SA growth recovery so far narrowly based

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By Cees Bruggemans, Chief Economist of FNB.

For South Africa, the New Year (and decade?) kicked off with a few nice bangs.

Reported new car sales in December were 25% up on a year ago. Industry insiders were looking for another 10%-15% gain in 2011. Way to go!

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Retail trade data was as happy for November 2010, sales volumes being up by 7.8% on year ago, ahead of consensus expectations of 6.8%, reflecting good wage gains for those in employment, and increased numbers of welfare recipients, bringing some cheer to early summer.

For most of 2010 there have been three outperforming retail areas. Top performer has been household furniture, appliances and equipment, averaging 19% sales volume gains on last year in the three months to November.

Only slightly less robust have been pharmaceuticals, medicines and cosmetics averaging 13% growth and textiles, clothing and footwear averaging 10% growth.

The great surprise in November were hardware, paint and glass merchants, registering 8% year-on-year growth in November sales volumes, after a year of mostly declines (though the trend had been improving since 2Q2010).

In contrast, general dealers averaged a steady 5.5% growth in retail sales volumes during 2H2010.

The relative underperformer continued to be retailers in food, beverages and tobacco, where sales volumes have advanced only minimally since last Easter.

So in parts the retail trades still showed some weakness. Also it was sobering to see sequential monthly sales volumes stagnating since June, even if trend levels kept ticking higher. There should be renewed lift in the sales data into 2011 as yearend bonuses and new wage round gains make their mark.

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Elsewhere, even mining got into the upbeat act, with a 9.6% output gain in November compared to a year ago, and output levels now being on a par with 1H2008 (before the global recessionary bust) and still climbing smartly.

The Big Five (82% weight in total mining revenue) varied from +15% for platinum (weight 27%), +8% for coal (weight 25%), +2% for gold (weight 17%), -3% for iron ore (weight 5%) and -11% for diamonds (weight 8%).

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Elsewhere there was less cheer.

Manufacturing in November was 4.6% up on a year ago, but that was after the strike-bound 3Q2010 had dented the growth trend recovery. The motor industry and chemicals did +30% in November, but oil refining did -16%, basic iron and steel -19% and textiles/clothing -4%, indicating a relative narrow recovery from strikes.

Manufacturing has now clawed back half its recessionary output losses of 2008-2009. This is slow going, but electricity constraints and strong Rand don’t help.

The Kagiso Purchasing Managers’ Index remains above 50, suggesting growth, but both the overall index and the sub-components (new sales orders, purchasing commitments, inventories, prices, employment) show sub-optimal levels compared to decade-long averages during economic upswings. Yes, there is a manufacturing recovery underway but its head of steam is narrow and apparently not as yet very well developed.

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Electricity output bounced nicely in 4Q2010 after dipping in 3Q2010, presumably also mainly reflecting strike action and lowered output in various industries, which have since restarted.

Even so, electricity output is now only a minimal 2% up over a year ago (for the three months to November 2010), and effectively back at the peak level achieved already in 2Q2010 and before that in 2Q2008.

If this is the ceiling beyond which we can’t go for now due to capacity constraints, it imposes a direct dampener on any electricity-intensive economic activity (further worsened by annual 25% tariff increases already obtained and still in the pipeline).

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Elsewhere, civil engineering contractors in the construction industry kept their confidence low in 4Q2010 (with three out of four contractors reporting unsatisfactory business conditions according to FNB/BER).

Inadequate demand was highlighted by 90% of respondents, up from 84% in 3Q2010.

Last year, turnover by civil engineering contractors declined by some 36% over 2009, and over 20% of all construction jobs (42000) were shed during 2008-2010 from a peak near 200 000, according to SAFCEC.

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Credit growth was positive in 2010, but mid-single-digit. Real estate transactions are only half their long-term volumes. Transfer duty collections are rising, but off a low base. Residential house prices during 2010 rose by barely 3.5%, effectively in line with CPI inflation. Credit restraint is an important factor, as many people are too indebted to qualify for new loans.

The building industry is similarly weak, with the VALUE of building plans passed perhaps rising since May 2010, but the NUMBER of house plans approved last year falling by 13%. For flats and townhouses the decline was 26%.

The number of houses completed in 1H2010 fell by 29%. The number of flats and townhouses completed fell by 39%.

Since late 2008 over 400 000 formal jobs were lost, while three annual age cohorts joined the labour force. In terms of matriculates and graduates, this totals over one million. Only about 200 000 were needed to replace retirees. That’s a lot of new slack on a formally employed workforce (generating 90% of GDP) of 9 million.

According to SARB, household consumption growth is sustainable, with the lowest interest rates in 30 years ensuring low borrowing costs, eventually underwriting fixed investment revival.

Source: Cees Bruggemans, FNB, January 24, 2011.

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