Is the Global Recovery an Illusion?

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As long as there has been demand and supply of goods and services there has been some sort of economy. Real economy is the part of the economy that is concerned with the actual production and delivery of goods and services. In South Africa, the real economy accounts for a substantial amount of revenue. (Services alone account for approximately 65.9% of GDP).

According to the GECS (Global Economic Conditions Survey), the third quarter of 2014, the real economy has taken a direct hit. The concern highlighted in the report was the illusion that financials and selected emerging markets maintain, and how this illusion is far set from the real economy. The GECS, jointly carried out by ACCA and IMA, recorded a slowdown in confidence by finance professionals (recorded at 28%, down from 30%). The slowdown in confidence has a ripple effect on the struggling South African economy.

Finance Minister Nhlanhla Nene, recently revised South Africa’s projected growth to 1.4%. The realty though is that the economy is worse off the anticipated. Key economic focus areas tend to be the financial markets and currencies. However the real economy needs to be taken into account in order to gauge whether the global recovery is real or an illusion.

GECS Report author Manos Schizas, senior economic analyst with ACCA, said: “It is clear that the buoyancy of the financial sector has masked the true picture in the real economy, where despite growth capital being at its most accessible since the global economic crisis, the lack of genuine business opportunities has meant that investment has been subdued around the world.”

Manos Schizas further reports “The drop in demand for oil and other commodities has also been a test for many emerging economies, which rely on fuel and mineral exports for continued growth and financial stability.” A recent media report mirrors Schiza’s claims by attributing a possible Nigerian currency and budgetary crisis to the drop in global oil prices.

South Africa is not left unaffected as mineral prices bottom out due to over demand and lack of investor confidence. South Africa’s real economy growth cannot live up to the expected 1.4% target announced by the Finance Minister, as many of the companies producing and delivery services are struggling under the current economic conditions.

Karen Smal, Acting Head of ACCA South Africa reiterated the need for local accountants to take the real economy into consideration when advising on growth rates and company growth targets.

Despite this, majority of finance professionals (58%) were still optimistic about the state of the economic recovery, these results are not worrying in themselves but the latest GECS report digs further into the survey responses to uncover a number of worrying trends: a second consecutive quarter of falling global business confidence; a growing reliance on government spending; fears of deflation in the developed markets; and a synchronised fall in capital spending around most of the world.

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