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Small business lifeline?

THE International Monetary Fund (IMF) predicts global growth to increase to about 3.75% this year (up from 3% in 2013) and 4% in 2015. These predictions are based on an improved second half of 2013, a period in which growth firmed in advanced economies.

Despite the growth in advanced economies, spurring from stronger outturns as final demand expanded broadly as expected and a boost to output from stronger exports, emerging markets still face weaker than expected domestic demand - a reflection in part of tighter financial conditions.

The global recovery remains weak, however, and significant downside risks remain. Emerging markets remain a key concern due to capital outflows, higher interest rates and sharp currency depreciation. Moreover, a persistent tightening of financial conditions could undercut investment and growth in some countries given corporate vulnerabilities.

At the opposite end of the spectrum, very low inflation in the euro area and the expectation of inflation dipping further raise deflation risks in the event of a serious, adverse shock to activity.

Taking into account the global economic climate, the IMF suggests further action and cooperation is needed to promote financial stability and robust recovery. Specifically for developing economies like South Africa, these are:

• Alongside exchange rate flexibility, credible macroeconomic policies and frameworks are critical to weather turbulence. Priority should also be given to shoring up fiscal policy credibility where it is lacking and subsequently, buffers should be built to provide space for counter-cyclical policy action.
• Further policy actions are needed to reduce unemployment and strengthen medium-term growth, while making it more balanced.

Locally, Statistics South Africa announced that headline consumer inflation accelerated to 5.8% year-on-year in January from 5.4% in December. As the economy continues to face setbacks on various fronts, the small business sector is likely to struggle.

Already in 2013, small businesses needed urgent assistance to keep operating (according to FNB) and if additional interest rate hikes occur in 2014, this will only get worse.

An aggravating concern is that MPs have agreed to a bill which will see tougher new measures governing credit providers. Through providing a uniform risk assessment process for credit providers, the national credit amendment bill seeks to curb reckless lending practices. Thus, it will be harder for consumers to access credit even if the prime lending rate remains at 9%.

The second bullet point above thus remains pivotal in South Africa – policies need to be initiated that provide employment and strengthen medium-term growth. If left to its own devices, the small business sector may be left virtually non-existent and our unemployment figures will jump substantially.

Keeping in mind that there is no one-size-fits-all solution, perhaps we need to revisit apprenticeships (German-style apprenticeships are touted as a solution to widespread youth unemployment in Spain and other southern European countries) and the importance of technical colleges in South Africa.

As in Spain, having a university degree in South Africa does not guarantee someone a job any more. In addition, we too have low-skilled jobs in services such as construction and tourism, where a degree is not an advantage. So why not train apprentices towards a range of standardised qualifications?

The costs can and should be shared between business and government. Since apprenticeships usually last three years, the companies benefit from the contribution of their young workers once they get the hang of their task and government, in turn, from a broader tax base.

 - Fin24

* Geoffrey Chapman is a guest columnist and trade policy expert at the SABS. Views expressed are his own.

Sources:

Barysch, K. (February 19 2014). Can German apprenticeships fix Spain’s youth job crisis?
IMF (February 22-23, 2014). IMF note on global prospects and policy challenges.

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