Fixed Investment Before The Fall: 1Q2008

According to the SARB quarterly bulletin released last week, real fixed investment in 1Q2008 continued to grow at a robust rate as if nothing untoward had taken place.

Total fixed investment grew by over 13% on a year ago, and at 14% annualized during the quarter, showing not much of a change compared to the pace achieved in 2007, when real fixed investment grew by 15%.

One steady sector was manufacturing, still maintaining 12% annualized growth after 13% last year.

The public sector surprised by growing at 25% annualized compared to nil growth last year, a rather volatile contribution, with little explanation forthcoming as to why this was so.

Among the asset classes, construction works as expected continued to shine, growing by 34% annualized compared to 30% last year, as the sector continued to benefit from aggressive infrastructure expansion.

Also, machinery and equipment representing some 40% of all investment remained a comfortable plodder. It grew by 11% annualized compared to 9% in 2007.

This was broadly reflected in private business fixed investment, some 75% of the total. This still grew by 12.5% annualized as compared to 15% last year.

But there were already a number of sectors and asset classes were the pace slowed down considerably in 1Q2008, without as yet pulling down the overall fixed investment performance much, but potentially delaying that impact to later quarters.

Mining slowed down to a 3% annualized crawl after a 25% sprint last year. Presumably Eskom blackouts, but also unseasonal flooding, had something to do with this abrupt change of pace.

Rather strangely, the small electricity, gas and water sector experienced a major slowing, from 35% growth last year to 9% annualized in 1Q2008, but that is unlikely to last, with so much new infrastructure in the works.

Possibly as a consequence, public corporations showed less fixed investment growth, slowing to 14% annualized from 32% last year, also seen as a temporary slowing.

Transport and communication was a mixed sector, continuing to show strong growth of 13% annualized, but this was half last year’s pace of 25%. The most likely explanation is continuing robust gains in communication, but a tailing off in transport, as especially commercial vehicles started to show slowing.

Already an underperformer last year, financial services slowed to a 2% annualized standstill compared to still growing by 11% last year. This steady slowing can largely be explained by the concomitant slowing observable in structures and transport equipment.

Residential investment grew by only 4% annualised compared to 10% last year as higher interest rates and reduced affordability became constraints. In contrast, non-residential investment slowed to 10% annualized, but this compared well with the 13% growth last year.

Transport equipment slowed to 15% annualized, compared to growth of 24% last year, reflecting the gradual slowing in commercial vehicles underway.

So whereas 1Q2008 still suggested good fixed investment momentum overall continuing from 2007 into early 2008, there was already evidence of weakness in the detail.

Mining should eventually recover a more robust pace, but may for the time being remain in thrall of electricity shortages.

FNB fixed investment roundtable discussions this month suggested that especially the residential building trade had hit a proverbial brick wall as from Easter, suggesting 2Q2008 growth could already be negative and sharply weakening further in 2H2008. Higher interest rates, reduced affordability and greater cautiousness all round were important contributing factors.

Even new non-residential building activity seems to have been badly set back by Eskom electricity shortages, with higher interest rates and political uncertainty also contributing factors, with few owners today being able to sit out periods with high vacancy rates and risk appetite accordingly more finely geared.

The economy continued for long to support commercial vehicle demand. But higher road transport costs, more Transnet competition and a weaker economy could bring an abrupt change in this outlook.

The financial services sector for this reason is also likely to show negative growth in real fixed investment in coming quarters, as structures completed and commercial vehicle sales prove weaker.

The good news was that manufacturing as a sector, and machinery and equipment as an asset class held up well. But here, too, we need to put question marks. BER business opinion surveys now show manufacturing fixed investment intensions weaker on a twelve month view.

And though infrastructure machinery and equipment needs may remain high, and in fact could still accelerate, this may mask spreading private sector weakness as companies turn more cautious, as borne out by 2Q2008 BER surveys.

In summary, fixed investment overall continued to show a pleasing growth momentum of 14% in 1Q2008, not much different from the 15% pace last year.

Some sectors, such as general government, showed startling gains, but one wonders how sustainable such performances are. More likely is the continuation of strong real investment in construction works, even as its pace should eventually moderate, having attained high absolute levels of activity.

But in the remaining sectors and asset classes there is considerable scope for doubt as to strength of fixed investment in coming quarters.

Mining is uncertainly linked to electricity supply. But manufacturers in BER opinion surveys are hinting at some slowing in intentions. The transport and communication sector will likely continue to moderate, still supported by the strongly performing communication sector, but weakened by changing transport prospects.

Meanwhile financial services may continue to weaken due to slowdowns under way in structures and transport equipment which may deepen further in coming quarters.

Prospects are therefore for strong infrastructure-linked fixed investment spending to continue, but private sector spending may crawl to an effective standstill.

Overall fixed investment growth for 2008 is therefore now only seen at 7%, half last year’s 15%. Next year shouldn’t be much better as these various trends play out. It will take time for the interest rate cycle to peak and subside again, and economic recovery finally to take hold from late 2009, but hopefully more decidedly from 2010.