Growth sectors accelerate as sinkholes grow

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By Cees Bruggemans, Chief Economist of FNB.

Strange sensation to have such a split growth story, as if putting one hand on a hot stove and the other inside the freezer, the brain dreaming of China (and Africa).

Some kitchen, some economy.

Strange? Try addressing three different audiences on the same day, one fully engaged in consumption revival (“happy days are here again”), one disappearing in the building and construction sinkholes (“brother, spare me a dime”) and one riding the global commodity price boom (“roll out the barrel”, as company earnings double).

Clearly, some people are stepping on the gas even as others are standing on the brakes. That makes for considerable confusion.

The biggest conceptual problem is in consumption. With large labour lay-offs, rampant unemployment and little new job growth, how can there be a consumption boom?

More easily than you think.

Consider your company’s bonus pool. Not the 13th cheque in the public service that everyone gets, irrespective of what was done during the year, but the ‘incentive’ element of private remuneration.

Some staff is given a lot, some get something, and quite a few get nothing, in each case ‘inspiring’ the labour force to yet greater things.

Something like that is going on nationwide at present.

Serious talent shortages create salary premiums, while strong labour unions can demand large political premiums.

That boosts wage bills way beyond what employers can carry, given limited demand growth and rising costs.

Thus there is no job growth, with job losses in slow-moving sectors. Emphasis is on productivity improvement, using more technology.

There is activity growth and more income, only it is more concentrated in certain hands and not others.

The local economy now generates about 3% more such real income annually. The outside world assists in giving many of our commodity exporters outsized price gains. And the government redistributes quite a bit of all this through higher taxes towards those with least spending power.

It is quite an income-and-spending engine outperforming all expectations, even absorbing some of the worst tax increases in years (higher electricity tariffs, new toll levies).

Strangely, many producers don’t quite trust all this luck. Motor dealers did 25% growth in passenger cars last year, starting this year off at a still very hot pace of +22%. But caution continues to prevail.

Yeah, things are better (after a halving in sales the previous three years), but can one trust it? Can it continue? Why should it?

After a bad hit, distrust prevails, rightly so. It takes time regaining confidence.

The good luck isn’t limited to the motor trade. It extends to furniture and appliance dealers, the rag trade in clothing and footwear, in pharmaceuticals and cosmetics, in food and drink, and most services.

The consumer boom isn’t mostly credit-assisted, though motor, furniture and rag trade have their fair share. Even if not qualifying for a new mortgage, a smaller credit purchase may get approved. Overall household credit is only growing at 6%, higher than inflation, but well short of the rapid growth in key consumer durables. The house mortgage is the missing link.

Some of that durable hotness is pure necessity. The car doesn’t get any younger, low interest rates have revived affordability, and new models tempt at every turn. This applies to the full spectrum (furniture, clothing). Even small house additions and alterations have turned up.

With good income growth, some credit-assist and large majorities of consumers already for a year claiming to be confident, going by FNB/BER surveys, don’t be surprised motor and retail trades are tearing up the track.

Retail had a very good Christmas last year, over 8% up in real terms and going strong.

More looms this year and next, as the talent premiums won’t dry up and the labour unions should have the best opportunity in years to demand yet more in what promises to be a hot political election cycle.

Also, the global commodity boom seems far from spend, so more largesse is possible, filtering through to the surviving rank-and-file as much as shareholders now.

So be prepared for the consumption bandwagon to keep rolling bravely, even with interest rates starting to revive slowly from later this year.

Meanwhile, deep sinkholes remain such as in building and construction, where activity levels have halved, in the one instance due constrained credit expansion (NCA and Basel 11 inspired) and in the other due to constrained public capacity restraining new contract flow.

Fixed investment generally will be a bit of a dark horse this year and next. There may be normal cyclical revival in consumption-related activities as capacity utilization improves. But elsewhere confidence is thinly spread, deep concern prevailing (about the larger world, our politics and a short truncated upswing).

This is in addition to constrained electricity supply and railway capacity limiting heavy industry expansion.

It is an unequal kind of world at present, and not only globally. Our own backyard is sharply divided into lucky corners and most unlucky ones. It could last a while.

Source: Cees Bruggemans, FNB, February 21, 2011.

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