We are still in the woods – Effects of stimuli wearing off
Extreme monetary and fiscal stimulus during the financial market crash and deep recession that followed the sub-prime crisis in 2008 caused a firm cyclical economic recovery in 2009 and 2010. While the policy-induced cyclical recovery likely pulled the world away from the brink of depression, underlying structural problems – predominantly in the developed world – not only soon surfaced as drags on global growth, but also set off yet another crisis.
This time around, unsustainable fiscal metrics in parts of Europe are threatening the future of the Eurozone itself. Similar, although not as serious, problems exist in the USA and UK.
Key downside risks remain financial and sovereign debt challenges in Europe, as well as excess capacity due to economic contraction in the developed world. This has quickened the economic pulse of emerging markets on the back of stronger balance sheets and long-term growth fundamentals.
Investors remain unsettled.
Investors have effectively two fears, both of which are causing them to shun risky assets. The first is the inability of policymakers in the Eurozone and the USA to deal decisively with their respective fiscal problems will eventually result in yet another financial crisis with dire economic consequences.
The second is that any decisive step to deal with the fiscal problems will inevitably result in a hit to economic growth via lower spending or higher taxes, but most likely a combination of both.
Prospects for 2012
After averaging about 5.5% between 2003 and 2007, global economic growth slowed to 3.5% in 2008 and slumped to 0.5% in 2009 as the developed world and parts of emerging markets plunged deeply into negative territory. Global growth recovered to about 4% in 2010 and is expected to slow to around 2.5% in 2011. The consensus forecast for global growth in 2012 ranges between 3.0% and 3.5%.
Prospects for 2012 remain unusually uncertain due to the risks that the unresolved fiscal issues could trigger yet another full-scale crisis.
Implications for Namibia
Emerging markets, including Namibia, are not immune to the developed world’s problems. Almost 49% of Namibia’s exports in 2010 were destined for Europe, which is around 18% of Namibia’s GDP.
As a trading nation, Namibia will never fully escape global events and trends. The key transmission mechanisms into Namibia are always via trade volumes, commodity prices and capital flows with the Namibia Dollar being at the forefront of any adjustments.
Growth for this year should be above 4.5% and is expected to slow to around 4% in 2012.
The key downside risks are a non-consensus broad-based global economic slump and/or a sharp drop in global commodity prices and/or a sharp depreciation of the Namibia Dollar which could force the Bank of Namibia to raise rates even in the face of a relatively weak local economy.
As things currently stand, it seems the Bank of Namibia will keep local interest rates on hold for an extended period of time. While inflation has recently risen to 6%, it has been driven predominantly by rising oil, food and energy prices.
Ongoing shocks from the European sovereign crisis and policy response to it remain the biggest determinant of the global economic outlook for 2012 and beyond. The USA is still facing headwinds from private sector and consumer deleveraging, as well as drag from broader fiscal consolidation.
Scientists forecast a crazy weather for the SADC region, including Namibia. Frightening lighting, heavy rains, unusual winds and floods are expected over the next five months. One hopes that if this scenario plays out, that the silver lining would be a boost for the agricultural sector in the New Year. If our farmers are doing well, the local economy and country stand to benefit.