Data confirms continuing upswing

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By Cees Bruggemans, Chief Economist of FNB.

Another good week of data releases, suggesting economic recovery is on track, steadily climbing out of the hole that was 2008-2009.

Electricity output rose robustly further in January, indicative our electricity-intensive sectors are steadily expanding.

With only 17% of electricity consumed by households (and the paying ones trying to achieve savings), it is the remaining 83% going into industry that tells you the economy is on the recovery trail.

Bad news is that electricity output is now at mid2008 levels. Increasingly we are re-entering the strained ceiling condition. Though we can probably stretch this output condition beyond the 2010 World Cup, one already notices short local brownouts in parts of the country.

It may just be a matter of failing municipal service delivery and infrastructure, neither coming as huge surprises, but this may allow us to stretch the available electricity just a little bit further.

Besides, this is so unremarkable in its own right elsewhere in the developing world (though not in the rich world), that it probably shouldn’t draw attention. That’s the problem with having been richly blessed and this no longer matter-of-factly being the case.

Thus the nice gains now observable in mining output, with its output trend line in recent months finally off the floor and starting a long ascent (though not in gold mining). This might ultimately not get capped by world market conditions (which are remaining rather blue sky) as by our own ability to generate electricity.

On this score it is gratifying to note how haste is now apparently being made to encourage as many producers to self-generate electricity and sell into the national grid. Mention is made of over 5000mw potential. That’s good going, at least 15% of Eskom supply, and would lift the capping ceiling on our growth if it can be made available soon.

This is also important for manufacturing output where especially the heavies (iron and steel, motor manufacturing, petrochemicals) remained the big growth lifters in January. Electricity supply will remain central to these major exporters being able to continue to do their good work, with Volkswagen winning a huge new contract potentially doubling its export activity.

Though manufacturing activity dipped in a minor way in January, this was not a major surprise following the steep preceding monthly increases, with its output trend line rising nicely now, in line with export recovery globally-driven and the inventory normalization underway following panic interruptions in 4Q2008 and 1H2009.

Thus the Kagiso Purchasing Managers Index jump to 60 earlier this month wasn’t an empty gesture, but very much signaled order flows are improving over a widening front as our recovery gains momentum.

This was further borne out by one of the biggest quarterly jumps in business confidence as the RMB/BER business confidence index gained 15 points in 1Q2010, rising from +28 to +43 points.

Though early stages of economic upswings do tend to see such very large jumps (compare 2H1999), in manufacturing confidence especially given that recoveries from recessions always have inventory distortions achieving early normalization, this time it is the combined recovery of impaired exports, depleted inventories and repressed consumer durables (cars!) that are coming ashore together in a combined rush to higher levels.

The stock market also responded favourably, the JSE All Share index moving back above 28 000, though one can never be sure whether this is in response to local news or whether it is purely the global heaving doing the lifting. With risk averseness again in abeyance, and the US consumer in the ascent, stock markets are apparently again seeking higher levels.

Regarding the RMB/BER business confidence rise, it remains useful to appreciate that wholesaling readings tend to be volatile (often adding air to the index).

But the minor lift in building confidence to +30 is probably very genuine (if still depressingly low), the promising increase in manufacturing confidence to +28 very realistic, the exuberant doubling in motor dealer confidence to 60 understandable (if somewhat exuberant, given depressed conditions), but the really fascinating move is by retailers (also lifting, but from already very elevated levels, never having shown truly recessionary plunging as other sectors did).

The retailing move to +51 suggests the end (or imminent end) to the depressed retail volume trend, something that so far has taken its time coming. But many quoted retailing companies (Shoprite-Checkers, Woolies, Spar, Lewis, Mr Price) have had good results lately and something might well be stirring here.

As household income starts rising as an accompaniment to rising output levels, consumers can be expected to step up their buying, something that will also start to come through in credit data.

The cycle is very much into a new upswing. Just a pity about slowing government spending, reticent private investment and disappointing public infrastructure holdups or we could really have been steaming shortly as of old. But these growth drag anchors cannot simply be wished away. Thank goodness for agriculture windfalls and World Cup support.

Source: Cees Bruggemans, FNB, March 15, 2010.

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