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By Cees Bruggemans, Chief Economist of FNB. SARB Governor Marcus has not been reticent about her concerns regarding EU banking and sovereign debt crises, slowing global growth, South Africa’s exposure via exports and capital flows, and the situation at home whose insufficient demand she typifies as a huge concern. To this can be added the many supply constraints hobbling the economy, such as capped electricity supply, limited export rail capacity, technical manpower shortages in the public sector holding back infrastructure construction, a new credit culture constraining property and the building trades, and poor education results and poorly functioning labour markets not supportive of the growth process. Our economic recovery these past two years since 3Q2009 has been a strange affair. Unlike many of our EM peers, our manufactured export volumes have barely recovered from the vicious 2008/2009 falls. Instead, our recovery has been strongly led by consumption revival (itself a surprise in the absence of more vigorous credit support) while suffering from weak, if any, public and private fixed investment revival. Throughout we were subjected to some of the strongest labour action in South Africa’s history, not in protest at severe hardship (as in peripheral Europe or increasingly at grass root level in the US), but in support of amazingly high real wage increases (in many instances twice to thrice the inflation rate). So there has been good personal income growth, as much driven by high global commodity prices, strong government patronage, focused union action and widespread skill shortage premiums. But inflation has also revived due to commodity price surges (including infrastructure tariffs), this year eroding real income gains and household purchasing power. After a strong 1Q2011 start, these many realities have led to a number of disappointing supply side performances in manufacturing, mining, tourism, retail, wholesale, motor trade, construction and the building trades. Car sales have kept growing, but at about half the pace of last year. Not particularly worrying in its own right as initial growth spurts following recession has much replacement catch-up to it. Still, the car slowdown has come earlier than expected, and may indicate middle class pent-up demand is more limited than perhaps hoped. Retail and wholesale trades have also seen their growth dwindle as real purchasing power faded this year. Manufacturing was badly hit by strike action (a transient feature), but the steel, petrochemical, paper and textile complexes also saw production units out of action, exports reduced and/or trade competitiveness suffering. Mining output stagnated, partly reflecting high precious metal prices (favouring more marginal ore bodies, prolonging mining life) and constrained export and electricity infrastructure. Construction activity rose mildly, but growth remained modest due to uncertain overseas conditions, public sector manpower shortages and financing constraints. Residential building activity remains mired well below normal levels due to constrained credit access, high debt loads, oversupply, falling real property values and reduced household appetite for new commitments. Non-residential building activity still suffers from substantial office and retail space vacancies. Following 2.8% GDP growth last year, growth through 2015 may average only 3%-3.5%, below long-run growth potential and maintaining a substantial output gap by way of idled physical capacity and employable labour. SARB Governor Marcus is well known for expressing concern that the aftermath of the global financial and economic crises of recent years will likely be with us still for many years. This should keep growth in the rich developed countries disappointingly low and also weigh on even the better EM growth performances. These global conditions are seen as offering many headwinds to the South African economy. To this we can add the many self-inflicted domestic shortcomings already enumerated also keeping growth back and that may be with us still for a considerable time. Thus South Africa, as elsewhere the case, also presents a picture of relative growth underperformance and lingering resource slack, potentially for many years still. This situation is being addressed via many policy channels simultaneously. Macro-economically, SARB has lowered interest rates to 35-year lows (with repo at 5.5% and prime at 9%), with the real repo-rate effectively zero and very supportive. Treasury has allowed a sizeable budget deficit near 5% of GDP to linger and its reduction will only be slowly achieved, even as government debt is expected to be stabilized near 45% of GDP (and all public sector debt near 60% of GDP). Micro-economically, government favours various industrial interventions aimed at boosting industrial activity and job creation. Even so, as the SARB Governor’s comments bear out, none of this seems to be succeeding in getting effective demand to rise faster and output growth to be more satisfactory in more fully reabsorbing slack resources. More policy action may still follow. If undue currency weakness doesn’t materialise (indeed, if the Rand stages a comeback nearer 7:$) and inflation remains mostly target bound (below 6%), more interest rate cutting may still follow (as soon as early November), with markets now not expecting any interest rate increases before 3Q2013 (mirroring US conditions). More policy easing could still follow in 2012, if warranted. Source: Cees Bruggemans, FNB, October 17, 2011.
By Cees Bruggemans, Chief Economist of FNB. Local news media ran away today with coverage about SARB and Treasury comments regarding foreign reserves and assistance to Europe, if any. More interesting did I find the following comment from an overseas bank (BNP Paribas) this morning regarding parliamentary remarks yesterday by SARB Governor Marcus: “SARB Governor Marcus delivered some very dovish comments once again, pointing out household consumption was slowing and that the lack of demand was “a huge concern”. Importantly, Marcus stated that the SARB wasn’t necessarily “wedded” to the results of their inflation forecasting model, despite price growth being seen as exceeding the target band by the end of the year. This implies that a larger emphasis could be placed on growth as opposed to inflation which could push the SARB to deliver a cut in rates at its November meeting.” So are interest rate cuts coming? Only 28 sleepies to go to the next MPC meeting on 10 November (a week after Europe delivers of important stuff) where presumably more will be revealed. Source: Cees Bruggemans, FNB, October 13, 2011. More on this topic (What's this?) Pros & Cons Of Online Banking (Green World Investor, 5/8/12) Spain’s Bankia SA Suffers a Bank “Jog” (Wall Street Daily, 5/18/12) The Decline of U.S. Retail Banks (Investment U, 8/9/11)
By Cees Bruggemans, Chief Economist of FNB. It is quite remarkable how one becomes used to instant Twitter distribution. When the service is then yanked away and one has to go back to old-fashioned email it feels like slow coach indeed. This is what I have been burning to say these past 24 hours or so: “Car sales strong, cement output rising, construction activity up, stock market resilient, manufacturing a jumping jack-in-the-box. Not all bad” Car sales surprised in September by remaining a good deal stronger than expected. Cement output for August was 12.7% up year-on-year, if with one extra trading day. Even so, trading day output is clearly rising. The FNB/BER construction confidence survey for 3Q2011 may have shown 4-out-of-5 contractors still dissatisfied, considering present business conditions unsatisfactory, but their responses regarding activity, tendering, demand, adequacy of building material all suggested a rise in activity to be underway in recent quarters, with more optimism expressed about 4Q2011. The surprise today was manufacturing, after falling 6% y/y in July now rising by nearly 6% in August. The good news wasn’t in iron and steel (still a very bad -18% y/y on account of steel mills out of action or global demand being supplied from elsewhere). Neither was it in petrochemical refining, still -13% y/y. Paper products -12%. And of course textiles -10%. But motor industry output did +41%, communication equipment +19%, non-ferrous metals +17%, beverages +15%, rubber products +12%, household appliances +12%, furniture +11%, meat 8%. Despite a very bad winter, the spring started on a high note, with upward potential from a re-established, more normal base. Meanwhile SARB Governor Marcus spoke in Parliament, mentioning the absence of a credit bubble, and the lack of demand being a huge concern. If the EU crisis heat were to moderate, and our inflation were to be seen as mostly target-bound, the slow global growth and our own sub par growth performance might still see rate cuts. First opportunity in November, with the first increase of any new rising rate cycle likely only very late in coming (would that be in 2013?). Meanwhile, overseas markets like the recent US data. Also the EU noises about bank recapping and the likely addressing of the sovereign debt issue, allowing risk to be switched back on. Instead of testing 8.50:$, the Rand was today back below 7.80:$ once again. August and September proved distraught times. Now for the last quarter of 2011. Could it turn out better than expected? Source: Cees Bruggemans, FNB, October 12, 2011. More on this topic (What's this?) What EU can learn from South Africa (The Big Pond, 9/14/11) Winter Strikes Help Boost This Metal’s Price (Investment U, 8/1/11) South Africa’s investor-friendliness questioned (The Big Pond, 7/21/11) 
By Cees Bruggemans, Chief Economist of FNB.
The FNB/BER construction confidence index edged lower from 23 in 2Q11 to 21 in 3Q11. This is the same level as in 1Q11 and much lower compared to the average level of 84 in 2006. The confidence index can vary between a maximum of 100 (which indicates that all respondents were satisfied with prevailing business conditions) and a minimum of zero (indicating that all respondents were unsatisfied). A level of 50 indicates that the respondents are equally divided between those satisfied and dissatisfied. The current reading of 21, therefore, indicates that the bulk of respondents remained dissatisfied with prevailing business conditions. Although confidence remained low, other indicators show that the construction sector continued to improve.
In conclusion: A number of indicators showed that the recovery in the construction sector continued in the 3Q11. However, confidence remained low, as absolute activity levels remained unsatisfactory and uncertainty about prospects may have remained considerable. Respondents expect the recovery to gain further momentum in 4Q11. More work is likely to flow from local governments, because it is easier to make decisions now that the local election is completed. National Treasury’s monitoring of local governments’ budgeted capital spending may also advance construction activity. However, a number of developments may cause respondents’ optimistic expectations not to be fully realised and that the recovery does not continue in a straight line in the next 6 months or so.
In all, the short-term prospects for the civil construction are brighter given indications of recovery in activity, although a number of head winds may see the recovery not continue in a straight line. Visit the FNB Economics website at www.fnb.co.za/economics and consider using our free e-mail service. FNB/BER Civil Confidence Index Percentage satisfied
Civil construction Growth in construction activity Civil construction Tendering competition
Source: BER Stellenbosch Source: Cees Bruggemans, FNB, October 11, 2011. More on this topic (What's this?) The Eco-Friendly Building Material That’s Tougher Than Concrete (Wall Street Daily, 11/9/11) How to Put a Touch of Glory in Your Life (Money Morning, 1/18/12) Telecity Buys UK Grid for Manchester Expansion (Telecom Ramblings, 9/26/11)
By Cees Bruggemans, Chief Economist of FNB. After decade-long overvaluation, rudely interrupted in late 2008 by a severe bout of global risk aversion and Rand undervaluation, the Rand finds itself today once again subjected to a spell of global risk aversion on account of crisis, its severe overvaluation reduced to mild proportions in 7.50-8.50:$ territory. Little of the Rand’s movements since 2002 had anything to do with domestic reality. This may well continue to be the case for some years to come, as global events loom large where Rand asset classes are concerned. To foresee where the Rand will be travelling next week/month/year/decade, one needs to be most clairvoyant regarding coming global events. The most obvious question is whether global events will be Rand negative or positive, and when. Expecting the Rand to hug neutral territory these next ten years, starting at 8-8.50:$ and weakening at our inflation differential (4% annually?) would be the only truly surprising outcome. The Rand is never very stable for long under present global conditions. Still, the past decade does offer insight of a sort. When global conditions become Rand-friendly (as they have been most of the time this past decade), the Rand has tended to become seriously overvalued for years of the order of 10%-20% on real trade-weighted. When things go seriously wrong, as is the periodic fashion, the Rand can easily become 50% undervalued for a few months. Having established the pattern of recent times, there remains the matter of event equivalence. Will we in the coming decade really ever be able to replicate the Anglo-Saxon banking system popping like a ripe melon as it did in late 2011, or repeat the Euro Project build-up and its popping of 2010-2011? Probably not to the same extent in these same spaces in this decade. Even so, US fiscal finances deserve a mention. There, the political standoff could continue until either the one or the other party dominates the entire scene, something the US electorate may well prefer to prevent. The US finances will either be resolved in one of two ways (a Democrat or Republican preference) or political gridlock may eventually invite a forced market solution. That’s three options that could have a major bearing on us this coming decade – good, bad or seriously either. Europe will either belly and fragment shortly or float Euro 2.0, after which a period of licking wounds and some stability may prevail, potentially through the decade. In other words, Europe is going through now what the US will still need to face up to eventually. This leaves two rather extreme EU options, very good and not good for the Euro and outsiders closely aligned with her. This crisis may come to finality within months, thereafter having to live with the playout for years to come. Then we still have China, either its good growth scenario continuing or a property-cum-banking pop flooring the growth story, with this scenario being possible in any year of the decade. This gives two more global game changers. The Middle East remains a very unstable place. Iranian ambitions are nuclear, the region’s youth likes more democracy, the clergy would prefer something quite different still. Three more global scenarios played out via commodity prices. That gives at least ten serious global plays this decade, all unfolding through capital flows, commodity prices, currencies and inflation performances, together seriously impacting growth prospects regionally and globally, and this feeding back into the financial plays. For my penny worth, US political gridlock continues, with the US as yet not at the end of its creditworthiness. Its housing weaknesses are not adequately addressed, keeping banking weak too, while politics enforces slow-puncture fiscal austerity. America will take its time to digest these imbalances, for the duration encountering slow growth and an accommodative Fed, with loads of liquidity, low interest rates, much quantitative easing, weaker Dollar. Europe is busily forcing itself into a new corset (Euro 2.0) guided by Germanic discipline and austerity over peripherals and banks. That will prove very severe for peripherals who don’t want to be wandering around on their own in the wilderness, even as banks get recapped (probably in a very torturous way) and select sovereigns are given debt haircuts for belated good behavior and promises of more. Poorer and wiser, the new Europe will be more severe on its citizens, but eventually also more trade-competitive if Germany these past two decades is anything to go by. All this will take time. Growth should underperform for the duration, markets remaining skeptical for long, risk differentiation vicious, the ECB accommodating, and like with the US other destinations more attractive qua asset yields and currency carry. China should pull through while subduing property and banking excesses a bit (but probably not enough). Its next generational tests loom, but may not arrive this decade. Something to look forward to in the 2020s? The Middle East may remain a bubbling cauldron, capable of yielding Black oily Swans, unpredictable at best and possibly more dangerous in times to come. This overall picture suggests the world will not shortly go up in US, EU or Chinese smoke, though their potential to surprise remains immense, with the Middle East a major wild card. The main scenario remains catch-up growth in the East pulling commodity prices along, and financial repair in the West greasing the liquidity spigots enough for yield-seeking capital to push global asset markets, commodities and currencies. In other words, the story of the past six decades (Eastern catch-up) and past three years (Western repair) still have enormous playout potential this decade (and indeed beyond, even if the shape of forces changes). That makes for a volatile Rand prospect, on balance mostly mildly to severely overvalued (as long as we don’t internally make serious mistakes affecting the global view of us), with at times severe pullback and relatively short periods of underperformance when the world hits the odd crisis air pocket, as it is bound to do. Starting from a condition of near neutrality at 8:$, with the world still in thrall to US growth fears and EU crisis conditions, coming weeks and months could still see the Rand relatively ‘weak’ in 7.50-8.50:$ territory. But thereafter looms slow US progress, large output gap, suppressed inflation, Euro 2.0 discipline and continuing Chinese catch-up. To me, this suggests a return to Rand overvaluation (10%-20% on real trade-weighted). Sometime in 2012 we may break below 7:$ again as she firms anew, driven by yield-seeking capital inflows and higher commodity prices. Source: Cees Bruggemans, FNB, October 10, 2011.
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. More on this topic (What's this?) Winter Strikes Help Boost This Metal’s Price (Investment U, 8/1/11) What EU can learn from South Africa (The Big Pond, 9/14/11) South Africa’s investor-friendliness questioned (The Big Pond, 7/21/11) |
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By Prieur du Plessis, on October 18th, 2011 posted in: 
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Prieur’s Readings (May 5, 2012) – staying up to date with top money news
Don Coxe webcast – updated (May 4, 2012)
Laugh out Loud: EU debt whack-a-mole
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