South African momentum loss

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By Cees Bruggemans, Chief Economist of FNB.

Last year, despite being only a 2.8% growth year, had the feeling of being a fairly normal recovery in the South African economy.

There was a strong surge by durable consumer goods, with growth in car sales approaching 30%, even if property remained winged and credit growth low single-digit.

A good general consumption surge, along with a strong inventory rebound, made it feel like a good old cyclical take-off, even if private fixed investment still lagged (nothing unusual in the aftermath of a Big Dipper).

But public sector fixed investment wasn’t going anywhere fast, and neither were export volumes after their initial Big Dip rebound.

And total employment kept stagnating near recession lows of 13m.

With building trade, real estate, credit, electricity, public infrastructure, export volumes and employment in abeyance, this cycle was certainly not business as usual.

It felt more like two different economies were operating, one with a nice income boost having consumption fun while statistically replenishing inventories, and one where structural stagnation was the definitive reality.

This performance duality spilled over into 2011, but there was more going on.

The 1Q2011 growth of 4.8% was overstated by a one-off manufacturing boost (a few steel and oil refining plants coming back on stream), but it nevertheless became the foundation stone for more hope about growth.

Instead, the 2Q2011 went completely the other way, with severe momentum loss in the motor trade (apparently not mainly due to the Japanese Tsunami), momentum loss in retail, a severe falloff in manufacturing output (possibly only partly due to strikes), with building and construction activity finally signaling cyclical troughs, but so far not much bounce.

The industrial slowing seemed to suffer from something more fundamental than just temporary headwinds. It had this uncannily in common with global experiences.

A major US bank expected better than 3% US growth in 1h2011 and only got 0.8%. It traced this back to 1% GDP growth loss due to higher oil and food prices eroding consumer real incomes, 1% GDP growth loss due to increased fiscal restraint at local, state and federal level, and 0.25% GDP growth loss due to the Japanese tsunami disturbance of industrial activity.

Clearly the tsunami disturbance was temporary. The higher commodity prices might be a longer term problem, though fluctuations along a rising trajectory were possible (now eroding real income, then again boosting it). The growing fiscal austerity is a long-term headwind.

Indeed, even if commodity prices moderate and real incomes suffer less erosion (possibly enjoying a bit of a boost in the short term from lower oil prices), the fiscal austerity will bite deeper in the US next year, to the extent of 1.7% of GDP.

Adding all that up, the US growth momentum through 2012 may not top 2% (if that), a combination of demand growth erosion and loss of confidence on the back of serial financial shock events.

That’s short of double-dip recession but still far too slow, and may see renewed increases in US unemployment.

South Africa’s budget reduction may not be as severe as in the US, and the strong Rand may have modified the oil and food price surges (now in any case moderating), but other administered prices (electricity, municipalities, tolls) and catch-up rental gains will still push our inflation higher, eroding real incomes.

We may therefore also in recent months have witnessed eroding demand and output growth due to eroding real income gains, even as confidence was subjected to serial shock treatment, local as much as international.

Not only the European and US debt antics, but also local political noise, and talk of higher interest rates.

In 2Q2011, FNB/BER consumer surveys showed English- and Afrikaans-speaking consumers registering -25 (heavily negative) on the question whether now is a good time to buy durable goods. Apparently not.

Even if some of our 2Q2011 momentum loss turns out to be temporary (strike effects, oil price spiking), there may be enough real income growth erosion and event shock intimidating consumers and businesses for growth to come off a notch or two, even into next year.

It makes a GDP growth target of 3%-3.5% much more realistic rather than anything higher. In South Africa’s case, this is also below potential and may prevent sufficient job gains to lower unemployment.

If anything, unemployment may still increase despite redoubled government efforts to ‘create’ jobs and very slow 1% population growth.

With global shock events pushing Brent oil back towards $105, the inflation trajectory over the coming year may also become lowered, especially if the Rand proves more resilient following overseas central bank actions.

Time will tell. But slow growth, lingering resource slack, a peaking inflation rate subsiding anew, and central banks globally relenting enough to keep the global faith, could also see our interest rates still lowered further.

At least we still have the means to do so, something quietly noted overseas, along with our good credit standing.

Source: Cees Bruggemans, FNB, August 10, 2011.

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