. So.........it looks like the worse is over?????  As I said earlier this is a very important indicator for the South African economy. SA car sales have finally turned the corner and that is new car sales.

Both FNB and ABSA property economist and real data confirmed that house prices have also turned positive for the first time in just on 3 years. This is good news....  As is experienced in the US the South African consumer is not spending yet even though there are positive signs.
One of SA biggest problems and I don’t even think the government knows how to tackle it is the following: In 1998 1.44 million students enrolled for Grade1. Of these students only 580 937 students eventually wrote matric which translates into a 60% drop out rate relative to the students who enrolled in Grade1. Of these students only 334 718 passed matric which means that of these students approx. 1.1 million students DO NOT HAVE MATRIC. The problem is so bad that government is now putting together a stimulus package to subsidise companies employing these students and maticulants. This I believe is one of SA’s major problems....what are we going to do with the millions of people with matric and no jobs let alone those without matric ...? See the breakdown of the unemployment rate by age group.

Now we come to the expectations of the soccer world cup. Many people were always sceptical of the benefits to the country of the world cup. One thing we must all agree with is the fact that if it was not for the world cup many structural development programmes would not have taken place. If only for this, I believe SA have benefited. However, the profitability of the world cup is HIGHLY questionable. The number of people attending the 2010 world cup will be on par with those that have attended the world cup in Germany however, the no. Of foreigners will be far less than originally forecasted by Fifa. This world cup apparently is the most profitable world cup for Fifa. We must remember Fifa have already made their money.  As can be seen from the slide that the 2010 world cup will not be profitable for SA. Unfortunately the SA tax payer will be paying for it for many years to come. However, the fact that the government was forced to do many improvements to the infrastructure of the country its ports, telecommunications etc....is VERY good for us and the country.

The government spending listed below I believe was mainly due to the 2010 world cup. We must not forget this has also contributed to cushioning the blow in SA of the global financial meltdown. If it was not for this kind of spending by the government we would have been far worse off. For my last slide I have to say something about Eskom. The impact of the electricity increase will have an impact on our inflation, but the economist believe we will still be within the target range of 3-6% for the next 2 years.

All we can do is be patient. Remember History always repeats itself. There have been many global recessions. We're might be experiencing bad times now but the good times will roll over soon again. We have survived the worse economic melt down in our living history. We will get out of it.

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