GDP – 2Q 2009 signals turn in the making
By Cees Bruggemans, Chief Economist FNB
First the bad news.
GDP declined 2% year-on-year in 1H2009, and will probably average -1.5% for the full year.
The good news is that the 1Q2009 was by far the worst statistical quarter (-6.4% quarterly annualised), while the real output damage was done in 4Q2008.
The 2Q2009 still showed a 3% quarterly annualized decline in GDP but when excluding agriculture the decline was only 1.9% for the remaining 97% of the economy.
This profile starts to equal America’s, down 6.4% in 1Q2009 and down 1% in 2Q2009. If we lag the Anglo-Saxons, we certainly lag them not by much even if Asia (and France and Germany) lead us by a fair nose (recovering from 2Q2009) while Australia seems to have escaped recession entirely (at least statistically).
We had four growth sectors in the economy during 2Q2009 (mining, construction, government, personal services), between them contributing one-third of GDP.
In addition, we have a very large chunk of the economy, mainly of a supportive nature, shrinking output only minimally by 1%-2% quarterly annualised (finance and business services, transport and communication, electricity), contributing another one-third of GDP.
That takes care of two-thirds GDP.
That leaves only two very large rogues (agriculture and manufacturing) and a directionless consumer (retail, wholesale and motor trade).
Agriculture at -17% quarterly annualized in 2Q2009 was a drag because this year is having a lesser maize harvest than 2008. This drag on growth may not be over yet, also because the coming harvest may be smaller than the last.
More importantly, manufacturing still declined at 11% quarterly annualized during 2Q2009 as select industrial exports (especially cars, steel) had yet to recover.
However, these sectors are in the forefront of global recovery, and our domestic demand here should stabilize and ultimately also benefit from reduced postponement of replacement decisions. And there is still the end of inventory destocking to be absorbed.
Thus, manufacturing is our great recovery story of 2H2009 (and probably 1H2010), with mining shortly on its heels, both benefiting from global demand lifting, together reinforcing the public sector growth effort (construction, government services).
The enigma is the household sector, meaning retailing, wholesale and motor trade especially, still declining by 4.5% quarterly annualized in 2Q2009, nearly entirely driven by postponement of replacement demand in durable goods, semi-durables and cars, and weak residential building activity.
Yet it is precisely these interest rate-sensitive sectors that should benefit from the cumulative 500 point interest rate easing since December, specifically last week’s resumption of SARB interest rate cutting. If yet another rate cut were to materialize soon, as discounted by the financial markets this week, this type of demand should show more decisive recovery potential from later this year.
Thus one-third of the economy is already steadily growing, one-third is only offering a minor drag on growth, with manufacturing (and mining) constituting nearly another one-fifth of the economy that should benefit most from global recovery now in the works and also our inventory destocking cycle ending soon, all of it reinforcing GDP growth.
As to the lagging consumer, the trade sectors (another 15% of GDP) should benefit centrally from more policy support following recent interest rate cuts. Financial services should also gain lift from this, while transport and communication should benefit from recovering industrial activity as much as recovering household consumption.
All of that suggests the 3Q2009 being a transition quarter, between the recession proper (4Q2008 and 1H2009) and the recovery proper in GDP growth (4Q2009).
It is now a matter of ongoing global repair, sustained policy push (fiscal and monetary) and pure patience to get us across the threshold back into overall GDP growth mode.
In the lead are public push (government, construction), global pull (mining, industrial exports), and policy support (the trades and services), with supporting acts all benefiting (electricity, transport, communication).
Only agriculture is weather-dependent and falls outside this forecast.
Source: Cees Bruggemans, FNB, August 18, 2009.
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