This recovery looks shot to hell

Gareth Stokes, FAnews Online Editor

Statistics SA churns out dozens of reports, indexes and indicators to help us assess the state of the domestic economy. Their most recent publications suggest the country’s post-recession recovery is more tentative than previously thought. We’ve been so b

Their explanation centred on the ‘lead and lag’ nature of economic statistics. They argue, for example, that liquidations always peak well after an economic turnaround. Kevin Lings, economist at StanLib, explains: “Liquidations are a typical late-cycle indicator and generally only peak well after interest rates have been cut and the economy has started to improve.” And that’s why the Liquidations (May 2010) and Insolvencies (April 2010) report just released by Statistics SA makes for such humbling reading.

More companies go belly up

Company and close corporation liquidations rose by 35.7% year-on-year to May 2010 – with the three months from March to May posting a 17.7% rise. “The overall level of liquidations remains extremely high by historical standards,” observes Lings. Small businesses typically burn through their cash reserves during recession. In the event the recession lasts longer than expected – or if the post-recession business activity is slow – these companies simply cannot claw back their losses. “The longer and deeper the recession the more damage is inflicted and hence even when the economy starts to improve the business is typically highly indebted having depleted their scarce reserves,” says Lings. Small businesses that survived the recession faced another hurdle. They struggled to secure bridging finance due to liquidity constraints in the banking sector following the global financial crisis.

The insolvency statistics point to an improvement among consumers. In April 2010 insolvencies fell by 34.5% y/y – down a healthy 22 % y/y for the first four months of the year. “Households tend to benefit relatively quickly from sustained cuts in interest rates and lower inflation,” says Lings. Households have benefited from higher average wages despite job losses in Q1 2010. Economists say the National Credit Act is also helping. Many struggling households have approached debt counsellors and negotiated repayment terms with their creditors, thus avoiding liquidation! Consumers make up approximately two thirds of domestic GDP.

It seems, therefore, that the insolvency and liquidation statistics are normal for this stage of South Africa’s economic recovery. The businesses closing their doors today are victims of a long period of soft economic activity rather than the slow pace of recovery. These numbers alone aren’t enough to derail the recovery momentum, and we can still look forward to the 3% GDP growth most economists are promising. What then about the manufacturing sector?

Factory doors still bolted shut

The real measure of economic performance is the goods and services the country produces. In June 2010 the Kagiso Purchasing Managers Index – a useful measure for domestic manufacturing activity – fell to just 48.4 index points (a score of 50 or more is positive). This is down from 51.1 in May and streets removed from the 60.4 achieved in February this year. The economists we spoke to had expected the index to rise slightly in June, but at very least to remain above the important 50 level. Can we really remain positive about the economic recovery following four consecutive monthly declines in manufacturing?

“The analysis provided by the BER suggests the build-up and start of the World Cup may have had some negative effect on the number of working hours, and hence an impact on overall activity levels within the broad manufacturing sector,” says Lings. We expect the recent strike at state transport company Transnet also had some impact. Another explanation could be renewed concerns from Europe, South Africa’s second largest trade partner. Fears of a second financial system meltdown have been replaced by concerns of large scale social disturbances as citizens become aware of the tough fiscal measures being implemented to address sovereign debt.

The disappointing PMI number points to a hiccup in the manufacturing turnaround trumpeted in Q4 2009 and Q1 2010. Although the world cup could boost certain sectors of the economy – notably retail and tourism – we doubt the 0.56% boost to real GDP will filter down to the industrial sector. And that’s not good news.

Notional jobs disappear just as quickly

In our discussion on insolvency we mentioned average wages had improved despite job losses in the latest quarters. Although this leaves consumers in an overall better position there’s no doubt the economy will stutter if the slide towards unemployment gathers pace. Whether government created 500 000 ‘job opportunities’ or not, the real economy lost 171 000 jobs in the first quarter this year (Stats SA Quarterly Labour Force Survey). The rolling one year job loss number (to 31 March 2010) is a worrying 833 000 jobs! And we’ve yet to absorb the massive swell of construction workers from the various (now complete) World Cup infrastructure projects.

Editor’s thoughts: Economists and politicians declared South Africa ‘free from recession’ the moment GDP turned positive. What we have to decide is whether the technical measurement of economic activity matches the events playing out around us. Are you – based on your business and personal circumstances – convinced we’ve seen the worst outcomes from the recent recession? Add your comments below, or send them to gareth@fanews.co.za