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Rex Column                                                                                 27 March 2017

A nutcracker world    

by Cees Bruggemans          words 800

The temptation in today's uncertain world is to draw up a long list of risks to assess the state of the future. All risks being obvious, though not necessarily equal in stature. That way, though, one might miss the forest for the trees.

It may pay to take a hard look at what has floored us in recent years, and to project these forces forward. And then still ask a few things about looming risks as yet not felt.

 

In my view, it is a remarkable short list that floored us in the post-financial crisis world. In other words I ignore 2007-2009, and start with 2010. And as far as I can ascertain, there were three nutcrackers operational.

Agricultural drought. The ending of the commodity supercycle. And the policy choices of Zuma and his elites. The consequences were easy to identify. Plunging farm income and higher household inflation, creating a headwind for the economy. A falloff in mining income, similarly creating headwind for the economy. And an underperforming public sector not pulling its full weight, while the preferred political policies caused private business confidence to tank in unprecedented fashion, in ways that had never happened since WW2, causing a sharp slowdown in growth momentum.

The good news is that the multiple droughts of recent years are presumably cyclical. This season’s maize output promises to be nearly twice last year’s.

The global mining cycle is more complex, with its Chinese features first offering a terrific windfall to commodity producers followed by a terrific bust. The Chinese industralisation effort based on exportation will probably not be repeated on anywhere near a comparable scale. And the world commodity producers have by now adjusted to this wrenching change.

The ironic news for SA is that not having fully geared up for the commodity supercycle due to incompetent policy interferences, our adjustment to the bust wasn't as wrenching either compared to others. Small mercies.

Any way, that's behind us. What isn't behind us, but looming bigger every day, is the ideological policy choices of government and its consequences. One observes ordinary people carrying on with life, and telling institutionalised stories that all might be well (as no other message sells), but in average boardrooms they are a lot more hard nosed than that. There has been a steady outward migration for greener pastures in what is called geographic diversification. It doesn't look yet at an end.

It would be different if we could see ourselves as one nation. But daily, some politicians take clear joy out of emphasizing how different we all are. That is not a platform for building healthy confidence and risk-taking.

The real challenges and choices here still lie ahead in future political cycles. So far it isn't obvious that the larger population wants a change in policy direction. That carries its own consequences.

As to other known and unknown unknowns still ahead, it is difficult to get too uptight. America is a big rich country, in which political checks and balances operate and nobody really gets the chance to do his nut. Trump has now been checked twice, by the courts on migration, and by the Republican Congress on healthcare. Losing too many battles is not recommendable. It tarnishes the reputation, and makes more important battles lose stature. Tax reform hopes have driven financial markets higher. If that were to falter, of which some signs, all future progress will be more difficult.

But in the end America is rich and will carry on. Its politics will mainly decide distribution aspects, whether to favour the rich over the poor or the other way.

One aspect could set the world back and do more damage than imagined. The wrong trade reforms could do real damage everywhere. But for now it remains difficult to read.

Europe has bigger structural challenges than America. The quick conclusion is to expect the worst, and the region to fall apart. I am not convinced that is the will of the majority. But it may take a while shaping.

China has its structural challenges, and OPEC lives in a world of its own, one in which walls are thought to do the job. But American frackers became the world swing suppliers some years ago, and it will be messy to unwind these controlled oil market shares. The world should benefit.

Two long-term realities concern me. One is climate change over which we may have less control than imagined. The other is global demographics, in the way climate change, war, growing population pressure and economic failure sets in motion unprecedented population migrations.

The last few decades may only have seen the start of something infinitely more ugly. It is that which should concentrate minds, not about which politician and elite should feed next.

 

Cees Bruggemans

Bruggemans & Associates, Consulting Economists

 

Website  www.bruggemans.co.za

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