By Felicity Duncan
It has been a decade since the vicious Great Recession ravaged virtually every corner of every economy in the world. The global economy has been steadily expanding since then, but the bitter truth is that, by many measures, we have never actually recovered from that recession.
Since the recession, many asset markets remain below their peaks – house prices, in particular, have not recovered in many markets. Much of Europe remains recessionary because there the financial shock that triggered the Great Recession – the collapse of the US housing market – also triggered a serious sovereign debt crisis.
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Asia bounced back quickly, thanks in part to the fact that it was not as deeply connected to the global financial system as the US and Europe. But even in the places that did the best after the recession, such as the US and China, things are not exactly good.
In the US, economic growth has been steady, but the benefits have not trickled down throughout the economy. Wages have been stagnant for more income groups. Only the very richest Americans have managed to grow their wealth and income – the vast majority have seen their real, inflation-adjusted wages and wealth decline or stagnate. Bubbling anger over this has resulted, somewhat weirdly, in a reaction against immigration and global trade (neither of which is responsible for the situation). The net result is the current US war on free trade and immigration, which will have brutal consequences for the rest of the world.
In China, meanwhile, growth has been strong and deep. But in the last two years, it has stumbled. As global trade is battered by America’s tariffs and hostility to the World Trade Organisation (WTO), China has been forced to allow debt to mushroom to sustain growth. China’s state and corporate debt has ballooned and poses a potential threat to the country’s long-term growth. Coupled with trade troubles and the Trump administration’s newly launched currency war, the outlook for China is increasingly uncertain.
Meanwhile, in Europe, Brexit and various structural issues, as well as trade troubles, have stalled growth. When the UK leaves with no deal on October 31 – the most likely scenario on current trends – the ensuing chaos will drag down both the UK and Europe’s growth. The whole region is likely to enter recession, with associated negative impacts on global trade.
Read also: Is the world heading for recession? Alarm bells are ringing – The Economist
Markets are starting to recognise these threats. Stock markets have been very tense lately – every Trump trade tweet sends them careening up or down as investors hold onto hopes of a trade truce. Meanwhile, yield curves in the US and elsewhere have inverted – a strong recessionary signal (although many folks are saying, perhaps unsurprisingly, that this time it’s different and the yield curve relationship no longer holds).
Even the most optimistic of us must admit that the risks are clustered heavily on the downside. It is possible that China and the US will find some way to do a deal (extremely unlikely, given the politics of the issue, but theoretically possible). The UK and Europe may resolve their impasse and minimise the pain of Brexit. The US may move ahead on trade deals with the rest of its partners and jumpstart the global economy (again, very unlikely as the election approaches). All of these good things are possible, but they are pretty unlikely. For now, the risks all point down.
And this is very unfortunate for South Africa. As a small country that relies heavily on trade and global capital flows, SA does best when the world is doing well, when trade is flowing freely, and when markets are optimistic. As investors flee to the safety of long-dated US treasuries, SA’s borrowing costs will inevitably rise – no matter what happens to our credit rating.
South Africa failed to take advantage of the global recovery that followed the Great Recession. We failed to invest in needed infrastructure and to make the necessary reforms to take advantage of export opportunities. We allowed political infighting and corruption to siphon away a decade of growth. We cannot afford to let the same thing happen again.
The global recession, if it happens, will be tough on SA. It will be tempting to forget about reform and focus on survival. But the goal must be to get the country into fighting shape so that we are ready to take advantage of the recovery that will follow. We cannot afford to miss another opportunity.
