South Africa’s growth duality and the coming push

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By Cees Bruggemans, Chief Economist of FNB.

It is really grotesque when you think about it.

Bumper Christmas retail sales volume growth of 8.7% (as foreseen by some, if not all), wholesale trade volume growth of 6.1%, a good start to the 2012 motoring year with 7% growth in January car sales, with the Wesbank motor dealer confidence survey in 1Q2012 lifting to 6.4 from 6.1 in 4Q2011, and the Kagiso Purchasing Managers Index comfortably cruising at 53.

Meanwhile, total buildings completed in December was a still distressing -5.6% year-on-year, with residential doing -2.6%, non-residential a depressing -14.5% and additions/alterations -2%.

New building plans passed at constant 2005 prices for December were only slightly better at +0.3% year-on-year, with residential -0.9%, non-residential +2% and additions/alterations +1%.

We know from surveys and cement sales that the construction sector is off its recession lows, but it has a long way to go to make up for the 40% falloff in 2010 once beyond World Cup project completions.

We also have seen mining output struggle, absorbing the gold industry’s long decline as a sunset sector, but other mining output also struggling to lift decade-long levels even as overseas commodity producers aggressively expanded their mining output.

Is this picture going to linger for another decade or could there be critical changes?

There is considerable stability to the prospects of both the high-performing sectors such as retail, wholesale and motor and the dormant building trades.

But both construction and mining should give us pause, as here we may see considerable efforts in coming years, with spillover in transportation and manufacturing, and ultimately benefitting a much wider array of sectors such as many services, but also household consumption through more job gains.

The main growth story at present remains household consumption. It is stably underpinned by good income gains via high commodity prices, supportive government spending and hiring, large unions still winning high pay increases, the scarcity premium favouring many of the skilled and talented, and not forgetting the belated recovery in income from property (dividends, rentals, business income, commissions, fees, bonuses, options and other variable income).

This is a momentum growth story, giving us 10% nominal income gains and 3%-4% in real terms as long as output in the economy doesn’t take a recessionary hit.

It is these real income gains that drive the retail, wholesale and motor trade, along with some unsecured credit lending.

Credit generally remains subject to the new credit culture vesting more thoroughly and more people only thereafter qualifying more easily for access to credit, a process four years underway now and likely still to run for some time.

For the duration we are likely to find especially the residential property sector with limited financing options, an oversupply of traditional stock from recent years, and demand unable to match supply, keeping nominal value gains remarkably modest near low-single digits in a 6% plus cost inflation environment.

This should keep the building trades from recovering early, maintaining low activity levels for longer until the imbalances are less severe. It has also ended the house as a wealth ATM, at least for the time being, a reality very pervasive in the US prior to 2007 but also a noticeable feature in South Africa, where some financial wealth (housing equity) could be easily tapped for things such as car and other consumer durable purchases.

These options seem much less available today, even as other forms of lending (such as unsecured credit) seem to have come to the fore.

But if all these features for the time being appear remarkably stable in their continuity (barring unforeseen external shocks), there seems to be renewed focus on things like infrastructure construction and its biggest down-stream beneficiary mining (and transportation), while manufacturing and other sectors would be upstream beneficiaries.

If, not unlike 2004-2009, there could be another massive wave of large infrastructure projects in rail, road and dam capacity, such as mentioned in the State of the Nation speech by President Zuma earlier this month, it would go a long way to boost construction and manufacturing activity in the 2013-2016 period and coincide with the coming on stream of new Eskom electricity generating capacity.

This could clear the way for greater mining investment and ultimately output activity in the 2015-2018 period, after which we would expect the next generation wave of electricity expansion (nuclear, coal and renewable).

Because of political inactivity in this area in the post-World Cup period, a conviction may have taken hold that such construction and mining expansion might be on hold for an indefinite period.

This may not be the case after all, provided the public sector provides decisiveness, and finance can be mobilised, that such efforts may resume as the decade unfolds, repeating the story of the 2010s, only on a bigger investment canvas, if without the household credit euphoria of that period.

It could mean a breakout from our 3% growth straightjacket of recent years as we approach mid-decade.

Source: Cees Bruggemans, FNB, February 20, 2012.

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