Ongoing recession trashes retail sales
In the run up to the April 2009 elections a number of ministers suggested South Africa would evade the backlash of the global recession. Ex-finance minister, Trevor Manuel, was particularly evasive when questioned on the strength of the domestic economy in February. He told an SABC interviewer: “there’s an argument that if it walks like a duck and quacks like a duck, it probably is a duck. [There] probably is a recession, but in technical terms, we’re not in a recession.”
Four months hence, we know that recession is hitting our economy just as hard as it hit Europe and the United States. Real gross domestic product (GDP) contracted by 6.4% in the first quarter of 2009 – plunging the economy into a technical recession – and economists now expect the second quarter number to be equally disappointing. Recession has taken hold of every consumer-based sector in the economy.
Forget the ‘shop till you drop’ attitude
Earlier this week, Statistics SA released retail sales data for June 2009. The decline year-to-year June is a worrying 6.7% – significantly worse than the expected -4.5%. Retail sales have been under pressure since mid-2008 and now look certain to remain depressed for the remainder of this year. The consumer sits at the heart of the retail sales dilemma. According to StanLib economist, Kevin Lings, “South African consumers are under pressure and effectively de-leveraging, both willingly and because banks have significantly tightened up their lending criteria.”
There are a number of reasons for this. Lings mentions prior increases in interest rates (over two years to December 2008), the introduction of the National Credit Act, declining growth in disposable income, banks tightening lending criteria, a slowdown in house price growth, increased job-losses and worsening consumer confidence. Household debt as a percentage of disposable income remains near record levels and has worsened slightly in the latest quarter. There is a direct link between consumer disposable income and consumer spending, with both measures reflecting negative quarter-on-quarter growth since the second quarter of 2008.
Falling demand triggers falling supply
The troubles in domestic consumption extend beyond households to companies – and beyond South Africa’s borders to the rest of the world. A quick look at the values exported by countries like Japan, China, Germany and the US confirms that global demand for manufactured goods has fallen off a cliff. South African exports have also declined sharply. This slowdown is evidenced by the rather dismal improvement in the manufacturing production statistics. SA manufacturing production is down 17.1% year-on-year to June 2009.
Lings managed to find some positive developments to comment on. He notes that the May and June numbers showed slight month-to-month improvements, ending 10 consecutive monthly declines. “Perhaps the sector is moving past the worst of the recession,” says Lings. Why is the manufacturing data so important? When economists crunch South Africa’s growth number the manufacturing sector accounts for approximately 16% (by value), meaning poor manufacturing performance drags down the country’s GDP.
“Given recent signs of stability in global PMI readings, the already sharp fall-off in local activity (hence a low base), the ongoing run-down of inventories, and the fairly significant policy response, we expect manufacturing activity levels to stabilise and show tentative signs of improvement in the coming three to six months,” says Lings.
Weak economic growth a certainty
“The latest declines in retail spending, together with the recent sharp declines in manufacturing activity as well as the weak motor vehicles sales and sluggish bank credit activity all still point to an especially weak second quarter estimate of SA GDP,” says Lings. And government is finally taking notice. In a meeting held in Pretoria on Tuesday, economics ministers, MECs and senior government officials contemplated the recession and its impact on the domestic economy. Although there is already a framework agreement in place between government, business and labour it’s clear (from recent strike action for example) that not everyone is singing from the same hymn sheet.
Sapa reports economic development minister Ebrahim Patel as saying: “We need to move from smart ideas to smart implementation.” We’d urge government to take this step sooner rather than later. Job losses and company failures won’t be stemmed by a series of meetings and discussions. What needs to happen is a softening of labour laws, increases in domestic productivity and the creation of ongoing incentives for inward capital investment into labour-intensive value-add manufacturing concerns.
Editor’s thoughts: One of the great ironies in South Africa in 2009 is militant strike action for inflation plus wage increases in the face of spiralling unemployment. Companies across all sectors of the economy have been forced to cut operating costs (usually through retrenchments or cutting working hours) to survive plummeting demand for their goods and services. What would you suggest government does to quell further job losses as South Africa battles recession? Add your comments below, or send them to [email protected]
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