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A hat-trick of shocking economic data

20 October 2008 Gareth Stokes

When it rains it pours. A look at the financial headlines from the last few days will leave even the staunchest supporter of South Africa Inc. reeling… Things have gone from bad to worse in the blink of an eye. Forget about the talk of bailouts and financial rescues doing the rounds in the US and Europe… Right now you need to focus your attention on events playing out at home.

The consumer is well and truly beaten

The first item that caught our attention was Statistics SA’s release of August retail sales numbers. Unfortunately they don’t make for pleasant reading. The August decline is the fourth real decline in a row. Retail sales fell 5.5% in August 2008 compared with August last year – following a 4.6% decline year-to-year for July. So far 2008 is down 1.7% for the first eight months. If you factor in the full-year real growth in retail sales of 5.1% in 2007 and 9.6% in 2006 you realise the party is over. Kevin Lings, economist at Stanlib says: “At this stage of the year, I would expect retail sales to decline during 2008 for the year as a whole.”

Retail sales statistics are the latest in a stream of numbers that suggest the pillars that have supported domestic economic growth since 2003 are crumbling. New passenger vehicle sales have been in a slump for months, house prices are in decline (regardless of which property index you subscribe to) and credit retailers are in the doldrums too.

The main reason for this consumer-led slump is that South Africa is still struggling to come to terms with higher interest rates, inflation and historically high debt levels. With household debt as a percentage of disposable income at close to 76% and a debt service ratio around 12% it’s not difficult to understand the problem.

There’s no solace in the share pages either

If you thought you could salvage some positive news from the share pages you’re going to be sorely disappointed. These days every rally on the JSE All Share Index is followed by a reversal. And the reversals tend to be much more significant. We could hardly believe our eyes when we saw yesterday’s closing numbers. The All Share closed down 1 545 points (or 6.99%). We recall a couple of days ago that Sasfin market commentator David Shapiro said we could still see 1 500 points on the down side; but we doubt he expected to see it all in one day!

The hardest hit sectors were resources (down 11.14%) – with platinum shares down 13.35%. Remember earlier this year when the All Share Index marched to its record high of 33 233? Back then resources led the way up – and now they’re heading the plunge back down! Listed equities are down 38% since the high (and 28% for the year), now trading at levels last seen in August 2006.

Last week we attended the Association of Collective Investments’ third quarter 2008 presentation. Be sure to check out the FAnews Online newsletter on Tuesday to find out the latest stats and figures from the industry. There’s been a flight to the relative safety of money market investments while equities continue to experience outflows. And although the latest turbulence won’t show in the third quarter numbers we’re sure there aren’t too many fund managers boasting about their latest 12-month unit trust performances!

The rand’s spectacular belly flop

Even the rand, which resolutely traded between R6.50 and R8.10 to the dollar since May 2006, has disappointed. We got a taste of how quickly the currency can fall when it tested R9.50/$ earlier in the week. But last week it tanked more than 16% in one night to around R10.80/$. The currency clawed back some of the lost ground to trade nearer R10/$ at the start of this week; but it still leaves an empty feeling in the pit of one’s stomach. We now have to worry about the impact of the rand’s slide on inflation too.

Reserve Bank governor Tito Mboweni’s efforts to rein in inflation (through his repeated interest rate hikes) are going to come to naught. If the exchange rate remains pegged at these levels we’re going to see the price of imported goods sky-rocket and everyone’s bugbear petrol is going to cost an arm and a leg again. Inflationary pressures will appear once more and dash any hopes we might have had of an early interest rate cut!

Is there any good news? Unless you count ‘Bafana Bafana’s’ recent 2-1 win over a second string Ghanaian team under that heading you’ll be sorely disappointed. It’s time to batten down the hatches and ride out the financial storm.

Editor’s thoughts: Prices rise and fall. Before you get too panicked about the sudden fall in the value of the rand, think back to December 2001. At the time the currency fell to almost R14 to the dollar and R19 to the pound. Do you think we’ll test these all-time lows? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by evbo, 21 Oct 2008
I think this is a good thing ! We have been overspending for years, companies have been selling overvalued products and riding on a dream ie your typical Toyota Yaris is not worth much more than about R45,000, but selling at R100,000 more !!! Paying R8-R10 for a loaf of bread is also ridiculous. Our retailers had it coming. When they are willing to settle for profit margins of 3-5%, thing will change - remember - their profit is our inflation !!!!
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Added by Eric, 20 Oct 2008
Hi Gareth Try R15.00 to R16.00 to the dollar.By the way I predicted this World Market crash as early as Nov 2007.
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