South Africa’s long business upswing has barely begun
By Cees Bruggemans, Chief Economist of FNB.
When up to your armpits in crocodiles, the long-term tends to look after itself. Or so I was told decades ago by someone who knew.
Nothing truer today.
Still, when lifting those tired eyes from impending near-Lehman catastrophes, what do we get?
The SA economy has completed two years of rising quarterly GDP (the ‘new’ definition for recovery?) and is now beginning its third year.
In decades gone by, when 24-36 months into an upswing, it started to be time to worry about the coming downswing.
Planning horizons were short, the economy easily overheated in terms of import-spillover and rising inflation, and SARB always stood ready to kill off anything rash wanting to rise above its lowly station.
Today, though, is different.
The economy hasn’t as yet reabsorbed the resources that became idled in the last recession and its aftermath.
Total working labour force fell from 14 to 13 million. Its formal component shrunk from 9.5 to 9 million through 2009 and has remained stuck there.
Along with new employable cohorts entering the system since then, the formal sector resource surplus is probably some one million strong, over 10%.
Manufacturing capacity utilisation keeps hovering just above 80% instead of getting nearer 85%-90%. Office vacancies are over 10% and lingering.
SARB and industry estimates suggest an output gap of 2.5%-3% of GDP. That’s a lot of slack to make up before starting to worry about overheating.
As it is, we are not even achieving, never mind maintaining, our normal cruising speed of 3.5% growth.
This slow start to the decade has many fathers.
The residential building trade has been hamstrung by oversupply from good times and tight new credit regime, keeping building activity limited to below normal levels.
Civil construction saw activity reduced by a third from peak levels and has yet to restore it.
Electricity is seriously handicapping heavy users.
Additional export rail capacity is talked about but yet to materialise.
Mining output remained remarkably stagnant this past decade, considering.
Private sector fixed investment fell by a third during the recession, and has yet to show broadbased recovery.
With so many unpromising features one would expect to be slow and not to be going anywhere fast.
Still, there were activity gains and incomes rose, fired by commodity windfalls, public sector patronage, union demands and skill scarcity premiums.
Household and government consumption have been early cyclical risers.
With durable consumption losing its early vigorous boost as pent-up demand dwindled and replacement normalised, and real income gains moderated through higher inflation, only a modest advance can be expected from consumption.
Meanwhile, certain types of private investment such as those focused on IT-driven modernisation and labour substitution have been growing. Construction may be past its low point as the public sector starts to stir anew and non-residential building activity may be in the throes of a new upswing despite still high vacancies.
Fiscal policy is slowly eroding its budget deficit through rising tax revenue, but SARB interest rates are at 35-year lows and remain supportive for recovery, with households still carrying a debt burden of some 75% of disposable income.
The credit turbo charger and building trade may be missing in action, infrastructure constraints serious drag anchors and the cautious business mood a dampener for fixed investment revival, but it isn’t as if all forward momentum has been lost.
Instead, we see echoes of 1995-1998 and 2000-2004 when growth also hovered uncertainly in a 2.5%-3.5% range, well below cruising potential.
Importantly, there is income growth sustaining household spending momentum, if somewhat slower than before.
The building and construction sectors are no longer contracting, with some cyclical upside, early so in construction from private work, medium-term from public infrastructure and non-residential building activity and longer-term from a reviving residential building trade.
These are important decade-long cyclical flywheels.
Consumer durable goods retain upside potential, as the middle class keeps expanding, the replacement cycle can shorten some more, and credit keeps normalising throughout the decade (meaning growing numbers of households finally having adjusted to the ‘new normal’).
With South Africa potentially losing an entire interest rate cycle as it follows global tendencies, rates remaining remarkably low for amazingly long, tailwind support for households and business remain significant.
Business balance sheets are strong and income recovering, while households will keep gradually deleveraging. Along with steady government spending, it creates potential for sustained growth momentum, if low through the early part of the 2010s decade.
The later part of the decade may be faster as credit and infrastructure limitations become hopefully less severe and the public and private debt burdens less restraining.
Even then it will probably take many years into this decade at modest 3%-4% growth before the output gap is closed and an element of overheating starts to be noticed, requiring more normal real interest rates.
Perhaps an unimpressive decade but probably still a tenacious one as job gains eventually outpace labour force growth and per capita income rises by a quarter.
That, for us, would constitute progress!
Source: Cees Bruggemans, FNB, October 4, 2011.