Cees Bruggemans - Evolution of Panic

The Rex Column 17 June 2008

By Cees Bruggemans, Chief Economist FNB

It is difficult to pinpoint when it began, but the first whiffs of panic surfaced over twelve months ago.

The motor trade experienced computer problems interfering with motor registration, interest rates had been rising and consumers had turned cautious, delaying replacement of passenger cars.

The outlook turned bleak, to which the new National Credit Act gave an additional twist.

Passenger car sales declined rapidly. Panic was in the air as dealers had to adapt to these unexpected changes.

By 3Q2007, the furniture and home appliance trades had joined the parade. Retailers and suppliers in these sectors saw their sales volumes starting to fall. A big cyclical adjustment was underway.

In August 2007 the global banking system suddenly went walkabout, requiring huge liquidity infusions from the ECB, BoE and the Fed as trust in the industry suffered severe erosion from subprime and derivative fallout. Financial markets suffered severe bouts of risk aversion in following months.

By November 2007, our stock market was ready to call it quits on banking stocks and retailers. The outlook had deteriorated to such a degree, with rising interest rates and the National Credit Act causing consumer withdrawal and steadily rising bad debt expectations that shares of leading companies started to slide. Today such shares are 50% off their 2007 peaks.

By late December 2007 the ANC had its leadership conference in Polokwane. Noises emanating from that meeting encouraged deep thinking about any implications.

By late January 2008, Eskom ensured that any futuristic deliberations occurred mostly in the dark, giving a further massive twist to doubts about the future. If they were capable of doing that to electricity, could water and other infrastructure be far behind, seeing what had happened earlier to municipal infrastructure, roads, health care, education and crime prevention?

Such dark thoughts fed another emigration panic, going by anecdotal evidence of so many wishing to leave hurriedly, most noticeably from February 2008.

By March-April 2008, the residential property market was in freefall, with buyers withdrawing to the sidelines, increasing numbers of sellers entering the market, properties staying longer for sale, price discounts increasing, transaction volumes plummeting and real estate agents starting to exit their industry.

Also at that time, the residential building trade started to reflect strain. Rising interest rates and inflation had reduced housing affordability, making more people cautious. Building plans passed had started to slide from late 2007, but the impact in the building industry really started to connect seriously only from 2Q2008.

Meanwhile, May 2008 became notorious in other ways as well. Oil reached $135 and CPIX inflation topped 10%, with more upside to come as Eskom was in the market for jumbo tariff increases, food prices were explosively rising, and oil had more upside.

But May 2008 will mainly be remembered for the sudden unrest in townships around the country. Especially black foreigners became targeted for a host of vague reasons, most apparently connected to economic and social issues.

Media focus on these events ensured blanket local and global coverage, giving fearful twists to expectations.

In early May 2008 the SARB Governor suddenly let it be known that he was considering an unscheduled meeting of the MPC which many took to mean another early rate increase to be on the cards, further fuelling fearful expectations.

In June 2008, the ECB hinted at shortly raising interest rates, even as the jump in US unemployment to 5.5% suggested US rates wouldn’t move soon, caused a drastic rethink in markets.

One consequence was a jump in oil prices to $140 as markets reconsidered the dynamics playing out.

Subsequently Fed chairman Bernanke reinforced earlier remarks that he also was becoming concerned about the longer term implications of commodity price changes, thereby reinforcing the ECB views, and further complicating the commodity price outlook.

Meanwhile the SARB Governor had added yet more fuel to his fires, saying a 2% interest rate increase might be possible. Although this statement was finessed afterwards the message had been fully absorbed that there was more upward potential in interest rates.

As we get to mid-2008, we have some reason to tremble with anticipation. So much panic has been sown in a matter of a few months, and so much of a reaction already registered in the economy slowing down rapidly. Yet what could possibly still lie ahead?

For that keep a sharp lookout for oil and food price announcements, inflation data, SARB interest rate decisions and the manner in which house prices, equity prices and economic sectors respond.

Panic may only be at mid-life, with relief some while down the road.

The very abruptness of the changes in economic conditions remind of 1998, 1985 and 1976, to mention only a few historic events coming close to what is currently playing and yet to show its full reach.