17 September, 2018
Dennis Dykes on the prospect of global recession
The chance of a
global recession in the next 18 months has
risen from 15% last year to 30% this year,
which means it remains a possibility
rather than a probability.
However, the dangers
"will certainly start rising once we get
into 2020," said Nedbank Chief Economist
Dennis Dykes, speaking to the Dolphin Bay
Brief shortly after his return from a
gathering in New York of economists from
around the world.
revealed that the economists expected the
global economy to be fairly well supported
until the end of 2019, Dennis said.
are a variety of possible triggers for a
global recession and these "could come out
of left field," given the unpredictability
of developments such as US President
Donald Trump "running policy on Twitter".
In a more immediate
threat to the South African economy, the
ratings agency Moody's is more likely to
downgrade the South African economy to
junk status later this year, given
President Cyril Ramaphosa's recent
announcement on changing the Constitution
to allow for land expropriation without
A global recession would mean the
equivalent of someone with a compromised
immune system getting tuberculosis
announcement was clearly a decision of the
ANC National Executive Committee and "gives
us a sense of where the real power lies,"
Ramaphosa is a process person, and we would
have anticipated finishing the public
participation process first," said Dennis.
"The announcement was politically expedient
and massively populist. We don't know what
changes will be proposed, but the
announcement will be very badly received,
and makes it difficult to make a good case
the international front, the US housing
market, which triggered a global recession
in 2008, is unlikely to trigger another one
soon. At the time, banks in the US, UK,
Germany and other countries were lending on
an unprecedented scale, with very thin
capital. Lending requirements have shot up
with the resolutions of Basel III being
South Africa, the capital of banks has
increased significantly, and in those
countries most affected by the 2008 crisis,
exponentially," said Dennis. "Banks are
safer than they ever have been, and the
housing market is much less vulnerable."
a very large proportion of lending has
shifted from banks to a shadow banking
system, in which a host of organisations
with access to funds are offering loans. The
upshot is that debt has in fact risen
significantly over the last decade. "It's
bizarre - you close and lock one door, keep
interest rates really low for a decade, and
the money pops out somewhere else," observed
big danger is that the central banks are
starting to withdraw their liquidity and
interest rates are rising in the US, UK,
Europe, and perhaps soon Japan, all on these
elevated debt levels.
is the liquidity that has been going into
the Amazons of this world and then out into
the broader corporate sector. We will start
to see whether we have been living in a
fool's paradise," said Dennis.
possible trigger for a global recession
could be high-tech stocks falling out of
favour, as happened to Facebook recently.
"If this spread to other tech stars, it
could trigger a very quick change, although
it won't necessarily happen because they are
all very different," said Dennis.
global recession would hit commodity
prices, which would mean less cash
income and earnings growth for
unanticipated consequences of the tariff
wars also pose a large threat. To give an
indication of the possible repercussions, US
President Donald Trump's tariff on Canadian
wood led to timber prices going "through the
roof" - by more than the tariff, in fact -
affecting the cost of housing, packaging and
other sectors in the US.
trade wars grow to the point that trading
volumes collapse, a world recession could
well follow. Many models estimate that the
trade wars will lead to only a slight
reduction in the GDP, but Dennis thinks
these estimates are "wildly optimistic, as
there are so many effects, including
consumer confidence, which they do not pick
global recession triggered by trade
protectionism would be very negative for
emerging economies, as they are very open,"
a global upswing, South Africa typically
experiences a cycle of commodity prices
rising, money flowing into the country,
interest rates decreasing and people
starting to borrow substantially on credit.
Companies respond to local demand, and at
the end of the cycle, start investing
the global economy slows, commodity prices
sink and the cycle turns. "What has happened
now is that South Africa has skipped a whole
lot of steps," Dennis said. "The global
economy has improved, and local interest
rates have been relatively low, but we
haven't seen credit rising by much. In one
way, that makes us a little less vulnerable
than in previous economic upswings, where
increased debt combined with rising interest
rates hits the household sector at the end
of the cycle.
by the same token, we have seen no
employment growth, and the little we have
seen has been in the public, not private
sector. We also haven't seen any investment
response, because domestic demand has been
South Africa now, a global recession would
mean the equivalent of someone with a
compromised immune system getting
tuberculosis. "We would be hit harder than
many countries. This is because a global
recession would hit commodity prices, which
would mean even less cash income and
earnings growth for companies. The Rand
would come under pressure, and our export
volumes would be low."
recovery that occurred after the 2008 crisis
is unlikely to be repeated. At the time,
there was a massive response by the central
banks, which slashed their interest rates.
China reflated its economy, starting to
import commodities on a large scale as it
put huge infrastructure programmes in place.
Other economies followed suit, and emerging
economies were favoured.
in South Africa face a raft of
prohibitions, including the insecurity
of property rights, labour regulations
and BBBEE cod
Much higher levels
of public debt, including in China, would
make it difficult to perform the same
trick, to the same degree, again.
Cyril Ramaphosa has
pledged to raise $100bn in foreign direct
investment (FDI) over the next 5 years and
hopes for his success have risen following
China's recent promises of investments.
However, while welcome, this is "not a
game-changer", said Dennis.
"Some of this
investment is for existing Eskom projects,
not just FDI in new greenfield
investments, which would see new factories
being built and jobs created. The Chinese
will also expect to get their money back.
We don't know the conditions attached yet,
but this is not a charitable move, and we
have to take it with a pinch of salt. For
them, this investment is small change, but
will score them big political points."
Dennis does not
believe that the Chinese "investment" will
be supplemented by others from the private
sector in the near future.
Would-be-investors in South Africa face a
raft of prohibitions, including the
insecurity of property rights, labour
regulations and BBBEE codes.
"Most countries have
rolled out the carpet for investors, which
is what we should be doing. Instead, we
have such onerous conditions in place that
it is sometimes amazing if people do
invest - particularly because the
requirements might go up in time."
Nedbank does a
bi-annual survey of capital expenditure
announced in the financial and technical
press. In the first half of 2018, this was
close to the lowest levels in two decades.
Investment in mining and agriculture,
previously top growth areas, has fallen
away completely. Renewable energy is the
only sector with signs of life, and these
projects were originally announced in
The South African
economy contracted by 2.2% in the first
quarter, and in the second there is a
possibility of another, smaller decline,
while what ratings agencies want to see is
"Basically, what is
needed is a policy environment favourable
to investors, so that we can have
sustainable economic growth and jobs
growth," said Dennis. "We should be
rolling out the red carpet to investors,
making sure they are comfortable.
"Hopefully, if the
socio-political environment starts calming
down after the elections, things will
change. Ramaphosa needs some kind of
personal mandate to move forward with his
own set of policies, and he needs to
establish control over his party.
he can't do that, we're not going to see
the investment, jobs and growth that we
Source: Dolphin Bay Chemicals