South Africa – the Turpentine solution

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By Cees Bruggemans

When faced with an obdurate quantity, completely unwilling to get moving, one last desperate solution is to lift its tail and apply a liberal helping of turpentine. And then make sure not to be in way as it takes off.

There is currently nothing more obdurate than a fearful world withdrawing deeply within itself, abstaining from discretionary spending, deleveraging debt, and in the process plunging the world into its worst recession since the Great Depression.

The rich have stopped buying diamonds and ordering Ferraris (blue blood can also bleed after all), middle classes everywhere have postponed car buying indefinitely, global business has abruptly cancelled investment plans (German and Japanese capital goods orders plunging 50%), everyone is traveling less, sitting tight, fretting.

This nonsense has also in recent months fundamentally moved our cheese.

Up to September 2008 our economy was still gradually moderating its growth performance. Thereafter complete unhinging can be observed in places.

Electricity supply was down 1.5% y/y in January 2008, but down a further 7% y/y in January 2009, cumulatively matching the 8.5% y/y down of December 2008. This wasn’t due to ordinary electricity savings by you or me, but mostly reflected industrial shutdown.

By January 2009, mining output was over 20% down compared to two years ago (with commodity Dollar prices also more than reversed in some instances).

Manufacturing had been happily trotting along through September 2008, output even still up on a year ago. Thereafter car, steel, furniture and basic chemical output especially plunged heavily, taking overall industrial output down by 1.7% y/y in October, 6.4% in November, 7.1% in December and 11% in January 2009.

Passenger cars kept plunging for the third year in a row, with unit sales last month down 35%, and car exports this year also expected to be down over 30%.

The transport sector is sliding deeply with commercial vehicle demand so far this year 40% down, reflecting huge uncertainty in outlook by freight carriers and other users as traffic has slowed.

Our foreign container traffic seems over 20% down this year going by industry sources, matching global trends.

Hotel nights sold had started to slide by late 2008.

Residential building plans in the course of 2008 were over 30% down, with house building activity this year likely over 10% down, and non-residential building activity with a lag also entering this same slide.

Cement sales (tons per day) last month were 14% down y/y and now sliding rapidly, with a 40% exposure to residential building activity according to Johan Snyman, Director of Medium-Term Forecasting Associates (MFA).

Durable consumer goods have also been selling poorly, with retail durable activity (furniture, appliance trade) down by double-digits.

When grouping together all those sectors in the economy currently down by 10% or more in output, we encounter mining, manufacturing, electricity generation, transport, motor trade, durable goods retail trade, parts of the hotel trade, real estate services, residential building activity and non-residential building activity shortly.

This group of sectors represents some 40% of GDP.

Only construction, agriculture, communication and the public service (over 25% of GDP) are still doing well, but agriculture is about to switch allegiance, with less acreage planned and fewer tons expected to be harvested (although some parts continue doing extremely well).

As to the rest, expect an increasingly indifferent performance from financial and business services and retail and wholesale trades as disposable income wanes, credit slows further and business activity reduces.

Adding up this lineup and its prospects, the GDP outlook keeps on sliding, by now in -1% to -3% territory this year as the full horror of the global contraction keeps storming ashore and our own citizens increasingly cower before the global banking crisis, the financial uncertainties it breeds with asset values still in full retreat, and job losses also an increasing reality.

So can this condition be turned, like our obdurate quantity suddenly taking off at great speed as the turpentine bites, reminding more of drag car racing with smoking and squealing tires?

The short answer has to be an unqualified Yes.

Much risk capital is holed up in safe havens, but has hardly adopted the fetus position. Instead, there is eagerness for news of the long awaited turn in events.

All eyes are on American banking, for explicit evidence of banks being successfully detoxed and replenished with adequate capital, while public spending programs worldwide start to bite.

Both signals are crucial, as they are needed for fear to subside, financial markets to lead the recovery parade and consumers (and therefore businesses) to recommit to spending.

This may still take some time, but meanwhile cars aren’t getting younger, new models are aggressively trotted out and at some point the Joneses will put their toes in the water. After that, don’t get killed in the stampede.

So abrupt turnarounds remain possible, as much on Wall Street (where bear rallies will eventually make way again for true blood bulls) as on Main Street when the Great Car Replacement movement gets launched.

In Germany this has been given an artificial boost with the government paying €2500 per old car scrapped and a new one ordered (car sales this past month taking off).

Any such general stampedes will potentially spread worldwide, probably just as fast as everyone globally imploding demand since last October, courtesy of intense communication links and same conditioning, perceptions and sentiment.

The key to any economic turnaround globally is the simple reality that little production capacity has been damaged (even in banking). Instead, much big ticket buying has merely been delayed, especially car buying and cancelled capital goods orders.

Inventory drawdowns are once-off hits to production. But with inventory levels restored to health, and car demand and eventually capital goods orders coming back, it could turn into quite a comeback roar eventually.

In South Africa, we can add further to this picture.

Besides our exports intimately being tied to global prospects, our consumer abstinence may also be a temporary phenomenon, as much weakness seems to be of the postponement variety.

With interest rates and the debt servicing burden set to decline substantially further in coming months, this prepares the way for a return of the willing consumer, once anxiety levels about global banking, asset markets, housing, pensions and jobs have started to subside.

It may currently look inconceivable, but just like booms in good times, panics in bad times don’t last forever in a fundamentally impatient world eager to progress. This is especially so if the financial cleanup can proceed to its logical conclusion and governments meanwhile act as temporary spenders of last resort.

Despite all the daily noise, the world is gradually getting there. Now don’t get killed in rush of the incoming tide, once it turns.

If only turpentine would work up the backside of my car when it doesn’t want to start in winter. Would make life so much simpler.

Source: Cees Bruggemans, FNB, March 17, 2009.


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