By Cees Bruggemans, Chief Economist of First National Bank.
Except for a disastrous 1Q2012 mining performance due to labour unrest and safety related stoppages, and parts of agriculture suffering drought conditions in some growing areas, most other economic data paint a sustainable if modest pace of expansion into next year.
The SARB leading indicator has been rising over the past nine months after a temporary relapse in 1H2011.
The SARB coinciding indicator has continued to rise, though somewhat more modestly of late, suggesting some loss of growth momentum, but nothing excessive.
Output growth has recently surprised to the upside in retail, wholesale and manufacturing.
The motor trade has continued to see somewhat faster passenger car growth than expected, though export volumes are off.
RMB/BER business opinion surveys have shown revival in confidence in nearly all key sectors.
Even the building trades and civil construction have been registering improved confidence in recent quarters from depressed levels, with real building plans and building completed higher than a year ago, and cement sales 10% up on a year ago.
Private credit growth has steadily accelerated, reaching +9.2% year/year in March 2012 from +8% in February, +7% in January and +6% in December 2011, now nearly matching 10% nominal GDP growth.
Then again, Aussie cut interest rates by an oversized 0.5% this week as its inflation wanes and growth eases, in part reflecting planned Chinese growth moderation and European crisis fallout. To what extent will this also suppress our export growth?
Meanwhile, despite high energy and food price increases, our inflation in recent months has surprised to the downside, with CPI down to 6% and PPI to 7.2%.
Even as the global crisis outlook eases in Europe and in the oil patch, key central banks remain supportive as fiscal austerity bites. Global prospect is for modest growth, easing inflation and generous liquidity.
Despite lingering market anxieties, regarding an abrupt US fiscal cliff (if Obama and Congress prove unable to address Bush tax cut lapses, automatic US spending cuts and deficit lifting), European strains (focused on Spanish finances today, Portugal’s supposed return to market financing by September 2013 and French socialist ambitions for reduced austerity and more emphasis on a growth pact), a Chinese hard landing (a lingering anxiety for some) and risky oil (Iranian pre-emption perhaps postponed but not necessarily indefinitely), the world is seemingly navigating these many icebergs in good spirit.
Though the Fed and ECB downplay further QE or LTRO action their respective economies are simply not growing fast enough, with the US registering 2.2% in 1Q2012 while Europe was mildly recessionary.
That won’t make much of a dent in the 15 million Americans still needing to be reabsorbed, and having to accommodate 100 000 new labour entrants monthly. The same applies to Europe.
Although US and EU inflation has been over 2% since 2010, this may ease as large output gaps weigh on wages and indirect tax and commodity price shocks wear off.
With the US warily facing a possible ‘fiscal cliff’ later this year, and Spanish financial strains potentially deepening enough to require more official support, from EU lifeboats and possibly the IMF, both Fed and ECB may eventually have to resort to more liquidity support.
This prospect should keep underpinning global asset markets, especially equities, commodities and EM currencies, with the Rand good for 7-8:$.
Gradual global Repair and Recuperation in many parts of the world remains the predominant outlook, with only select EU peripherals suffering severe recession and others mildly so, any crisis revival likely addressed by lifeboats, ECB and IMF.
There may be incomplete resolution, whether in Europe (Spain), the US (fiscal impasse), the Middle East or China, but there seems to be sufficient incremental crisis management to keep the wolf from the door.
Thus we keep steadily cruising, as much globally as locally, each country at its own speed, in nearly all cases at less than design speed but well above stall speed, addressing crisis debris or struggling (like South Africa) to get the national act together and seriously improve performance.
Such underperformance is a frustrating reality, for the fearful still offering potential of sudden relapses in the event of unexpected shocks.
Yet despite these unstable foundations, cruising speed prevails, globally and locally, mostly disappointingly slow, with central banks vigilant but remaining inclined to provide more support rather than playing disciplinarians as in more exuberant times.
It takes time to traverse this stretch. Locally, we need to work harder to right-size our imbalances, for which reason emphasis on a greater infrastructure investment effort later this decade is to be welcomed.
The challenge will be to deliver with the limited state capacities we currently have, a legacy from past policies unlikely to be reversed soon.
This creates its own modest expectations.
Yet the infrastructure backlog is so dire many could be underestimating the size and duration of the next fixed investment wave slowly coming into view and likely dominating the second half of this decade, potentially as vigorously as the consumer boom did the last decade.
Source: Cees Bruggemans, FNB, May 2, 2012.
By Cees Bruggemans, Chief Economist of FNB.
Just like in the larger world, our prospects are also gradually evolving, and not necessarily for the worse.
The focal point of global crises has shifted from Anglo-Saxon housing and banking (2007-2009) to European sovereign debt and banking (2010-2011) to Middle Eastern political and oil risks in 2012 (with China as risk factor remaining an unanswered question mark for many).
Europe remains for many a source of crisis and potential disruption. But the ECB’s two aggressive LTROs, in a matter of three months offering 800 EU banks €1 trill worth of 3-year money at 1% has, according to German Chancellor Merkel, bought the region 2-3 years time for EU banks to recapitalise, Eurozone countries to cut their fiscal deficits and arrest their debt spirals while refocusing on structural reform to get their flagging growth going again.
All these actions should underpin the continuation of a more viable European monetary union.
Within the US we had sharp recovery in 2009 and 2010, but hesitancy in 2011, and now we see renewed evidence of growth vesting and employment slowly coming back. Europe is likely to undergo something similar from later this year (if nothing big intervenes).
South Africa also initially recovered smartly from the 2008/2009 recession, but its effort was unbalanced in that it was mainly household consumption led.
Fixed investment was slow in coming back, held back by capacity problems in government and spare capacity and uncertainty in the private sector, while constrained infrastructure and the new, more disciplined credit culture were also limiting factors.
Last year still saw strong household income growth, especially in the public sector even as rising inflation eroded some of these gains. Thus we found retail, wholesale and motor trades and also many services performing adequately.
This, though, is not a static picture.
Inflation has risen further in the opening months of 2012, CPI reaching 6.3% and has yet to peak, with especially rising electricity, petrol and food prices eroding away real purchasing power.
In his February budget the Minister of Finance made further inroads here, projecting his personal income tax collections to rise by over 14% this year (well ahead of 6% inflation and 2% job growth). He further imposed greater wealth taxes through a 15% dividend withholding tax, upping capital gains taxes by a third and robustly boosting fuel and electricity levies, besides the usual sin tax increases. He also made changes to medical deductions, switching to a credit system that will impose a greater burden on middle class taxpayers.
The Minister is taking this extra pound of flesh in order to reduce his budget deficit faster, something demanded by global market conditions and simply precaution, just in case, as we are in no condition to face another major global crisis any time soon.
But the combination of higher taxes, more modest public spending and higher inflation should erode household real incomes enough to cause some slowing in consumption growth this year. The Minister appears stoically prepared to accept such growth sacrifice in the short term.
It makes the willingness of the SARB to keep interest rates unchanged this year at low nominal levels (prime 9%) and negative in real terms (repo rate of 5.5% against CPI inflation of 6.3% and rising) more understandable (provided inflation doesn’t shock too much on the upside, core inflation remains target-bound near 5% as now projected and headline inflation starts receding from later this year).
There is some hope our exports won’t do as poorly as some expect (provided mining labour unrest doesn’t escalate and indeed ends soon, especially in the platinum sector).
Also, fixed investment might do slightly better than projected, especially in the private sector as more machinery and equipment is being acquired than expected earlier, as reflected upon in a February FNB Round Table discussion.
Together these tendencies still suggest only about 3% GDP growth this year, with household consumption doing 3.5% after nearly 5% last year.
The big promise of much bigger infrastructure efforts, as highlighted by President Zuma in his State of the Nation speech and by the Minister of Finance in his budget appear to be things that may translate into much bigger fixed investment loads after 2014 at the earliest.
It will take time to gear up.
Meanwhile, SARB is expected to remain on hold with 9% prime, as neither 6% inflation nor 3% GDP growth warrant action at this stage.
The Rand as always will be volatile, likely in a wide 200 cent band straddling 7.50:$, supported by global growth pull out of Asia, less crisis concerns out of Europe (hopefully sustainable) and gradually better news out of America. The one big unknown for 2012 is the Middle East and oil, something to watch carefully, for it could have hugely disruptive potential, as seen on various occasions in recent decades.
Source: Cees Bruggemans, FNB, March 7, 2012.
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By Cees Bruggemans, Chief Economist of FNB.
One of the more unsettling aspects of recent times is the sense of very stable forecasts resting on unstable foundations.
We are 32 months into economic recovery, with GDP cruising steadily at 3% or thereabouts.
Forecasts differ for this year, and through 2014, but not by much.
The more cautious allow for European weakness to eat away some of our income and output gains.
Realistically, most of us allow for higher inflation and wealth taxes and slower public sector wage growth and transfers (off high bases) to constrain household income growth, while as yet not hoping for much from public and private fixed investment gains.
That said, we may be pleasantly surprised by faster income growth from property (meaning the many variable sources of income) in an economy showing momentum in all sectors except the building trades.
The global picture looks severe in places, but mostly so where we have least exposure (EU peripherals), even as Europe generally doesn’t suggest much growth. But then how big a difference does zero make compared to +1%?
We are apparently not to expect too much from public sector fixed investment in the short-term, going by the budget this week, but could private fixed investment be giving us a bit more, given recent trends?
These are perhaps slim hopes, but then we seem to be mostly arguing the toss around 2.7%-3% GDP for 2012, statistically not a big spread to get precise about.
More interesting is the question why GDP growth should top 3.5% in 2013 and 4% in 2014 if the infrastructure push may only materialise later, if then.
The answer seems to be receding inflation (minimally) and stabilising tax burdens (but then who knows, given some of the sentiments in last week’s budget), together easing up on households, giving them more space to boost spending anew after 2012.
Then again, global growth is supposed to be tweaking higher from 2H2012 and beyond as crises recede, also benefiting our export performance.
And, yes, there might be slightly more push from fixed investment spending, private and public, but then don’t hold your breath.
Anyway, Year Three in any forecast is always easily revised, and we have been doing that now serially for three years. So a bit of disappointment for longer in the 3% growth range would not come as a huge surprise.
Inflation forecasts have steadily crept higher, but for the past year have assumed a relatively short sojourn outside the 3%-6% target before dipping back.
Peaking territory seems to be flexible around 6.3%-6.8%, after which a slide towards 5.5% is expected, mostly due to changing food and energy prospects with core inflation rising to top 5% and not easing much thereafter.
The Rand as always is a very volatile proposition, but few call 6:$ or 9:$ shortly. That amounts to relative stability saddling 7.50:$ with a 200 cent trading range.
Interest rates are unlikely to rise with such GDP growth underperformance, considerable resource slack (output gap) remaining and inflation mostly tame if high up in the target. Most forecasts see repo at 5.5% (prime 9%), also bearing in mind a faster budget deficit step down.
With Fed, BOE, BOJ or ECB unlikely to raise rates before 2014 (if then……) it isn’t obvious in the least why our SARB would want to start raising rates through 2013 UNLESS some of these numbers turn out to be less stable than here suggested.
But even then we seem to be mostly tweaking the verbiage.
It is a different matter altogether when considering the possibly very unstable foundations on which most of our forecasts tend to rest at present.
Not so much domestically, where politics of late appears to have acquired renewed focus, macro policy is traditionally stable and even some of the micro policies may gain in coherence, though dissonance remains a disturbing feature consistently confusing audiences.
It is globally where we seem to be traversing deeply troubling times, with every important part of the world grappling with uniquely existential questions, in some instances offering up the chance of genuine mayhem if missteps are made.
The focus used to be on the US, with many ready to switch to China, though the flavor of the moment remains Europe, with the Persian Gulf an exotic alternative.
If, as feared most by our policymakers, Europe were to encounter another twist in a contorted road, a much bigger disruption could still originate there than seen so far, in which case both our exports and Rand have weakening potential, undermining growth while boosting inflation, potentially in undreamed orders of magnitude.
While acknowledging such risks, markets seem to be pricing less of it while shifting their attention (again) to oil and Middle East. Early last year it was the Arab Spring (or Fourth Revolt as some call it) that especially in Libya caused oil export disruption.
Coming on top of the Japanese tsunami distorting energy demand/supply, it added heavily to the oil price premium.
Today, the world is getting succour from gas prospects (long-term fracking offering revolutionary prospects) but the focus is increasingly on potential conflict in the Persian Gulf. Even a short-term 50% spike to oil prices could be lethal, never mind a bigger one lasting longer (remembering the 1970s).
Anything significant here could move our cheese by a few percentage points, growth from +3% to -2% (?), inflation from a 6.5% peak to over 12% (?), the Rand potentially getting a 50%-60% haircut towards 12:$ (?), and only the SARB knowing what it would do to interest rates (with the weaker Rand stabilising the economy, interest rates traditionally boosted to tame the inflation surge?).
But then we can’t be sure about other effects, such as precious metal booms as seen in the 1970s, compensating much and yielding quite a different outcome.
These are fat tailed risks (huge outcomes but now with significant probabilities), given the unsettled state of the world today. We may therefore mostly stick with our stable ‘base’ case views, but these merely reflect an inability to firmly incorporate heightened event risk.
Thus many are waiting in dread for the butcher’s knife (and bill), though wondering whether there will be a respite before having to face the music once again.
Yet stock markets seem far less perturbed, everything gradually pushing higher again after the handwringing of late last year. But then an ocean of liquidity and record corporate margins dictate their own reality show.
Source: Cees Bruggemans, FNB, February 28, 2012.
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.
By Cees Bruggemans, Chief Economist of FNB.
After being missing in action for two years, ever since the World Cup soccer ended, with civil engineering turnover dropping 40% in 2010 and barely lifting off the floor last year, it would seem the nation is being prepared to get another adrenaline boost in what remains of this decade through infrastructure construction and other accompanying efforts.
The winning of the World Cup Soccer bid in 2004 unleashed a wave of focused infrastructure commitment. Across much of the public sector the carrot was held high. If the nation was going to be a successful host, much was needed to be done.
This resulted in many major infrastructure projects being launched in close wave-like proximity by mid-decade. The operational term was ‘bunching’.
It turned out the private sector was after all quite capable (as steadfastly predicted) of meeting this increased workload but many public sector entities experienced capacity problems in sustaining the pace.
In too many instances it turned out to have been too much of an effort, with not enough public means to sustain the challenging pace. As projects were completed, there was too little follow-through. A period of consolidation followed.
But with the economy struggling, political promises not being met and many infrastructure pressures mounting, political focus appears to have finally been regained.
The earlier indigestion has sufficiently receded for a new effort to be possible?
Thus we find in recent months apparently a renewed focus on infrastructure needs and the imperative of launching another wave of major projects to strengthen the longer term growth performance of the country and thereby reinforce political continuity.
This practical push follows an extended period of policy conceptualisation, in which petty bickering was a major feature. Looking back, one can see the shrill demands from the fringes for nationalisation being denied and the push from the Left for a New Growth Path being eventually subsumed in a counter-push from the Centre for its Vision 2030, a common sense based approach offered up by the National Planning Commission.
This synthesis seems to be close to complete, with the “new-new” policy emphasis offering a clearer picture of greater state intervention in the economy across a wide spectrum of initiatives.
There is a wish for more import-substitution and export-beneficiation to push industrialisation, with a greater regional use of export-zones, a greater emphasis on resource nationalism to gain greater state rents, a massive infrastructure effort to debottleneck export capacity the old-fashioned way and for private finance to fund most of it (about which presumably more in this week’s budget as institutional means are invited to get mobilised).
The entire effort isn’t without its contradictions.
From the moment the new political dispensation took hold in 1994, the new government’s main choice was for power maximisation, given the historic backdrop and the non-negotiable determination to secure the long-term future in her own image, leading to cadre deployment on such an overwhelming scale that over the intervening years it prevented growth maximisation due mainly to a mismatching of skill and talent in the economy.
This focus hasn’t apparently changed much (if it hasn’t intensified). Power maximisation remains the main objective even if alongside it there remains the outspoken wish for growth maximisation to address poverty and inequality, except that the latter has struggled to be achieved, given the many supply side handicaps put in its way (as if it was some Sea Biscuit capable of still outperforming even against the greatest odds).
Instead of growth maximisation flowing naturally from the country’s resource deployment, the pace at times had to be forced despite debilitating weaknesses, not unlike a budding Olympic athlete following the wrong diet and lifestyle, yet forcing herself from time to time to compensate through extraordinary effort and focus (though with no results guaranteed).
Despite woeful education results, mounting supply side bottlenecks in electricity, rail, municipal and water capacity, underperforming exports relative to EM peers, with the public sector struggling to meet its targets as too many of its cadres favour operational over capex budgets, and the private sector intimidated as much by awesome global risks as the many domestic political agendas, the economy has nevertheless struggled onwards, achieving modest growth of 3%, maintaining financial stability and even achieving some structural change through very limited employment expansion.
Be that as it may. The objective of power maximisation isn’t going to go away, while need for performance and social delivery continues to mount.
And thus again the wish for yet another redoubled effort, another wave of focused trying, as the country attempts to boost its performance in the coming decade, with important leadership decisions ahead.
Certain import-substitution efforts in public procurement linked to long-term energy and rail transport investment makes an awful lot of sense. There are natural economies of scale, the technologies aren’t beyond us, there are long lead times, was done before for decades to great effect (prior to 1985) and why it took so long to restart these efforts is anybody’s guess.
Export beneficiation is more challenging, for the state seems to know more than private market interests as to how to channel the fruits of our endeavours, and possibly willing to spend extra on incentives to steer such efforts. But whether this will amount to genuine value-added maximisation, when taking all costs into consideration, remains to be seen.
The same applies to increased resource nationalism, where the state appears to want to increase its rent from the natural resource endowment, but hopefully without causing private participants to withdraw, or becoming unwilling to participate in future.
More promising is to focus anew on debottlenecking our now very tight infrastructure constraints in order to get a much greater traditional export effort going.
Presumably this is in addition to the existing R800bn three-year public infrastructure budget (mainly incorporating Eskom power station, municipal, provincial and existing rail and road efforts).
We were told in the State of the Nation speech earlier this month that there will be major rail, road and water/dam efforts in the east, north and west of the country over the next five to seven years that look like being additional efforts.
To this picture we can quietly also add the next wave of Eskom commitments beyond its current two coal-fired power stations and private electricity efforts, which will be in a class of their own in the 2020s (some coal-based, much of it presumably nuclear, along with renewable).
But where’s the money going to come from?
Presumably not from an increased tax burden (unless you want to add increased disincentive to insult in hobbling the economy yet further), while saving on operational budgets is likely to be vigorously resisted by the many cadres so preoccupied.
That leaves institutional means, provided it doesn’t become an invitation for higher tax burdens by refusing to pay market finance charges and thereby impose a social-minded contribution.
This brings other contradictions to the fore.
We would apparently love to be like China, another developmental state, which has organised its affairs in such a way that it has access to unlimited pools of citizen savings at minimal costs, as citizens are starved of consumption alternatives while the absence of social safety nets forces them into desperate levels of saving, with alternative personal investment capabilities carefully limited, leaving only low-return cash deposits.
Such a feature marking true developmental states doesn’t apply to us, and neither does the notion that unions will be tame or non-existing and public sector bureaucrats proving superior in allocating investment funds and running industrial projects. It just doesn’t describe our many complex realities. Yet this apparently may not prevent anyone from trying.
This week will show whether our capital market will be pushed into action, tapped by public corporations and government issuing a lot more debt and on what terms.
The political will seems to be gearing up for another big infrastructure push and it will be interesting to see the time tables unfold, and business, markets and public taking time to absorb the magnitude and adjust their thinking.
It would seem 2013-2016 could see a major industrial effort underway, which if it materialises would rub off on the private sector, encouraging it to extend its planning horizons and gearing to meet the opportunities on offer, in the process upping the growth rate yet further and creating more employment opportunities which would also bolster household incomes and consumption (and government tax coffers).
Still missing in action for some time is likely to be household credit-based consumption as the new credit culture will take some years fully vesting.
This should limit household consumption growth to its pace of the recovery to date. This would free available resource space in the economy for the public and private investment effort and export catch-up.
So there is promise beyond 2012 as the country gears up for yet another wave of focused effort. It now remains to be seen just how focused we will get this time.
Source: Cees Bruggemans, FNB, February 19, 2012.
By Cees Bruggemans, Chief Economist of FNB.
South African manufacturing has deeply disappointed of late in supposedly not recovering more strongly from the 2009 recession, especially in 2011, to the point of even promoting the impression of a new economic slowing or at least cyclical underperformance to be underway.
As with Mark Twain remarking about his reported death, things may have become somewhat exaggerated.
The culprits? There may be many, but two subsectors stand out, their experiences in 2010-2011 of such a nature that it may distort perceptions of the cyclical post-2009 behaviour of manufacturing and the economy generally.
Oil refining capacity in this country is mainly in private hands and outside of Sasol is mostly 40-50 years old. The nature and capital-intensity of oil refining is such that companies can only expand (and modernise) capacity in big lumps. Given the small local market and mature growth, large production shortfalls and import dependencies tend to build up before big investment decisions are made, bearing in mind the returns on capital that can be earned.
Global refining capacity surpluses, large new capacities coming on stream overseas, our own refining margins very slim and any refinery addition from necessity having to be very large, the appetite hasn’t been there for such greenfield investment locally, allowing the bulk of our oil refining capacity to age to a point where plant breakdowns happen more frequently and maintenance shutdowns last longer, affecting oil refining production and manufacturing output generally.
Given the growth in demand over time, any new capacity investment would naturally have given rise to growth in refining activity, lifting overall manufacturing activity as well. Instead, such incremental growth is being met from imports of refined product and isn’t supporting the growth of overall manufacturing activity.
This is not a cyclical but a structural issue. With a weight of 8.5% in overall manufacturing, oil refining underperformance can distort our impressions of manufacturing’s cyclical condition, and even that of the economy generally (escalating the bias).
Similar problems, however, can be observed in parts of the basic iron and steel subsector, with a weight of 7.7% in total manufacturing.
Here, too, we have especially in recent times encountered plant breakdowns, maintenance shutdowns and/or reduced local output and reliance on increased imports.
Especially the steel plant in Newcastle appears to have given problems. South African steel output this past year has been well down on the previous year, November’s crude steel output being down 13.7% on a year ago.
This may again mostly reflect structural rather than cyclical issues.
To gain a better feel of how manufacturing ‘generally’ is performing of late, especially in recovering from severe labour-related interruptions in mid-2011, it may be advisable to check how ‘Non-Bisor’ Manufacturing has been doing (that is, without the structural distortions of basic iron and steel and oil refining).
Instead of trying at subsector level to remove distorting influences (which statistically is rather challenging), it is easier to simply drop the two subsectors and run a Non-Bisor Manufacturing Index parallel to the normal Total Manufacturing Index, using Statssa data.
In the graphs below it will be noted that although in years gone by there have from time to time been short periods of deviation between the two data sets (mostly reflecting plant maintenance shutdowns in oil refining and steelmaking), this has generally not been a major or enduring condition influencing our perception of overall manufacturing performance.
Things changed for the worse, though, in 2010 and even more so in 2H2011. The oil and steel sector-related plant interruptions appear to have become more prolonged and severe, judging the manner in which Non-Bisor deviated from Total Manufacturing output.
This was mainly assumed to be a supply-side rather than a demand phenomenon as economic recovery started in mid-2009 and has ever since continued steadily (even as globally there was a pronounced demand slowdown in 2H2011 not visibly related to local tendencies).
Despite substantial volatility observable in Non-Bisor Manufacturing output, especially in late 2011 (mostly traceable to that other major subsector, motor vehicle production), the cyclical trend recovery in Non-Bisor Manufacturing output from its 2009 recession low has been much more persistently positive than in overall manufacturing.
It is this perception that may need addressing.
Manufacturing has been recovering since 2009 and has done so more persistently than overall data distorted by subsector-specific problems would have suggested.
Even though Non-Bisor Manufacturing output hasn’t quite recovered its 2007 cyclical peak, it has regained (much) more of the lost ground than perhaps imagined so far, with less reason to fear imminent falloffs due to supposed self-evident slowing in the recent data, taken to mean perhaps that demand has been severely faltering (or trade competitiveness lost).
Relax, the manufacturing recovery is well on track, better than expected, even if it could be stronger, when going by the Non-Bisor data.
Graph 1 Manufacturing production indexes (2005=100)
Graph 2 Change in manufacturing output (year/year %)
Source: Cees Bruggemans, FNB, January 13, 2012.
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