SA economy at mercy of adverse global economic forces

Nazeem Martin

"Similar to the situation in 2008, the South African economy is at the mercy of adverse global economic forces. Growth in China is at a 25-year low, and with it the prices of commodities. Europe is still struggling to recover from the last crash and even positive developments seem to conspire against us: the recovery of the US economy is pushing up interest rates there, pulling investments away from emerging markets such as ours.

"Locally, South Africa's worst drought in a century is bound to ignite high food inflation, which will be intensified by the fall in the rand. Unlike the 2008 crash, we have no growth spur such as hosting the Soccer World Cup to look forward to, and the state has no more fiscal reserves to spend in order to boost the economy."

Martin adds that 2016 is also an election year, which results in the focus of government shifting from policy decision-making to electioneering. "In all democracies, this tends to put a damper on any policy response that a government may try to boost the economy, such as softening the labour laws."

Less money to spend

For the majority of owner-managed businesses on the ground, these grim conditions essentially mean that their clients will have less money to spend, says Martin. "Those businesses that service households will find their clients' disposable income knocked by inflation, stagnant wages and rising interest rates. Businesses in corporate supply chains will feel the effect of shrinking budgets as corporations cut costs and put growth plans on the back-burner.

"The same goes for businesses that service government - budgets are being revised and the chances of the long-awaited infrastructure build plans by government rolling out this year are remote."

Based on the above scenarios, Martin says that competition among businesses across the board will increase as they chase a shrinking amount of disposable income. "Pressure from staff for increased wages to cope with food inflation will add to the discomfort, and input costs in general are likely to rise."

Martin however stresses that during an economic downturn a surprising number of opportunities present themselves to businesses that are well prepared and carefully managed. "Many businesses that remain standing during this period will experience an increase in the number of enquiries from potential customers who had previously used the services of competitors who succumbed to the downturn."

©Andriy Popov via 123RF

Exploiting a windfall

However, he warns that such opportunities should be handled carefully and with long-term growth in mind. "Businesses that exploit such a windfall opportunistically with heavy prices and poor service, will find that their clients leave in droves as soon as the good times return."

Martin concludes that business owners should remain positive and practice their survival tactics as the 'good times' will return. "South Africa remains a land of opportunity for the entrepreneurially minded. We have enough going for us. We have the people, we have the skills, and we have enough entrepreneurs to tide us over during this storm."

In such business trading conditions, Martin proposes a set of four survival tactics for business owners:

• Preparation and planning: Now is the time to review costs and fine-tune efficiency and productivity. Plans should include more than one scenario, and staff should be drawn into these exercises as this will help manage expectations.

• Cash-flow management: This is supremely important. Businesses with weak debtor management systems and leaky budgets will probably not survive.

• Improve your service: Increased competition in the coming months means businesses will be tempted to move to other suppliers.

• Keep your eye on the inevitable business opportunities that downturns bring: Some of the most enduring businesses in the world were born during recessions. Even the terrible drought South Africa is experiencing has an upside for some businesses, such as those selling water-saving devices. Tunnel farmers who produce food under controlled conditions have a great market to look forward to in the coming year, for example.