Deepening SA recession emulates 1985

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By Cees Bruggemans

Deteriorating American, European and Japanese prospects suggest these economies face -3% GDP decline in 2009.

The annualised decline of -6.2% in US 4Q2008 GDP wasn’t as yet the worst of this cyclical contraction.

This dubious honour is now being reserved for 1Q2009. Forecasters are looking for -7% to -8% annualized GDP decline, with potential for -10%, with 2Q2009 and 3Q2009 projected less severe, but much becomes relative against such benchmarks.

This growing weakness reflects abrupt reduction in business spending, with cautious households delaying big item replacement, favouring saving (‘debt deleveraging’).

Worldwide, industrial production (manufacturing) looks like being over 25% down this year.

Most country yield curves, including our own, show an interest rate trough this year, and a 100 point or more claw-back next year, as people cling to the idea of early reversal in monetary conditions.

In some cases, this year’s projected trough isn’t as yet low enough (except if already near zero), and do forget about any claw backs next year. Too soon!

In our case we seemingly are on our way to matching the 1985 recession. That says something, for at the time our interest rates doubled (burdening the indebted), the real Rand exchange rate halved (catching out the unhedged) and company sales in many sectors plunged (catching out the unprepared), all unprecedented phenomena thoroughly flooring the economy.

This time interest rates didn’t double. They only went up by half (prime rising from 10.5% to 15.5%). But household indebtedness also went up by half, from 55% of disposable income to near 80% before subsiding.

Two half doublings is as much bang for the buck as one full interest rate doubling. And you see it in our debt servicing burden (what you pay your credit providers monthly). That doubled from 6% to 12% of disposable income over the upswing then, and it did it again now.

Today the Rand has again lost half its value against the Dollar these past twelve months, though has fallen less on trade-weighted. But unlike 1985, when politics was the main source of our troubles (with foreign banking lines being withdrawn, plunging us into crisis), the trouble today is key export prices more than halving in a matter of months (platinum). That’s the equivalent of what happened then as well, hurting just as much, just differently.

As to silver linings, the economy certainly didn’t add 200 000 new jobs in 4Q1985, but one has some difficulty believing we did so in 4Q2008, especially considering other economic data.

Steel output was -75% and mining -10.7% down in December 2008. Manufacturing declined 22% annualized in 4Q2008.

Residential building plans and new car sales are key.

Passenger car unit sales last month plunged -34% (another cyclical low), with total vehicles -36% down. This is happening 30 months into the car industry downswing. The depth and speed of decline of this cyclical downswing is now already far outpacing 1993 and 1998 experiences.

Instead, we are approaching 1985 territory.

Same for the plunging residential building plans passed, where 1985, 1976 and 1974 are the true historic benchmarks for extreme severity. We are basically there.

The good news is one cannot keep plunging (at some point starting to compare little with very little in the base period, moderating the final stage of descent).

The bad news is that this is truly shaping as a massively deep and prolonged recession in the truest sense.

Worse, it may not remain an ‘annualised’ recession. So far, we have measured recession from mid-2008 by the revised -0.5% annualized decline in non-agricultural GDP in 3Q2008 and -2.2% in 4Q2008. But we may even see overall GDP going negative year-on-year in 2009.

The reason is not primarily domestic, though plunging car sales, stagnant housing markets and contracting building trades don’t help.

The prime reason this time could be exports, especially if imports don’t fall off enough, kept elevated by infrastructure investment and basic consumer spending, budget supported and oil assisted.

Our export declines of late 2008 may transform into low export levels during 1H2009 and even 2H2009. Not only steel and car exports, but also mining, ferrochrome, chemicals and other manufacturing.

If export volumes go down by over 10% and import volumes decline only by low single-digits, we have a problem.

Every 1% off net exports knocks 0.3% off GDP. So net exports declining by -7% could take positive domestic demand of +1% and transform it into -1% GDP in 2009.

To know the final outcome, we would have to wait for February-March 2010 to get the full dataset (even if it may subsequently still get revised out of recognition).

Meanwhile telltale signs suggest GDP may be going negative this year, formal employment may decline heavily (going by employer intimations) and car and house postponements suggest we may match 1985’s deprivation.

Source: Cees Bruggemans, FNB, March 9, 2009.


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