Two hammer blows to a quick economic recovery

Gareth Stokes, FAnews Online Editor

It took South Africa longer than the rest of the world to enter recession. The United States’ recession began in December 2007. Britain and much of Western Europe followed suit in the next six months. South Africa – buoyed by rampant commodity prices in t

He dismissed poor performances in motor retail numbers, manufacturing output, mining production, house prices, retail sales and insolvencies as indicative of an economic slowdown until very late in the game. Government’s reluctance to acknowledge the economic crisis was finally quashed by President Jacob Zuma in his 2 June 2009 State of the Nation Address. The President deals with the matter on the second page of his lengthy address: “While South Africa has not been affected to the extent that a number of other countries have, its effects are now being clearly seen in our economy,” he said. “We have entered a recession!”

April retail sales – no reason to celebrate

Government’s admission comes as an increasing number of local economists trying to guess the recession turning point. Is it appropriate to talk about turning points when the second quarter is likely to be even worse than Q1 2009? And should economists obsess about turning points against the backdrop of an entire year of negative GDP growth? The latest numbers have delivered a double hammer blow to economists’ turning point obsessions. The first is the ‘no surprises here’ Statistics SA release of retail sales data for April 2009. The data showed a real decline (year-on-year to April) of 6.7%. Analysts were expecting a disappointing number, as April is littered with public holidays and retailers had to deal with an additional ‘slow’ day as the country went to the polls for its fourth democratic elections. But nobody expected the April number to be the weakest on record in more than a decade!

According to Kevin Lings, economist at StanLib, “the latest decline in retail spending together with the sharp decline in manufacturing activity in April [and] the exceptionally weak motor vehicles sales in the same month will have a negative impact on the second quarter estimate of GDP.” In other words – recession is going to bite harder than initially thought. Consumers are (once again) caught between the proverbial rock and a hard place. Their consumption behaviour has changed significantly to reflect the generally poor economic outlook, tighter lending conditions and a continuing slump in disposable income.

While economists hope lower interest rates and the plethora of sporting events through April, May and June will bring relief, we’re not so sure. Additional disposable income created by falling interest rates seems to be gobbled up by sticky inflation. Food prices haven’t fallen as fast as expected while regulated prices such as electricity, water and municipal rates make the official inflation figure look like a cruel joke. To make matters worse the petrol price looks set for a sharp increase in July.

Cracks showing in trade statistics

Retail sales numbers and similar consumer-biased indicators speak to the health of the domestic economy. If we want to assess the impact of recession on countries around the globe we have to take a closer look at trade statistics. A detailed study of global imports and exports is like taking a toddler’s temperature… As long as the numbers are within an acceptable band there’s nothing to worry about. But that’s not the case. Dwindling consumer confidence and massive slowdowns in manufacturing activity have dealt a second hammer blow to any prospects of an early economic recovery. South Africa’s trade balance (the difference between exports and imports) is deteriorating in line with the rest of the world. The outlook for global trade is so poor that the World Trade Organisation (WTO) pencilled in a 9% contraction for 2009.

Poor trade figures are part of the reason for South Africa’s swelling current account deficit. In the first quarter of this year the current account deficit reached 7% of GDP (from 5.8% of GDP in the fourth quarter of 2008. “The worsening of the current account deficit in Q1 2009 was mainly due to a sharp reduction in SA exports,” says Lings. Imports declined in both volume (down 8.4% quarter-on-quarter) and value (down 13%), but couldn’t compensate for the massive slowdown in demand from South Africa’s main export markets. Export volumes were down 21% and export values 19.4% weaker over the same period. Lings said “the sharp fall-off in exports, which was extremely broad-based, clearly reflects the impact of the global recession on SA.”

Lings says South Africa will run a current account deficit for many years to come. “This is actually crucial for the development of the country given that most of the key capital equipment needed to enhance the productive capacity of the country will have to be imported,” he said.

Editor’s thoughts:
A current account deficit might be crucial for a developing or emerging economy to prosper, but there is a level at which it becomes dangerous. The rand will remain under pressure against the world’s major trading currencies for as long as this overhang remains. Are you concerned about the current account deficit or do you prefer to give economic indicators a wide berth? Add your comments below, or send them to gareth@fanews.co.za