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The dreaded double-dip recession looms again

02 August 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

How many of you remember the economic debates in the immediate aftermath of the 2008/9 global recession? I attended dozens of presentations where the “shape” of the recession and subsequent recovery were debated at length. We are looking at a “V-shaped” r

As you reflect on the many guesses as to the “shape” of the recovery you cannot help but feel sympathy for economists. They have a thankless task… They are always shooting at moving targets, and there is little hope their growth, inflation or exchange rate predictions will be spot on. The difficulty in forecasting macroeconomic variables is evidenced by the vast majority of economists predicting interest rates would stay unchanged prior to the July 2012 Monetary Policy Committee meeting. Instead, we got a 50 basis point cut!

It is only with hindsight that we will know what “shape” the economic recovery took. And – to be honest – we can only think about the shape of this recovery once it actually occurs. Midway through 2012 it seems a full recovery is as distant a prospect as when the crisis hit almost five years ago.

Is South Africa following the Euro-zone into a second recession?

There is little doubt the domestic economy is stuttering. Instead of building on its post-recession momentum GDP looks certain to come in lower than expected this year – perhaps even dipping below the 2.5% level. It is no wonder then that Dave Mohr, economist at Citadel Private Client Wealth Management, painted a rather gloomy picture in his presentation titled: Can local slowdown slip into recession?

One way to answer this question is to consider the consumer and business confidence indexes as measured by the Bureau for Economic Research (BER). Unfortunately the latest movements in confidence numbers are consistent with those experienced prior to the severe market slowdown of early 2008. “The confidence numbers tend to lead what is going to happen to the ‘hard’ numbers,” said Mohr. “From a domestic perspective the BER confidence numbers cannot rule out the possibility of a recession.”

This sombre outlook repeats across multiple sectors of the domestic economy. New car sales have improved, but remain well below their 2006/7 peak. Building activity, whether residential or non-residential, has shown virtually no sign of life. “We have had not experienced a recovery in the building sector to date,” said Mohr. But a long-term graph of house price growth suggests the lack of recovery is a Godsend. House prices are still extremely high in historic terms and South Africa’s “correction” has been mild compared with those in areas of the US and UK. “Nobody can guarantee that house prices will not fall further, but at least there is some support there,” he concludes.

Property experts might interject at this point… Real house price growth has been in decline since early 2008, which suggests we are only four years into a cycle that typically plays out over several years.

Will Mr and Mrs Consumer join the party?

South Africa remains heavily dependent on consumers for its economic growth. Although the gap between income growth and inflation is narrowing it seems consumers still have capacity to spend. “We should still see some real growth in consumption expenditure – financed from the higher than inflation wage settlements reached in 2011,” says Mohr. Wage settlements should come in above inflation through 2012 too.

Consumers will also find solace in the relatively soft outlook for core inflation going forward. It seems likely that the Reserve Bank’s 3% to 6% target range will not be breached on the upside – with the result the bank might consider another 50 basis point interest rate cut in November this year. The level of household debt to disposable income remains at elevated levels, but there has been a significant improvement in the debt service bill to household disposable income!

The problem is that consumers are struggling with administered price increases such as electricity, fuel and municipal rates to name a few. In two weeks time we will have a clearer picture of Eskom’s electricity increases for 2013 to 2015. If these come in higher than expected the consumer will take a heavy knock!

Alarming debt trends

Mohr also raised concerns over the recent increase in unsecured lending. He observes that the level of unsecured debt would double quickly at its current 30% per annum growth rate. “Banks are pushing into this space because of regulation – and there is a strong possibility of some sort of credit bubble developing in the [mid and low income] segments of the market,” he says.

It is unlikely South Africa will dip back into recession based on a mild Euro-zone recession scenario. However – the 2012 and 2013 growth forecasts offered by the Reserve Bank, National Treasury and the private sector are a touch ambitious. Against the continued global economic malaise we can look forward to further interest rates cuts – there is simply no other policy option to stimulate growth. “In the event of a world economic slump due to a Lehman-type moment in Europe, a weak rand should act as a shock absorber against deflation and economic collapse,” concludes Mohr.

Editor’s thoughts: It is difficult to reconcile South Africa’s “stumble along” economic outlook with recent stock market gains. The JSE All Share touched another all time higher a few days ago… But the situation cannot persist if the US and Europe remain subdued. Have you noticed declining confidence among your clients and potential clients? Add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Irene, 03 Aug 2012
Anybody counting on SA consumers to keep the SA economy going is not in touch with reality. Food inflation is going to skyrocket in the coming months once the effects of the current USA drought and Asia flooding start hitting the markets. The growth in unsecured lending is not sustainable and the bubble will shortly burst - depositors & shareholders will be the losers when one or more of our financial institutions go belly-up, as the government does not have the resources to bail out our banks with granting above inflation salary & wage increases in the unproductive public sector, ever-increasing pay-outs on grants and rampant corruption & mismanagement of taxpayer money means the cupboard (national fiscus) is already bare. When taking all these factors into account, the growth forecasts from all quarters are wishful thinking and spin-doctoring. SA is not alone and this is unfortunately the "new reality" that people all over the world must become used to. By lowering interest rates the Reserve Bank is only impoverishing responsible savers & citizens and wiping off billions in the value of retirement funds. This may mean that there will be more people queing up for a state pension in years to come. Financial advisors who do not alert their clients accordingly are creating false expectations and are remiss in their professional duty.
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