GDP lead sectors take off but rest lags
By Cees Bruggemans, Chief Economist FNB.
Growth in GDP (total goods and services produced in the economy, excluding inflation) speeded up in the 4Q2009, confirming the recovery gaining strength.
In the first quarter of recovery (3Q2009) GDP growth (annualized) was still only 0.9% but in the 4Q2009 this accelerated to 3.2%, considerably faster than consensus expectations (+2.6%) of nearly all economists.
When excluding volatile agriculture, the remaining 98% of GDP recovered at an already much faster rate, by 1.8% in 3Q2009 and by 3.8% in 4Q2009.
Thee two ‘star’ performing sectors (manufacturing and general government) contribute only one-third of GDP but produced three-quarters of the GDP increase during 4Q2009 indicating a still relatively narrow recovery path.
Manufacturing grew by 10% annualized in 4Q2009, primarily boosted by inventory changes and export recovery. General government spending grew by 7% annualized, reflecting aggressive fiscal policy support for the economy.
Much further down in the growth performance rankings, so-called ‘average performing sectors’ (basically matching overall GDP growth) were the small construction sector growing by 3.6% and personal services growing by 3.1% annualised in 4Q2009. Together these two sectors contribute 10% of GDP.
A very large group of economic sectors, contributing 40% of GDP, can be described either as ‘stagnant’ (so far) or as ‘stragglers’.
Mining output still fell heavily in 3Q2009, bounced impressively in 4Q2009, but so far with no clear recovery path. Its trend suggests stagnation until it can decisively break out topside.
Same applies to the very large financial and business services sector, except its output ups and downs are far milder than in mining, with some hope that early 2010 will see growth slowly accelerating as credit growth starts it gradual comeback.
Transport, storage and communication lifted out of its mild recession from mid-2009, but its quarterly gains have remained very small, well below the gains of its boom years and also very much sub-par to the average GDP performance, earning the sobriquet ‘straggler’ – ready to get promoted to average (and eventually back to star rankings) if only its growth can decisively pick up (of which so far no sign).
Then there are still the heavily underperforming sectors whose output fell steadily throughout 2009, together contributing just over 15% of GDP.
Agricultural output fell nearly 12% annualized in 3Q2009 and another 7.5% in 4Q2009. Less dramatic declines were recorded by the retail, wholesale, motor and hotel trades, their output declining by 1% in 3Q2009 and a further 0.7% annualised in 4Q2009.
This composition of the GDP growth performance during 2H2009 on the output side of the economy highlights key aspects of the recovery profile.
Growth is prominently led by industrial inventory and export boosts and steady government commitment. Although construction still made a good showing, its growth momentum is probably dwindling.
In contrast, everything dependent on or supporting the household sector and business activity generally either did poorly (the trades) or straggled (financial and business services and transport, storage and communication), between them contributing 50% of GDP.
So one notices outperformance in one dimension while still clear underperformance in another, even though the rising GDP output means more income, probably a start with modest job gains in manufacturing (if the Kagiso Purchasing Managers Index is to be believed) and this in turn assisting the gradual lifting of household consumption out of recession as time goes by.
It doesn’t help that the primary sectors remain stuck, with mining yet to benefit from the global liftoff, probably for very industry specific reasons. Meanwhile agriculture could be brewing a positive surprise for 2010 following all these summer rains, potentially shortly re-entering the star ranks (if only for a season).
There is yet more good news besides agricultural prospects and the impact of the World Cup at mid-2010.
Whereas industrial manufacturing output dropped by 16% between 3Q2008 and 2Q2009 (on account of aggressive inventory destocking and partial export collapse), the rebound so far in 2H2009 has been (very) late and still only modest, a bare 4% gain from the cyclical trough. More is therefore still to come in 1H2010. How much we will find out the hard way. But this booster has yet to show its full support to GDP recovery.
Lastly, when casting our eyes a year back, what does the rearview mirror tell us?
Overall, the year 2009 witnessed a 1.8% decline in GDP. If we exclude agriculture, the decline was only 1.5%. If we allow for future revisions these next three years, the 2009 GDP decline may turn out to have been somewhere between 1% and 1.5%. Still bad but not as horrific as elsewhere in the world.
Interestingly, some sectors are still way below their peak activity levels (with a lot of resource slack showing) while others kept on steaming throughout 2009.
For instance, in 4Q2009 sectors operating still well below year ago levels (and contributing 60% of GDP) were mining (-5.9% y/y), manufacturing (-5.4% y/y), the various trades (-3.1% y/y) and financial and business services (-2.4% y/y).
In contrast, sectors well ahead during 4Q2009 compared to a year ago (and contributing a quarter of GDP) included construction (+7% y/y), personal services (+5.4% y/y) and government (+4.1% y/y).
So yes, the recovery is still narrow but gaining strength, and probably gradually broadening, with various sectors probably adding yet more growth momentum to GDP in early 2010, also slowly transforming the operating conditions for the still straggling or underperforming sectors.
But there remains a lot of resource slack and sector underperformance which beyond the initial inventory and export recovery boosts may not have fully recovered their normal self yet – the real focus needs to be on final demand, meaning household consumption, government consumption (with the budget promising a slowdown to 2% growth) and fixed investment (probably negative in 2010).
Once we factor in slow credit growth recovery and an analysis of spending growth (demand), bearing in mind the influence of expectations on durable goods replacement and private fixed investment, the economy continues to labour under numerous restraining drag anchors.
It is therefore right that fiscal policy remains so very supportive, even if elsewhere in the public sector increased charging these next three years will provide quite a headwind to private demand.
As to monetary policy, it has to take into account both the outlook for inflation and the risks thereto when looking forward, including the likely state of the economy. It for now is recovering, but narrowly.
Source: Cees Bruggemans, FNB, February 23, 2010.
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