Plunging cars, credit, confidence, CPI

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By Cees Bruggemans

There is an awful lot of cordless bungee jumping going on at present.

Car sales down 30%. Motor dealers 30% fewer. Real estate agents falling by 50%. Steel output to fall by 30%. Stock market down by 45%. Oil price down by 65%. Platinum price down by 65%. Rand down by 40%. Business confidence down by more than a half.

These are big numbers. They don’t remain ring-fenced. Their impact goes wider.

Credit growth is coming off quickly now. At 16.5% it is already half way down from the 30% cyclical peak, but likely reaching single-digit growth during 1H2009.

CPIX inflation reached 13.6% recently. CPI will be below 6% by mid-2009 before bouncing mildly, and thereafter resuming its downward draft.

After years of experiencing rapid expansion in every possible sector of the economy, things over the past year have reversed rather drastically.

The only three things doing well at present are maize, infrastructure and public servants. But that doesn’t even add up to 20% of the economy. The remaining four-fifths are underwater or apparently getting there.

Yes, we do have impressive shock absorbers. Oil down by 65% means the country pays much less for its energy. But this gain barely matches the export losses faced by the precious metal miners, at least in Dollar terms.

And, yes, the Rand’s 40% decline is shielding our miners and creating opportunities for import replacement for some of our struggling manufacturers, but it won’t save all of them. Global industrial production is falling heavily now, unleashing intense competitive struggles, which will also wash ashore here.

The steel story is one indication, with 30% less steel to be produced next year. But also fewer cars, with domestic sales still shrinking, and export of cars also likely to be off by 15%-20%.

Consumers have been cutting spending since mid-year 2008. Roughly, this suggests us already being five months into a consumer recession. If the car data doesn’t convince, retail sales volumes may perhaps do so, down by 5%.

But even fixed investment, the acknowledged anchor of our future prosperity, is absorbing a few bad hits. It still grew by 15% in 2007. But ever since there has been some backpedaling, and one wonders where it will stop.

Supposedly infrastructure was untouchable. But there is some fraying at the edges regarding capital availability. It used to be skills. Now that bottleneck seems to have been pushed into the background.

But the real problem with fixed investment resides in the private sector.

By type of asset, residential fixed investment is most under pressure, from affordability issues (interest rates), supply-side problems (electricity connectivity, municipal services) to tightening bank credit criteria.

Building plans passed are falling in real terms, as are buildings completed. The rate of decline since late last year is considerable.

Non-residential building activity in the retail, office, industrial and warehousing space could be next as present projects reach completion.

Together these two sectors represent 20% of total fixed investment. They are expected to show substantial decline in activity levels next year. That should have knock on effects for building merchants and manufacturers of building materials.

Commercial vehicle sales are also declining in recent months, indicative of a new reticence out there.

These three items together are usually a good leading proxy for manufacturing investment in plant, machinery and equipment. Expect more pullbacks as people expect a slower economy and lower capacity utilization.

Another disappointment may be looming in mining, where this time around it is falling commodity prices that cut prospects, with not even a weaker Rand being able to prevent more cutbacks. Mining output to date is running over 7% down on last year.

There is more pain in the wider economy, in retail, banking, real estate. Time will tell how much wider this ultimately went in services industries, also in terms of employment shrinkage.

The national budget will remain an important support for domestic demand. But whether it can overcome declining output levels, new orders, inventories and employment remains to be seen.

Our economy remains robust, but it is going through a robust cyclical adjustment, hoisted upon it by outside events and our own wish to contain inflation and make the balance of payments less vulnerable.

We are not alone in this experience. Plenty of countries are going through the same, as much industrial (US, UK, Europe, Japan, Singapore, Aussie, Kiwi, Canada) as developing (Eastern Europe and Central Asia especially).

Happily, many of these countries and central banks are actively doing something about their predicament, going by huge fiscal packages, central bank liquidity injections and aggressive interest rate easing.

We, too, may lighten policy ere long.

Source: Cees Bruggemans, FNB, November 17, 2008.


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