Another risky year unfolding

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Not everything is running as smoothly as the 2009 revival seemed to promise.

JOHANNESBURG - If you thought 2008 was exciting (Polokwane fallout, Eskom blackouts, inflation bulges, the Reserve Bank's rate shocks, global financial crises, recession), this year is also shaping up as rather exciting.

It turned out 2009 was perhaps the eye of the storm. Perhaps marked by recession, but there was eventually the start of recovery from 3Q2009. And it was preceded by strong revival in the rand and equity markets from fear-depressed levels, with even nominal house prices starting to rebound from midyear.

But on entering 2010, in which we will finally host the FIFA World Cup, not everything seems to be running as smoothly as the 2009 revival seemed to promise.

Globally an awful lot of caution appears to have re-emerged in financial markets, even upholding the dollar.

There are deep questions about an overheating China and it eventually pulling back, with the global economy not able to keep up its pace of recovery once inventory and fiscal boosts fall way (and underlying angst re-emerging in weak final demand and ongoing credit strains).

Also, there are sovereign risk-related fears, in regional sideshows, such as Dubai, but more pertinently in Europe where far too many periphery countries have deteriorating state finances, potentially threatening not only default but the entire European concept, foremost the euro.

These many fears are proving strong enough to keep equity markets marking time, while reviving risk aversion favours dollar safe havens despite zero-interest returns.

At best these may eventually prove overdone concerns about things that can be successfully resolved. But at worst there awaits another financial crisis, even on a par with the global banking one of 2008 and what then followed.

Clearly, such thoughts are unsettling, and it shows in disturbed financial markets everywhere.

But it isn't only external events that should keep us focused. Domestically we also continue to make waves, something financial markets cannot keep taking in stride indefinitely, even if there is much noise.

There remain deep societal divides flavouring daily politics, for example:

Calls for nationalisation and pronouncements indicating that nationalisation isn't government policy.
Calls for the abolition of inflation targeting in favour of more populist easy monetary policies, if possible coupled to a much weaker currency, as compared to official pronouncements to the contrary.
A popular wish to intervene deeply in the economy by way of company subsidies and state capitalism as compared to apparently supporting such ideas with minimal financial backing.
Strong policy statements about intended infrastructure commitments these next three years, and indeed longer term, compared to perceptions of a failing infrastructure falling yet further behind.

It isn't only that so many municipalities appear dysfunctional, but also that (growing) construction delays at turnkey infrastructure projects may further cap economic potential in the near future.

A modern economy, like modern marriage, isn't only a matter of continuing habit. Instead, like in financial markets always, there is this deep questioning going on, feeding into future expectations and inviting short-term reactions, with potentially long-lasting consequences.

Is confidence being undermined? Are fear and caution rising to the surface? And how does this play?

Financial markets sell off as risk aversion rises. In the real sectors, households still appear concerned about their high-debt levels, their uncertainty about income and employment prospects, and whether now is a good time to buy durable goods. There remains remarkable willingness to postpone replacement.

Similarly, private businesses lost a lot of confidence, cut their fixed investment outlays deeply in 2009, are sitting with much spare capacity and reduced expectations and seem hesitant to recommit to much rosier prospects.

Along with hesitant infrastructure construction, slower 2% growth in real government outlays on account of constrained budget reasons and credit access also more disciplined, it suggests only slow recovery in final demand once the temporary inventory and fiscal boosts are played out and exports have more fully recovered.

We may benefit this year from holding the World Cup, and even have a windfall agricultural year due to good rains, but this may not fully compensate for these many other restraining forces possibly holding back growth this year and even next.

This is before considering whether the worst will still happen a second time globally, so soon after 2008, and this time focused on sovereign issues.

The world may find solutions to these many problems and prevent a worst outcome. But we don't know yet for certain whether this will be the case. Meanwhile uncertainty prevails, potentially restraining our growth revival, globally and locally.

Cees Bruggemans is chief economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics