Navigating the turn as green shoots sprout

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By Cees Bruggemans

After massive shocks savaged the economy last year, by 4Q2008 (really already 3Q2008) putting us into recession, the only question basically mattering now is whether there are yet more of these massive shocks to be absorbed shortly. For if we are, we will remain probably repressed, recessed if not depressed for much longer.

But short of a large meteorite striking the southern oceans, and wiping out our living space, I am having little success identifying the rogues that will do us in.

Perhaps I am not looking hard enough?

For could the global banking system still encounter a relapse, with another big bankruptcy, fragile nerves failing once more spectacularly, yet with global policymakers by now having shot away all their ammunitions, their cupboards bare of the means to address yet more catastrophic failures?

Then again, have global policymakers already overreached themselves, burdening their national finances and monetary systems to breaking point and will poorly executed exits still sink us all?

Could there be other surprises (Black Swans usually traveling in flocks in military formations)?

These are hard questions.

Much less hard is identifying the green shoots sprouting out all over, also locally, heralding the turning of our fortunes which has already happened in some parts and is presumably very near in an overall sense, even if it may take a while to ‘feel’ like a recovery.

The earliest identified leading indicator turning the corner from 3Q2008 was the FNB/BER consumer confidence index. But as explained elsewhere this was probably an optical illusion because of the massive fall in confidence in 1H2008 linked to Eskom, OPEC and SARB. These Three Musketeers apparently so frightened their audience with their swashbuckling antics early last year that there was probably an overreaction by consumers.

If consumer confidence had declined just a little more slowly at the time, 1Q2009 would have been the earliest turning point, much more believable for the company it would have been keeping.

Interestingly, when the moment came to truly panic and register falling confidence, from late September 2008 (and reflected in the 4Q2008 survey), South African consumers didn’t seem to understand that the biggest banking failure in history was now underway, giving rise at that very moment to the Greatest Recession since the Great depression.

Just goes to show that if it happens far from your bed you don’t necessarily pay attention or appreciate the significance of it all. Then again, perhaps most of us were genuine peripheral bystanders to it all, and did we register the true relevance of these events for us quite accurately. Time will tell, but this may well be true.

It also needs to be mentioned, however, that some South African consumers showed much greater trepidation about events at this time, so it wasn’t as if there was no signaling going on at all. There was, for those who cared to turn over stones and examine entrails a little deeper.

The second in line to the throne, the real pretender who should be king, indeed always, being the ultimate forward-looking machine, is the stock market.

The JSE reached its lowest point in November 2008, but was probably thereafter protected by a 40% Rand decline at the time (thus yet another optical illusion really). After again testing low territory in early March 2009, our stock market finally turned up decisively along with the bottoming global markets.

This leaves the SARB interest rate policy and the Rand as the first decisive shoots of the new cycle, with fiscal policy in 2H2008 the passive passenger.

The Rand declined abruptly to near 12:$ in late October 2008 (within hailing distance of Lehman bellying). This was the Rand’s lowest point since the 2001 debacle, thereafter recovering its sea legs and from April 2009 more decisively breaking below 10:$ on its way to below 8:$ by late June 2009.

At the crisis moment, for us, five weeks after Lehman bellied, the Rand registered its darkest hour after which it started its long road to recovery. In hindsight, that was the real moment of turning for us, the fork in the road where the one leg leads to yet more disaster and the other leads back to happiness.

For a recovering Rand implied global support, if not yet from trade then certainly from capital flows.

The SARB was late responding, agonising about many things, not least the Rand, global events and our still very high inflation rate at the time, but finally it came through with a hesitant first 0.5% interest rate cut in December 2008.

This was policy confirmation that the water had broken, and that support for the economy was required, reinforcing the beneficial effect of an undervalued Rand and setting us in motion on the road to recovery, even if it perhaps didn’t quite feel that way at the time (SARB being as always inflation preoccupied and all that).

The then Minister of Finance should at least be given a medal for standing by passively as month after month the shocks of 2008 bludgeoned our economy into submission from an early stage, creating drag on our growth and his tax revenue.

As a consequence his budget surplus topped out at 1% of GDP (annualized) in early 2008 and started its long and increasingly rapid descent, already in 2H2008 moving into deficit territory, and growing in size all the time, as the Minister refused to add to the economy’s many agonies by cutting his spending or raising taxes, preferring to offer support by way of increased state borrowing.

It was the only advisable thing to do under such circumstances, but it was done passively and without too much comment at the time, with the growing budget deficit merely registering the deepening economic agony.

As to becoming a green shoot, only rising tax revenues on account of an improving economy would really qualify as such, but that may be some months away still, indeed a late arrival.

So besides two optical illusions (consumer confidence and a Rand-shielded stock market), one external shock absorber (the Rand) signaling the global high tide for us and one internal passive shock absorber (fiscal budget), there was really very little as yet happening in late 2008 heralding the turn.

This would change as we entered 2009.

The pace of interest rate cutting would be dramatically increased to nearly 1% monthly for a while.

Mining (particularly non-gold mining) probably led the output turn from February 2009, mirrored in Dollar-denominated non-services export earnings (the earliest real shoots).

This was probably followed by electricity production from March 2009, the SARB leading indicator from April 2009, and local passenger car sales, the Kagiso Purchasing Mangers Index and manufacturing output from May 2009.

However difficult perhaps to believe, but residential building plans passed as calculated by the SARB, whether monthly annualized or the year-on-year change, probably also send a turning signal from February 2009.

On this score it must be mentioned that the FNB building confidence index did tentatively turn up by June 2009, but it was nearly all due to wholesaling building material merchants. Without their rather volatile responses this index would have kept falling for now, perhaps a truer rendition of reality out there, its real overall turning probably still some quarters away.

A special mention is warranted for the RMB/BER business confidence index, which has kept falling so far, but whose pace of descent probably braked from 1H2009 in preparation for a decisive turn.

Next month (August) we will probably hear that GDP fell at a slower pace during 2Q2009, with 1Q2009 seeing by far the biggest decline annualized, reflecting the actual output collapse in 4Q2008. That will also serve as a confirmation of a broad turn being underway.

Globally, similar processes have been playing out, with passenger car sales, manufacturing activity, export volumes and capital goods orders all apparently turning up sometime during the first four months of 2009.

On this score, global stock markets and commodity prices were also early turning birds, Brent oil reaching its $34 low point over Christmas 2008 (since then doubling anew), followed by most stock markets from early March 2009 (with the long-term 10-year US bond yield also reaching its lowest point near 3% at this time before starting to rise again).

In time, looking back, this cyclical turn in the making may look a lot more decisive than what was experienced at the time, given the varied responses and the distance of data in many cases.

Still, what matters is that the ship is righting itself. The rest is detail.

Source: Cees Bruggemans, FNB, July 13, 2009.

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