There is a worldwide global economic meltdown and South Africa will not be able to escape its impact. Nor the obligation on policy-makers to fashion measures to mitigate it. Remember the celebrated sixteenth century poet John Donne?  "No man is an island, entire of itself". Nor has South Africa an economy entire of itself.

Last October just as Wall Street began another nerve-wracking slide to a record low, senior Old Mutual economist Johann Els was reassuring policy holders and investors:  ".... The South African economy has probably weathered the worst of the storm and conditions are likely to improve from here into 2009". He also pointed to "some positive factors that make the South African economy relatively less vulnerable than many", among them a weaker rand that "will help boost exports in the medium term".

True enough the steep fall in oil prices and moderating inflation allowed the South African Reserve bank to cut its key lending rate in December 0.5% to 11.5%, down from a peak of 15.5%. That will enable, Els predicted, the CPIX (consumer price inflation less mortgage costs) to decline from 10% in December, 7% in January and on down to 3%-6% in the second quarter in 2009.

Other economic advisers were likewise optimistic pointing to the fact that South African banks had avoided (good judgment or exchange control?) the trap of mouth-watering returns offered by toxic US mortgage-related sub-prime securities. Bottom line, Els expected GDP growth in 2009 to hold steady at "just below 2%".

Around the world countries would be overjoyed to exchange 2% growth for the bleak prospects facing their citizens this year. But first let's do the numbers for end-2008:

In the US two words describe equity markets last year: annus horribilis. When the year began the market cap of shares in the S&P 500 index was $12.86 trillion. By years- end it had slumped to $7.85 trillion resulting in the biggest destruction of wealth investors have ever suffered. You could buy General Motors stock for a mere $3.20 a share!

Consumer confidence also evaporated: the Conference Board's index (1985=100) declined from 110 in January 2008 to 45. And the Institute of Supply Management's index of manufacturing activity dropped in December to around 38 (below 50 indicates contraction). Labour markets look awful. First-time jobless claims were up over the year from 344,500 to 552,250 and 4,5 million claimed unemployment benefits in December, the most since December 1982.

Brand name American companies across the board, from retailers to banks to airlines have disappeared, victims of the credit crunch as banks stopped lending and consumers stayed home with wallets tightly closed. Only those with the strongest balance sheets are likely to survive if the current phase of economic Darwinism continues. Indeed the effect of the financial freeze-up is penetrating every nook and cranny of American society. Not only corporate employees are being laid-off. So are service providers like hospital workers, police, firemen, teachers, travel agents and librarians.

Overall it can't be ruled out that the recession, which has been tightening its grip all year, may yet morph into depression as deflation succeeds inflation as the prime challenge facing the Treasury and the Reserve Bank. Barack Obama is urging Congress to quickly pass a huge $775 billion economic stimulus package because, he says, "the economy is bad and getting worse".

Britain's economy is in even worse shape. Housing prices dropped 18.7% in 2008 and the decline appears to be accelerating. Thousands of employees in the City, London's financial district, have been laid off depressing further an ailing housing market and consumer spending. Even century-old Woolworths, the iconic mass retailer, is closing its 800 stores having failed to find a buyer.

In the Euro zone and beyond a Harris/FT poll finds a universally gloomy outlook: only "a quarter or less" believe recession will last less than a year while 3 out of 10 Germans think their economy will "not return to growth in the foreseeable future". 

In Russia industrial output in November fell 8.7% year-on-year, the steepest decline since August 1998 and with natural gas revenues falling  talk of a rouble devaluation is spreading. Russia's three Baltic neighbours are predicting their economies will contract by 3.5% this year.

As for Latin America the World Bank forecasts growth down to 2.1% this year: Morgan Stanley researchers are less optimistic. They've cut their forecast for the seven largest economies from 1.5% to an outright contraction of 0.4%.

Even global powerhouse China, after years of 12% torrid economic expansion, saw a cooling in GDP growth to 9% in third quarter 2007 and demand for foreign goods has fallen by 18% year-on-year. Millions of migrant workers are being sent back to rural areas. This year its economy will still be growing, although slowing to 7.5%.

Should the gloomy prospects for global economic growth prove accurate, how severely is South Africa likely to be affected? What impact will the inevitable fall in export orders have on its current account? World-wide investors have become risk-averse so what will be the effect of shrinking fixed capital inflows on the balance of payments and on the creation of new job opportunities in a country already trying to tackle an unemployment rate of 25%-plus?

As personal incomes stagnate and corporate profits shrink tax revenues will be down. That will make an ambitious job-creating expansion of public sector infrastructure spending (a key plank in ANC economic policy) more difficult to finance, assuming there are enough work-seeking skiilled and experienced engineers available.

Despite limited room for manoeuvre government, employer organizations and trade unions should start putting together contingency plans for coping with the fall-out from the darkening economic skies around the world. There will be a heavy social and economic price to pay if policy-makers and opinion formers underestimate the impact of global recession, especially at a time of political uncertainty as the old order gives way to the new.

For what it's worth here are a few Do's and Don'ts to get the debate started ....

• Post-election reappoint Trevor Manual as Secretary of Finance and Tito Mboweni as Governor of the Reserve Bank. It has never been more vital to ensure seasoned professionals are in charge of fiscal and monetary policy.
• Without delay start planning for an effective economic stimulus package consistent with maintaining financial stability and within the parameters set by the IMF.
• Resist the seductive overtures of special interests pushing for more protection against competition from imports. Higher tariffs will push up the costs for consumers at a time of rising unemployment and downward pressure on incomes, and invite retaliation and international censure.
• Critically re-examine labour laws and regulations and reframe those that unnecessarily undermine productivity
• Sharpen up implementation of competition policy to protect hard-pressed consumers from price-fixing and profiteering.
• Wage war against corruption and reinstate the Scorpions with the necessary authority
• Dispatch trade missions to key export markets and a team of savvy bankers to key foreign capital markets to reassure investors that the government supports private enterprise, recognizes the contribution business makes to economic growth and job creation and welcomes foreign participation.

Let the debate begin!

George Palmer is a former editor of the Financial Mail

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