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WHEN SA's first-quarter economic growth figures were released in May, they showed the economy grew by 4.8%.
This was higher than any economist expected, and raised hopes for a solid performance for the SA economy this year. But storm clouds have gathered, and those hopes might be dashed.
The storm clouds are mostly international. Top of the list is the Greek crisis, which might be on its way to becoming a Greek tragedy. The eurozone country has been plunged into a debt crisis and needs to implement more austerity measures before it gets more money from the International Monetary Fund (IMF) and the European Union (EU).
Politically, the appetite for more austerity is wearing thin, with protests on the streets showing how Greek people feel about the need to shrink the public sector.
The Financial Times reported that the IMF was blocking a critical €12bn aid payment to Greece just weeks before it was due, insisting it couldn't go through without concrete assurances from European officials on a new Greek bailout.
The IMF, due to disburse €3.3bn of the aid payment, is prevented from giving aid to a country that cannot pay its bills for the next 12 months. Eurozone finance ministers have acknowledged that under the current €110bn bailout, Greece will run short in March 2012.
The IMF had been counting on the EU to come to the rescue, but there has been continuing disagreement between eurozone countries over the terms of a new bailout. Meanwhile, Germany has been clamouring for private bond holders to bear substantial costs of the new bailout.
Against that backdrop, the pressure is on for a depreciation in the euro. If private bond holders are forced to take a loss, that could lead to a mini banking crisis in Europe, which could explode into a bigger crisis if Greece simply defaults.
If Greece doesn't get the €12bn tranche of its aid package, there will be a European financial crisis which will spill over into the rest of the world. For SA, it will mean a sharply weaker rand, and the inflation associated with that. However, oil prices are also likely to drop, so there should be some relief from that score.
US in trouble too
As though Greece's fiscal problems aren't enough, there are fiscal troubles in the US as well. US lawmakers are currently wrangling over the increase in the country's debt ceiling, which currently stands at $14.3 trillion.
Congress has to approve the increase in the debt ceiling, which will be hit by August. However, Democrats and Republicans have turned the debt ceiling into a tool for a deal on the US deficit (the difference between spending and revenue). Democrats want tax increases to pay for a reduction in the deficit, while Republicans want spending cuts.
The chairperson of the US Federal Reserve, Ben Bernanke, has warned that the country's creditworthiness is at risk if its borrowing limit isn't raised. Bernanke said any delay in the US government making payments could cause chaos on global financial markets. It could also damage the dollar's status as a reserve currency, he warned.
Bernanke said he understood the desire of many politicians to use the deadline to force some necessary and difficult policy adjustments, but said the debt limit was "the wrong tool for that important job". If the debt limit isn't raised, and the US reneges on payments, it would be logical for the dollar to weaken. But markets aren’t always logical, and a US crisis could see the dollar strengthen, as it did when the subprime mortgage crisis hit.
However, it's more likely that the dollar will weaken. This would mean a strengthening rand. Still, while US lawmakers might allow things to go down to the wire, it's likely that a lifting in the US debt ceiling will be approved in time. That Bernanke had to warn about it shows, however, how precarious the situation is.
The Japanese earthquake and tsunami has also had an effect, with SA manufacturing production falling by a steep 3.7% month-on-month in April, bringing the year-on-year increase down to 0.4% from a downwardly revised 4.9% in March.
Sharp declines occurred in motor vehicle production, which was affected by the situation in Japan. The manufacturing figures do not augur well for SA growth in the second quarter.
Another cloud on the horizon has been the Arab uprising, which has pushed petrol prices higher. True, they are slowly moving down now, but according to the consumer price index the annual rate of petrol inflation was 16.3% in April.
Less dramatically, a cloud that has been hovering is the "soft patch" hit by the global economy in the second quarter of this year. Indicators of industrial production and retail sales show the global economy isn't in the pink of health. There were some fears of a double-dip recession, but these have now dissipated and there's agreement that what the world is going through is a soft patch.
SA faces many homegrown problems in its economy, of which unemployment is the biggest. But at the moment there are clouds on the horizon from the international economy. Here's hoping that those clouds will disappear behind the sun.
- Fin24
This was higher than any economist expected, and raised hopes for a solid performance for the SA economy this year. But storm clouds have gathered, and those hopes might be dashed.
The storm clouds are mostly international. Top of the list is the Greek crisis, which might be on its way to becoming a Greek tragedy. The eurozone country has been plunged into a debt crisis and needs to implement more austerity measures before it gets more money from the International Monetary Fund (IMF) and the European Union (EU).
Politically, the appetite for more austerity is wearing thin, with protests on the streets showing how Greek people feel about the need to shrink the public sector.
The Financial Times reported that the IMF was blocking a critical €12bn aid payment to Greece just weeks before it was due, insisting it couldn't go through without concrete assurances from European officials on a new Greek bailout.
The IMF, due to disburse €3.3bn of the aid payment, is prevented from giving aid to a country that cannot pay its bills for the next 12 months. Eurozone finance ministers have acknowledged that under the current €110bn bailout, Greece will run short in March 2012.
The IMF had been counting on the EU to come to the rescue, but there has been continuing disagreement between eurozone countries over the terms of a new bailout. Meanwhile, Germany has been clamouring for private bond holders to bear substantial costs of the new bailout.
Against that backdrop, the pressure is on for a depreciation in the euro. If private bond holders are forced to take a loss, that could lead to a mini banking crisis in Europe, which could explode into a bigger crisis if Greece simply defaults.
If Greece doesn't get the €12bn tranche of its aid package, there will be a European financial crisis which will spill over into the rest of the world. For SA, it will mean a sharply weaker rand, and the inflation associated with that. However, oil prices are also likely to drop, so there should be some relief from that score.
US in trouble too
As though Greece's fiscal problems aren't enough, there are fiscal troubles in the US as well. US lawmakers are currently wrangling over the increase in the country's debt ceiling, which currently stands at $14.3 trillion.
Congress has to approve the increase in the debt ceiling, which will be hit by August. However, Democrats and Republicans have turned the debt ceiling into a tool for a deal on the US deficit (the difference between spending and revenue). Democrats want tax increases to pay for a reduction in the deficit, while Republicans want spending cuts.
The chairperson of the US Federal Reserve, Ben Bernanke, has warned that the country's creditworthiness is at risk if its borrowing limit isn't raised. Bernanke said any delay in the US government making payments could cause chaos on global financial markets. It could also damage the dollar's status as a reserve currency, he warned.
Bernanke said he understood the desire of many politicians to use the deadline to force some necessary and difficult policy adjustments, but said the debt limit was "the wrong tool for that important job". If the debt limit isn't raised, and the US reneges on payments, it would be logical for the dollar to weaken. But markets aren’t always logical, and a US crisis could see the dollar strengthen, as it did when the subprime mortgage crisis hit.
However, it's more likely that the dollar will weaken. This would mean a strengthening rand. Still, while US lawmakers might allow things to go down to the wire, it's likely that a lifting in the US debt ceiling will be approved in time. That Bernanke had to warn about it shows, however, how precarious the situation is.
The Japanese earthquake and tsunami has also had an effect, with SA manufacturing production falling by a steep 3.7% month-on-month in April, bringing the year-on-year increase down to 0.4% from a downwardly revised 4.9% in March.
Sharp declines occurred in motor vehicle production, which was affected by the situation in Japan. The manufacturing figures do not augur well for SA growth in the second quarter.
Another cloud on the horizon has been the Arab uprising, which has pushed petrol prices higher. True, they are slowly moving down now, but according to the consumer price index the annual rate of petrol inflation was 16.3% in April.
Less dramatically, a cloud that has been hovering is the "soft patch" hit by the global economy in the second quarter of this year. Indicators of industrial production and retail sales show the global economy isn't in the pink of health. There were some fears of a double-dip recession, but these have now dissipated and there's agreement that what the world is going through is a soft patch.
SA faces many homegrown problems in its economy, of which unemployment is the biggest. But at the moment there are clouds on the horizon from the international economy. Here's hoping that those clouds will disappear behind the sun.
- Fin24
