Pinpointing the recovery

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By Cees Bruggemans

At what point does GDP (the value of all goods and services produced in the economy, excluding inflation) stop dropping, ending recession? When does activity start rising again, heralding recovery?

Recession endings and recovery starts depend on what the level of GDP is doing. After spending, output, employment and profits have dropped considerably during recession, the new recovery commences from a level below a year ago.

Most economists prefer to refer to quarterly annualized change in GDP. This is the actual change in GDP for the quarter, scaled up to an annual change (assuming this pace is maintained for four quarters).

If that quarterly number is down, we are still in recession. Only when the change turns positive do we enter recovery.

How far before the whole economy turns? Has any part of the economy already turned or is that impossible, with so much negative news daily assaulting us?

Bankruptcies, forced sale auctions, falling car sales, lost jobs, falling credit growth. Surely the economy is still deteriorating badly?

Not really, as important parts of the economy have already stabilized or may be rising.

Production-wise, mining and Dollar-denominated exports have stopped falling, rising since February 2009.

Electricity production has risen since March, with car sales and manufacturing output probably turning the corner in May.

Spending-wise, government consumption never gave the ghost, while infrastructure investment also keeps expanding (even when encountering strikes).

Consumer spending on services also kept growing. Along with a positive shift in inventories, at least 55% of total spending has kept expanding through 1Q2009.

Along with parts of other sectors probably also still expanding, some two-thirds of overall spending kept growing slowly while the steeply contracting one-third of the economy explains why we are actually in recession overall.

Perhaps confusing, but not all spending and production activity need to be contracting in a recession nor does everything need to be expanding in a growth cycle. Gold output keeps sliding through good times and bad as our mines are deep and costly to mine now.

Do we have any more signs things could be changing for the better soon?

Many forward-looking indicators have already turned the corner some months back, suggesting the whole ship may follow soon.

The SARB started easing interest rates from December 2008, cutting with a vengeance in early 2009, something that usually tends to prompt the economy to start turning within a year.

The Rand has smartly recovered from its low near 12:$ in October last year. Similarly, the JSE all share index saw low points in November 2008 and March 2009 near 18 000, but is well above that today, lively to boot.

The FNB/BER consumer confidence index turned in 3Q2008, more decidedly so from 1Q2009. The Kagiso Purchasing Managers’ Index probably turned from May 2009. And the SARB leading indicator probably turned from April.

That’s a lot of positive warning. The 2Q2009 will still see a drop in GDP. And 3Q2009 may be touch and go, depending on how all these various elements, and the bits I haven’t mentioned are currently behaving. But by 4Q2009 the general tide will probably have swung, with the overall activity level rising.

A new expansion will have begun. It could well prove to be another long upswing, seeing that worldwide there is much slack resource, while emerging countries remain impatient to grow. Not long now before everyone will be talking recovery rather than recession.

Source: Cees Bruggemans, FNB, July 20, 2009.

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