South African economic catch-up

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By Cees Bruggemans, Chief Economist FNB.

Our decline into recession was abrupt. We fell deep, perked up late and now surge belatedly in places as we play catch up off sometimes very low bases.

Still makes growth performance feel good where it shows.

Though expectations about World Cup foreign visitors are being revised lower, there will still be a party atmosphere this winter, adding to GDP.

Also, with so much summer rain, up country looking very green and the maize crop already estimated at 13mt (possibly exceeding this), we could well have an agricultural surprise this year, also adding to GDP.

Star performers this past week were the Kagiso Purchasing Managers Index breaching 60 like a knife cutting through (soft) butter and new car sales up 21%.

The Kagiso index, after extremely sharp falls in late 2008, is now belatedly showing a steep rise, tracing a sharp V-pattern.

Manufacturing order flow must be recovering strongly, with the outlook looking more normal than at any time these past 18 months (indeed catching too many purchasing managers unawares?) to get this kind of enthusiasm going.

Still, what is on display is probably the full force of a normalizing (abnormally abrupt) inventory AND export adjustment.

That is both unprecedented and extremely powerful.

Usually cyclical declines aren’t a mistake. Cycles have downswings for good reason. Upswings go too far, too many things get out of line, globally things turn down, inflation (and interest rates) rise domestically and an inventory adjustment is underway while exports disappoint. This takes time playing out.

This time around the global sell-off was extremely intense and abrupt as financial events made people around the world jumpy and defensive, preparing for the worst.

You don’t get 30%-50% industrial sell-offs in a matter of months because somebody is having a bad day. Instead, we are into extreme events.

Canceling the panic was just as extreme. Global changes of mind can regularly be observed in financial markets, but it rarely happens in the real economy. But it did this time once the policy aggression connected, the banks were visibly saved and people started breathing again.

It was surprising, though, to see our industrial and export response being so late and muted while many countries overseas were early and vigorous. But even latecomers finally feel the global waves lapping around their feet, drawing them into the rebound.

Our export levels haven’t fully recovered yet. Monthly exports went from $8bn (August 2008) to $3.7bn (January 2009) after which gradually recovering to $6bn by December 2009.

Clearly we are rebounding, especially noticeable in heavy industry, even if metal prices and contract spats (and electricity tariff increases) are lately clouding the local prospect.

By far the biggest manufacturing push probably came from a normalizing inventory cycle, with stocks bare, destocking rapidly falling off and purchasing managers seeing the order flow improving in coming months.

Still, there remain deep concerns about the state of the consumer, especially real income and the willingness to replace expensive durables and anything involving credit.

The credit cycle has probably turned, but it remains for now subdued. Going by housing survey data and transfer duty paid, the property market turned mid2009 with a nice bounce, much of it cash-assisted.

Meanwhile after a good 15% year-on-year January start, new passenger car sales have followed through even more strongly in February with a 21% lift.

There are a few distortions here, especially rental company frontloading World Cup fleet ordering (possibly ‘stealing’ orders in 1H2010 they would otherwise have placed in 2H2010). Also there was one particularly vigorous new car launch, its demonstration effect apparently very strong.

Yet even when these special effects are allowed for, there is an underlying momentum discernible in new car sales now that promises more lift. As it is off an extremely depressed base, upside surprise may at some point be expected, if only because the car population isn’t getting any younger and the postponed replacement elastic has to start snapping back sometime.

Electricity output surged higher in January, now equaling mid-2008 levels, nearing an inevitable ceiling, ere long capping growth through 2014.

More evidence is wanted about retail sales volumes turning positive and credit starting its comeback.

Household income needs to turn positive and the anxious mood of the past year needs to lift. Current global events (Dubai debt, Chinese property, Greek foibles, Euro indigestion, anxiety about central bank exits) mustn’t be confused with spectacle of bankrupted global banks and the world reacting fearfully, as happened in late 2008.

That was a REAL crisis. Today we are back to spectator sports. It isn’t the same thing and anxiety levels are gradually dropping.

Not necessarily for exporters facing a Rand possibly breaching 10:€, 11:₤ and 7:$ shortly or a construction industry facing project deficits, cutting its cloth accordingly.

But generally feel-good factors may slowly keep reviving as companies leave the cyclical trough behind and refocus on improving earnings.

The cyclical worst is over. Now for the catch up.

Source: Cees Bruggemans, FNB, March 8, 2010

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