The motor industry, half full or half empty?
If you expected an improvement in motor vehicle sales following the 450 basis point reduction in interest rates (since December 2008), then the latest statistics will disappoint. The National Association of Automobile Manufacturers South Africa (Naamsa) announced yesterday that 30 731 new vehicles were sold in July 2009 compared to 42 337 vehicles in the same period last year – a 27.4% decline! When aggregate vehicle sales from the AMH Group are factored in, the decline amounts to 25.9%. In their official statement Naamsa observes that “the trading environment during July 2009 has remained fundamentally weak, with all sectors of the South African automotive industry experiencing severe sustainability challenges!”
Year-to-date only 224 706 vehicles have been sold locally, down some 32.7% on last year. And the once buoyant export market remains in the doldrums, with only 11 220 (down 60.3%) vehicles exported in July! Clearly the global recession is impacting South Africa’s vehicle manufacturing sector far more than expected.
When things fall apart
Domestic vehicle sales are in a slump due to massive pressures on the consumer, both household and corporate. The latest liquidation and insolvency numbers released by Statistics SA confirm the stresses on the consumption side of the domestic economy. The total number of liquidations was 33.5% higher in June 2009 against the comparable period last year. According to economist Mike Schussler “this is the highest percentage recorded for the month of June since 2003.” But there are other worrying signs. One is the increase in the number of company and close corporation liquidations. Statistics SA says these numbers were 44.1% and 30.2% higher respectively over the first six months of 2009. This signals the transfer of consumption distress initially experienced by households to the business sector.
There were some signs of improvement. Total insolvencies for the first five months of 2009 decreased by 13.9%, while May 2009 insolvencies were also 46.8% down compared with May 2008. But Schussler warned against reading too much hope into these ‘green shoots’. New debt counselling procedures implemented through the National Credit Act were going to skew statistics. “Individual debt counselling will skew figures of insolvencies for some time to come,” said Schussler, adding that insolvencies were very much a lagging indicator in the economy. “We’re still going to see the number of liquidations rise for a few more quarters at least,” he added.
How to re-ignite the consumption spark
The question most economists are wrestling with is how to bolster consumer confidence against a backdrop of faltering growth and rising unemployment. One option is to cut interest rates further. The Reserve Bank’s Monetary Policy Committee will meet next week and decide whether such a step is appropriate to stimulate the economy. There are arguments to be made for another cut – data from the real economy (motor vehicle sales for example) is pretty dire and inflation is trending softer – but it’s not clear the decision will stir the embers of a stifled economy.
Dr Azar Jammine, chief economist at Econometrix recently told Fin24: “I did not think there would be another cut, but little by little I have been shifting this view.” In the same breath he warned, were the bank to take this step, there would be little wriggle room for further interest rate interventions until at least mid-2011! Jammine is probably among the minority who expect a further cut in August. Most economists expect we’re in for a long period of stable rates coupled with a drawn out recovery in the manufacturing and consumption.
It’s also not clear that another interest rate cut will be enough to get consumers to start spending again. South African households have followed the US trend by shifting from expenditure to saving, and in many cases to survival! People aren’t ready to plunge the extra cash created by declining mortgage lending rates into a new vehicle, choosing instead to reduce their mortgages and other high interest debt to better survive any future financial turmoil
Editor’s thoughts: Latest estimates suggest South Africa’s GDP will return to positive territory in the third quarter of this year, but post a 2% decline for 2009. As yet there’s little evidence to support a major recovery in the manufacturing and consumption driven sectors of the economy. Do you think further interest rate cuts will bolster the economy, or has the consumer simply become too cautious to be influenced by interest rates? Add your comments below, or send them to [email protected]
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