Shifts in the US economy, the rise of China as an economic power and Eurozone debt are pushing the world economy towards a new order. This is according to Stanlib’s chief economist Kevin Lings, who spoke at a Wits Business School Distinguished Lecture recently. Lings highlights great structural changes in the world economy and its movement into a new world order. “The world is going through a transition stage, and this is a disorderly process,” says Lings. “We are moving from one world to another.” He explains that he believed the 2008 economic crisis had morphed into a political problem, and that the solution to the world’s economic woes is as much to do with politics as it is to do with economics.
Because of Eurozone debt issues and structural weaknesses in the US economy, the contribution of developing countries to the world economy is declining, he explains. The emerging markets of the Brics economies are growing faster than developed countries and are therefore gaining power, he says. In the United States, a decrease in consumer confidence and high levels of unemployment indicate a risk of recession, Lings says. “The US shopped till they dropped, and consumed themselves into debt.”

US retail, motor production and manufacturing production do not reflect bad data, but consumer confidence reached an all-time low in 2009. “A lack in consumer confidence leads to an increase in savings,” says Lings. And increases in savings ultimately lead to a decrease in consumer spend. But should savings remain at a stable level, the only threat that could push the US into recession would be job-shedding. Over six million people in the US fall within the long-term unemployment bracket, and these numbers are on the rise. In light of this structured unemployment level, Lings says, the US will need to create a whole new industry to create jobs.

A growing number of vacant homes and massive US government debt mean that the US cannot go back to its former glory. The US has 14.3 million vacant homes, which are either on the market or have been repossessed. Lings emphasises that this structural overload of property is a great burden on the US economy. He uses the example of housing prices in Las Vegas, which have dropped by 60% since 2008 and may never return to what they were. This situation is compounded by an increase in US liquidity from the Federal Reserve and low levels of fixed investments, Lings stresses. And because only 15% of US gross domestic product (GDP) goes to fixed investment, it is evident that too much is being spent on consumption. Ling proposes the creation of a whole new industry as the only means for the improvement of the US situation.

On the European front, Lings says, the lack of convergence between economies is one of the fundamental issues for the debt crisis. He also emphasises that Italy and Japan’s large debts have devalued their positions within the world economy. Italy is the most indebted government in Europe, with its debt standing at over 120% of its GDP, while Japan’s debt will reach 242.9% of its GDP in 2013. The consequence of the Greek crisis is that its citizens are losing confidence and moving their money to other countries, and the Greek banking system is being propped up by the European Central Bank. Unemployment in Greece has increased by 40%, and the stock market has lost 85% of its value. Because Greece’s weak economy and massive debt are enforcing one another, Lings says, it is in a state of depression – not recession – and needs to reform before it can improve.

Eurozone debt issues and changes in the US economy have had implications for the South African economy, Lings says. While South Africa is part developed and part emerging and has one of the least indebted governments in the world, its economy would benefit from greater fixed investment. Infrastructure development such as harbours and railways will be necessary for growing its economy and creating new jobs. Lings emphasises that public sector jobs in South Africa are largely increasing, while private sector jobs remain at a stable, lower level. Also, more social grants are awarded than there are existing jobs in South Africa.

While public corporations and the private sector continue to invest in the country, government investment reduced after the World Cup. Furthermore, Lings says, threats of nationalisation, growing policy uncertainty and government opposition to foreign investors such as Walmart scare off investors. This causes the business sector to lack confidence in the South African economy.