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Johannesburg - Inflation is the next major threat to the global economy.
And, other than with the global banking crisis, South Africa will not be fortunate enough to escape this bogeyman.
The rescue packages that governments, especially those in developed countries, have so lavishly doled out and the pressure on consumers create a dangerous inflation cocktail.
Adrian Saville, head of investment at Cannon Asset Management, said responses to the financial crisis are stoking the fires of inflation.
Reacting to the crisis, governments in the developed world are quickly stepping up state expenditure - and borrowing money to do so. In so doing they are printing money in an attempt to stimulate spending. The inherent danger is that governments are backing insolvent businesses to sidestep their problems.
Saville said unless governments in developed countries can come up with a plan to reduce money supply, runaway inflation is inevitable.
Arno Lawrenz, head of investments at Atlantic Asset Management, reckons inflation will remain under control until economic recovery is in full swing, after which it will run riot.
In the early stages of economic recovery higher resource prices will fan inflation, while governments will still want to keep interest rates low. In contrast with governments' views, markets will look for higher interest rates to compensate for rising inflation.
If a balance cannot be found, the lower interest rates will force people again to invest in risky assets - which is what caused the crisis in the first place.
Lawrenz however reckoned that the markets will at some or other stage win the battle, suggesting a fragile economic recovery. "The price the global economic recovery will pay will be high inflation." Governments will certainly not extricate themselves from the indebtedness trap if they allow inflation to rise while the economy is recovering.
In South Africa inflation prospects are not too rosy either, but for reasons entirely different from those in the developed countries.
According to research by Merrill Lynch, inflation in South Africa over the next 12 months will remain between 8% and 9%, despite the recession.
The biggest drivers of inflation in South Africa are increases of more than 10% in the unit costs of labour, which will be passed on to consumers in the form of higher prices for goods.
Merrill Lynch believed that this will be bad news for interest rates. The next up-cycle will be similar to the previous one, with the difference that the rising repo rate could turn back down at some point under 10%.
- Sake24.com
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