Recessionary momentum rapidly losing steam

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By Cees Bruggemans

The big hit to output lies already far behind us, being heavily concentrated in 4Q2008.

In contrast, 1Q2009 saw already cyclical repair as the recessionary momentum lost steam, globally and locally.

This is perhaps not yet conventional wisdom, but given time hearts and minds will follow.

American GDP declined by 6.1% annualised in 1Q2009, as bad as the 6.3% annualised decline in 4Q2008. Yet the composition of this latest decline offered enormous cheer, explaining the stock market’s warm reception (better than expected company earnings also helping).

After falling heavily in 2H2008, US consumer spending actually increased by 2.2% annualised in 1Q2009.

In contrast, US businesses cut inventories and capex heavily (largest such cuts in 30 years), explaining 80% of the GDP quarterly decline.

Both items are unalloyed good news.

The US consumer ain’t dead, helped by strong disposable income gains, with government assists and purchasing power gains overcoming employment losses.

Business cutbacks are once-off hits restoring leanness to operations, allowing bounce in output once these end (shortly), output thereafter again guided more closely by consumer spending (for part of the way policy-assisted).

Thus the US economy appears on course for GDP recovery in 2H2009. Japanese prospects are similarly business-driven and policy-assisted. Chinese re-acceleration is policy driven. In contrast, Europe is more dependent on export prospects, facing late recovery.

How are these processes playing out in South Africa?

Retail volumes have been mostly flat since mid-2007.

Durable good retailers (furniture, appliances) and motor dealers have experienced long deep sales declines, more recently joined by building material merchants.

A bottom is yet to be reached in all these areas, though may not be far off, guided by declining interest rates.

In contrast, general dealers, food/beverages and clothing/footwear retailers have held up well and kept growing, if more slowly recently.

Consumers cut back durable purchases, freeing up means for sustained spending on other goods despite slowing income growth, with government assists limiting downside.

Thus 85% of our retailers have enjoyed remarkably benign conditions in what remain severe circumstances globally (though motor trade, furniture retailers and building merchants suffering severely).

Turning to recent output data, mining, manufacturing, electricity (representing a quarter of GDP) show very similar performances.

After a volatile 1H2008 performance partly due to electricity disruption, manufacturing output started declining gradually from August 2008, cumulating in massive losses in November/December (torpedoing 4Q2008).

Since then, manufacturing appears to have come out of its nosedive, with 1Q2009 recording much more subdued output declines suggesting a bottoming in progress.

Mining had an even more variable 1H2008 (after an already poor 2007), similarly taking a severe cumulative knock in output during November/January, bottoming thereafter.

Electricity production fluctuated during most of 2008, falling heavily during November/December, thereafter suggesting bottoming in 1Q2009.

Transport activity has probably also closely followed these industry patterns, as did Dollar export revenues, declining massively during 4Q2008, bottoming in 1Q2009.

All these sectors show output declines in response to massive global industrial cutbacks (especially steel, motor) and local inventory reduction and weak demand (consumer durables, motor vehicles).

If global industrial output is currently bottoming out, our industrial and mining exports should also come to reflect this with a minor lag.

Household weakness (vehicles, durables, building) is driven by our own interest rate cycle (already advanced), its bottoming still lying ahead (shortly?).

Construction and non-residential building activity have kept advancing, even as residential building went into recession.

Though there should be more lagged activity loss in non-residential activity this year and next, residential activity should bottom later this year, with construction remaining growth supportive (though slowing).

That leaves public sector activity (strongly positive), communication (positive) and financial/business services (probably neutral to positive).

Thus, slowing household consumption and globally-induced industrial collapse in 4Q2008 lowered GDP, taking us into recession. Global and local bottoming in activity during 1H2009 also readies us for GDP recovery from 2H2009.

GDP will be heavily down sequentially in 1Q2009, less so in 2Q2009, with recovery starting in 3Q2009 or 4Q2009.

Significantly, the SARB leading indicator turned positive this February, only two months after and hot on the heels of the US leading indicator turning up last December.

Domestically, our advancing interest rate cycle will shortly impact positively on motor trade, consumer durables and residential building.

Non-residential building should remain a lagging drag anchor on GDP recovery, as should other forms of private fixed investment activity.

There are qualifications.

A secondary wave of weakness, induced by increased unemployment, also globally, needs to be watched closely. Credit tightness could be a near term impediment, possibly delaying things somewhat. Another imponderable is Mexican flu, although already appearing less of a threat than only a week ago.

GDP activity levels bottoming shortly, with recovery underway in 2H2009, is dependent on the flu outbreak being contained rather than becoming severe later this year and next, depressing economic activity anew.

So far it is premature to assume the worst, as reflected in rising global stock markets, which sense an already more fundamental cyclical turn in the making.

Souce: Cees Bruggemans, FNB, May 5, 2009.


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