Has the economic storm lifted?
How can you tell when a country is through the worst of a recession? It doesn’t always help to look at economic data. The statistics we’re bombarded with on a daily basis reflect the past. By the time the GDP number confirmed South Africa’s ‘technical’ recession most of us (ex-minister of finance Trevor Manuel excluded) already knew the economy was faltering. Will we sense the economic recovery before GDP goes positive again?
We ask this question because recent data suggests a moderate improvement in areas of the economy. House price indices published by the country’s main banks show a slowdown in the rate of decline in residential property prices. And Statistics SA released promising inflation numbers for July with the August number likely to confirm the declining CPI trend. More importantly, the latest Bureau of Economic Research (BER) manufacturing survey showed a positive shift in sentiment! These sparks in the domestic economy suggest South Africa Inc could be firing on all cylinders by the second half of next year. The International Monetary Fund (IMF) forecasts an economic contraction of 2.1% for 2009 and growth of 1.9% next year.
IMF charts the recovery
While reading a recent Standard Bank Economics weekly update for South Africa we stumbled across some interesting IMF research. The organisation has completed an assessment of the impact of fiscal and monetary policies on various global economies through the financial crisis. In their report Selected Issues for the South African economy the IMF “analysed the impact of the expansionary fiscal and monetary policies on inflation, output, the trade deficit and employment!”
The IMF documents 12 stages the economy will have to complete as it heads towards full recovery. And nine of these steps have already come to pass. What should we expect in the next 12 to 18 months? The IMF reckons the next stage is for private investment to rise in response to lower real interest rates and economic recovery at our main trading partners. And here they’re referring to rising capital expenditure in the private sector rather than equity markets. This surge should lead to a recovery in economic output (stage 11) and finally an improvement in the trade balance (stage 12).
Standard Bank says they expect output to contract 1.5% in 2009 before recovering to 3% growth in 2010. But they warn that “any improvement in the trade balance is likely to be short-lived!” As soon as South Africa shows signs of recovery the bank expects the import bill to surge, undoing any improvements due to “domestic demand and capital formation in 2010!”
Latest manufacturing data inspires confidence
We reckon the 10th step in the recovery is already well underway. The BER manufacturing business confidence index improved to 22 points, up from 11 previously, in the third quarter. According to BER economist, Christelle Grobler, the “survey shows a modest yet clear change of trends when compared to the first and second quarter 2009.” Although manufacturing activity is still under pressure it seems the worst is now behind us. “The most significant change once again took place in the basic metals sub-sector, with respondents in this category actually reporting an increase in production volumes,” said Grobler. The commodity sector and related manufacturing industries play a huge role in the domestic economy.
This improvement is borne out by the latest Statistics SA manufacturing production statistics. Kevin Lings, economist at StanLib, noted that the country’s manufacturing production rose 3.3 % month-on-month (seasonally adjusted) in July this year. “Production has now increased for three consecutive months, after declining for ten consecutive months,” said Lings. This is positive news despite overall production activity languishing at 2004 levels. If we compare total production to July 2009 with last year then production is still down 13.7%!
“Manufacturing activity certainly appears to be moving past the worst of the recession, although the improvement is confined to selected industries,” said Lings. A closer look at the numbers reveals that only three of 10 major sectors are contributing to the turnaround. Food, motor manufacturing and computer equipment are on the rise... “Overall, given recent signs of stability and tentative improvement in the local PMI readings, we expect manufacturing activity levels to show further signs of improvement in the coming 3 to 6 months,” said Lings.
Editor’s thoughts: We’ve found the best way to get a feel for the economy is to spend some time at our local shopping centre. How busy are the tills? How many shops are vacant? Are the restaurants full? At the moment we believe South African consumers are still feeling the pinch. We haven’t seen the full impact of retrenchments on the domestic economy. Do you think the IMF prediction of 1.9% growth in 2010 will be enough to pull South Africa out of the economic doldrums? Add your comments below, or send them to [email protected]
