Recessionary data horrific but moderating
By Cees Bruggemans
With employment losses probably only now reaching their maximum pace in South Africa (though having peaked in the US), monthly data suggest a bottoming process in output.
Year-on-year data comparisons in many sectors still show the horrific nature of the decline this past year:
• passenger cars sales in May were 27% down
• commercial vehicle sales were still 43% down
• manufacturing production in April was 21% down. When excluding food and beverages, and electrical machinery (both only about 5% down), the remaining four-fifths of manufacturing was down 25%, with car production a whopping -50%.
• Mining production in April was down 10%.
• Electricity production in April was down 6%.
• Retail sales volumes in April were down nearly 7%.
• Residential building plans in April were 48% down.
So there was ample reason to feel depressed these last few months, yet we had a successful general election, with high voter turnout and only modest support loss for the ruling party. The large output declines were due to three major forces.
Firstly, a major commodity-led inflation surge and subsequent policy tightening hitting interest-rate sensitive sectors these past two years.
Secondly, global crisis hitting our industrial and mining export sectors from late last year, which were already distorted by electricity disruption.
Thirdly, all these forces and their resulting employment losses belatedly inviting household retail cutbacks.
Yet passenger cars sold per day were the same in May as in April. That is hardly really good news, as April was a badly distorted month, containing three holidays (Easter and Election), with many people probably taking holidays. May was not supposed to be a productivity disaster, yet it still was.
Even so, there comes a point where a sales contraction has gone exceedingly far. Cars seem to be in such a situation, bearing in mind interest rates have been cut by 4.5%, though bank credit criteria remained tight.
Manufacturing fell a further 2.5% in April compared to March, nearly twice the distance as in Europe (-1.4%), though year-on-year in both instances near -20%.
April offered distortions by way of three holidays. Losing three out of 22 working days is a very large bite, suggesting output in an underlying sense (daily) to have risen. We need May manufacturing data to confirm.
According to BER business opinion surveys, motor trade confidence lifted for the second quarter in a row, though still atrociously low. A swing seems underway. Globally, car sales have been lifting for some months, in part subsidy-supported (though hardly the full story).
Electricity production rose in April, as did mining output. Since early this year, both sectors are trending sideways to better after horrific declines in 2H2008.
Manufacturing would also have confirmed a sideways trend if it hadn’t been for April’s setback. If it was holiday distorted, with May the litmus test, our industrial cluster would confirm stabilisation.
The waiting is for global lift (in the works nearly everywhere according Purchasing Managers Indices), inventory adjustment ending and replacement duration shortening. This would come through both in domestic order levels and exports.
This is where policy activism comes into its own, as much the budgetary drift into deficit (probably by now representing a 6% of GDP swing, from 1% of GDP surplus to a deficit approaching 5% of GDP) as in monetary policy.
The SARB has by now cut interest by 4.5%, prime falling from 15.5% last December to 11% today, providing a comforting tailwind to the economy as debt servicing costs have fallen rapidly.
Yet tight bank credit criteria, demanding higher returns and less risk, along with a firming Rand, pushed by rising global risk appetite to test 8:$, are probably still offering important headwinds to interest rate-sensitive demand as well as making things difficult for many producers.
This year will probably see GDP fall by 1%, pushed lower by household weakness, falling private fixed investment and major inventory destocking, though bolstered by strong government spending and probably modestly supported by falling import volumes.
By next year, growth should be accelerating again towards or even beyond the 3% level, assisted by the ending of the inventory depressant and some lift in export volumes.
The interest-rate sensitive sectors will be importantly influenced by the level of interest rates and the availability of credit, whether through traditional bank channels or new intermediating ones.
Following a simple Taylor Rule estimate, assuming the present CPI inflation rate of 8.4% to still moderate to 5% by late 2010, and considering an output gap likely surpassing 5% by early next year, there remains scope for two interest rate cuts of 0.5% each.
Government spending will be an important support for the household sector, with infrastructure spending holding up well as we address national priorities, not least the 2010 World Cup Soccer.
Source: Cees Bruggemans, FNB, June 17, 2009.
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