The recovery through rose tinted glass
Another day, another set of macroeconomic indicators. A couple of weeks ago the Reserve Bank’s economic strength indicator – a mix of 12 critical economic measures – showed signs the already slow economic recovery was losing traction. This week economists were forced to get excited about rather unspectacular credit extension numbers. If these guys keep “viewing” the numbers through rose-tinted spectacles it might be time for us to worry.
“SA broad money supply (M3) was recorded at a growth rate of 3.71% year-on-year (y/y) in July 2010, which is above the 2.40% y/y recorded in June 2010,” writes StanLib economist Kevin Lings. The part where the proverbial champagne corks go flying follows: “and came in above market expectations for a rise of 2.53% y/y!” Should we get excited if the M3 number comes in 100 basis points above expectation? We asked Lings’ colleague, Paul Hansen, who observed whichever way you slice it, the latest numbers aren’t great.
Putting the consumer under the microscope
To gain a better understanding for the domestic economic outlook we need to consider private sector credit – the loans, mortgages and hire purchases agreements that keep both corporate and private consumers ticking. “Private sector credit rose by an encouraging and fairly robust 1.1% month-on-month (+R22.25 billion) in July,” says Lings. It was the largest month-on-month improvement since 2007, boosting the rate of change in private sector credit to 1.98% y/y.
The reason we broke out the “rose coloured spectacles” analogy in the opening paragraph is we’re not getting a sense of these improvements on the ground. Volumes in the housing market remain stagnant, motor vehicle sales are flattering only due to their recovery off an extremely low base, consumers remain credit averse, and the free cash created by all those interest rate cuts is being sucked into the black hole of taxation and administered price increases. To make matters worse the current round of public sector wage strikes is seriously denting productivity countrywide.
We cannot see the impact of the apparent “resurrection” in mortgage credit numbers either. Lings says the July 2010 mortgage credit number ticked up another 0.5% m/m, adding R5.12 billion to the tally. Should we get excited about this being the 12th consecutive increase in mortgage activity? We would if we had the spectacles mentioned earlier. But in reality this “increase” could represent mortgages on a mere 5 000 average middle-class homes. It’s just too easy to get stuck on the “off an extremely low base” disclaimer. Lings is forced to concede that while house prices have generally improved, and estate agents are reporting more buyers in the market; activity levels remain far below previous peaks!
Underpinning two thirds of growth
Consumption expenditure makes up approximately two thirds of South Africa’s GDP growth. And without credit the consumers simply aren’t coming to the party. “There has been some concern that credit demand was not gaining any significant upward momentum,” observes Lings, before adding that credit growth generally lags an overall economic recovery.
The question is how long this lag should take to filter through the system. Although the domestic economy has been in turnaround mode for almost a year already we’re yet to see the rise in incomes that typify early stage recoveries. And Lings says we’ll only see a significant improvement in credit after that. “The delay in credit growth is currently being compounded by the fact that the banking sector is digesting a surge in bad debts relating to the previous credit excesses.” So we’re in for a slow credit extension recovery until the bruised banks revert to their pre-crisis lending criteria.
What can we expect going forward? We’ll leave it to the economist to sum up: “We still expect credit growth, especially consumer credit, to move steadily higher during the remainder of 2010, and a little more meaningfully higher in 2011, as the combination of 30-year low interest rates, improved real income growth and the slightly easier lending criteria out of banks start to have a more positive effect.”
Editor’s thoughts: Less than two months after the World Cup South Africa seems to be trawling “sentiment” lows. The massive public sector wage strike seems rooted in political power struggles rather than economic reality, with ordinary citizens watching in horror as government plays with their tax rand. Are you confident the economic recovery is intact? Add your comment below, or send it to [email protected]
