Download The worst is behind us

By Sizwe Nxedlana
Research Economics
South Africa Economic Analyst
Economist
[email protected]
(011) 352 3276
June 2009
The worst is behind us
South Africa officially joins the global recession
Green shoots of economic recovery
The worst is behind us
South Africa officially joins the global recession
•
The South African economy contracted by an annualised rate of 6.4%qq in Q1 2009. This
outcome was worse than the consensus forecast of a 4% annualised contraction. The Q1 2009
decline in economic growth served as official confirmation that South Africa entered recession in
Q1 2009 following the annualised fall in economic output of 1.8% witnessed in Q4 2008.
Figure 1: Recession confirmed
10.0
%qq saa
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
1993
1996
1999
2002
2005
2008
GDP at market prices (2000=100)
Source: StatsSA
•
The sources of the very deep contraction in economic growth in Q1 2009 were broad based with
seven of the ten sectors that make up the economy registering negative growth. However, the
magnitude of the contraction was most pronounced in the supply side of the economy. Output in
the domestic manufacturing sector fell by an annualised 22.1%qq during the first three months of
the year following an annualised decline of 21.8%qq in Q4 2008. Mining output was decimated,
falling at an annualised rate of 32.8%qq in Q1 2009 while the electricity, gas and water sector
(utilities) contracted at an annualised rate of 7.9%qq.
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Research Economics
South Africa Economic Analyst
June 2009
Figure 2: Mining and manufacturing led the decline
30.0
%qq saa
20.0
10.0
0.0
-10.0
-20.0
-30.0
-40.0
1993
1996
1999
2002
Mining and quarrying (2000=100)
2005
2008
Manufacturing (2000=100)
Source: StatsSA
•
The fact that it was the mining and manufacturing sectors that experienced the deepest
contraction in output illustrates the negative impact that the deep and synchronised global
recession is having on the domestic economy. The mining and manufacturing sectors are South
Africa’s main exporting sectors and as such are directly affected by sharp declines in global
economic growth. However, the internal trade sectors also remained under pressure during Q1
2009. The wholesale and retail trade, hotels and restaurants sector contracted for the fourth
consecutive quarter recording an annualised growth rate of -2.5%qq in Q1 2009. This indicates
that domestic households remained under pressure during the period. Another negative shock
was the fact that South Africa’s largest sector, finance, real estate and business services, also
declined, recording an annualised growth rate of -2.3%qq. This was the first decline in growth in
the finance sector since 1993. The economies star performer amidst a dismal crowd was the
construction sector, which grew by 9.4%qq in the first three months of the year.
•
The Q1 2009 outcome of -6.4% is the largest annualised quarterly contraction in domestic output
since Q3 1983. This places us in the vicinity of the contraction witnessed in the US during Q1
2009 of -5.7% annualised however, South Africa’s rate of economic contraction is less then that
of the UK (-7.4%), the Euro Area (-9.8%), Japan (-15.2%) Mexico (-21.5%) and Brazil (-13.6%).
This illustrates that we are clearly in good company. What is also important is to note that this is
data for Q1 2009. We are now less than a month away from the start of Q3 2009. There are
indications that the worst of the great recession, both domestically and internationally is already
behind us with Q4 2008 and Q1 2009 likely to be periods that registered the deepest contractions
in economic activity.
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Research Economics
South Africa Economic Analyst
June 2009
Figure 3: SA is in good company
0.0
%qq saa
-5.0
-10.0
-15.0
-20.0
South
Africa
Mexico
Brazil
Singapore
Sweden
Hungary
Euro Area
UK
Japan
US
-25.0
Q1 2009 GDP
Source: The Economist
Green shoots of economic recovery
•
A great deal has been done by central banks and governments particularly in the industrialised
world to limit the extent of the credit and banking crisis on real economic activity and to bring back
confidence to households and business. Central banks initially responded to the meltdown of the
credit system by reducing policy interest rates to levels approaching zero. This was followed by
the implementation of a range of new measures aimed at increasing liquidity to households and
businesses.
Figure 3: First response was to reduce rates towards 0%p.a.
7.0
%p.a.
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
US: Federal funds rate
ECB: Refi rate
Japan: Overnight call rate
UK: Bank rate
Jan-09
Source: Reuters Ecowin
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Research Economics
South Africa Economic Analyst
June 2009
•
Over and above reducing interest rates to levels approaching zero, central banks have expanded
their lending activities by lending directly to investment banks, accepting more types of collateral
and increasing loan terms. Furthermore, central banks in the US (Federal Reserve, Fed), the UK
(Bank of England, BoE), Europe (European Central Bank, ECB) and in Japan (Bank of Japan,
BoJ) have embarked on quantitative easing policies which involve the direct purchase of various
forms of debt such as government and corporate bonds and other types of asset backed
securities in order to ease frozen credit markets and to lower important market interest rates by
increasing the availability of money. The basic thinking behind the quantitative and credit easing
policies is that if banks are not lending optimally despite record low interest rates and this is
having an extremely negative impact on the real economy then skip them for the time being while
they are being fixed by governments through bailouts, stress tests, recapitalisations and the
relaxation of mark-to-market accounting rules.
•
Credit conditions have eased in recent months going by lower inter-bank and commercial paper
rates and lower government bond yields indicating that the central bank actions have had a
positive impact. More importantly it seems that the aggressive remedial measures implemented
by central banks and governments are having a positive impact on real economic activity by
improving global sentiment which was in tatters in Q4 2008.
•
Indicators of consumer and producer sentiment have improved markedly in recent months. In
particular, consumer confidence and Purchasing Manager Indices (PMIs) in several industrialised
countries such as the US, the UK and Japan have recovered and maintained steady upward
trends since bottoming out in November and December last year. The producer and consumer
survey data have historically been good leading indicators of economic activity, usually turning in
advance of official economic data. The rebound in consumer and producer sentiment suggests
that the worst is over with respect to the downward adjustment in economic activity and points
towards a gradual recovery over the second half of 2009 and into 2010 particularly for the worst
hit sectors, retail and industrial production.
Figure 3: Improving global sentiment signals pending recovery in real economy
72.0
index
%yy
62.0
10.0
5.0
52.0
0.0
42.0
-5.0
32.0
-10.0
22.0
12.0
-15.0
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
US: PMI total (sa)
US: Industrial production (Rhs)
Source: Reuters Ecowin
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Research Economics
South Africa Economic Analyst
June 2009
•
Falling risk aversion and improving global sentiment has also been clearly signaled by trends in
the financial markets. There has been a marked rebound in equity markets. Equities in the
industrialised countries in general are currently up more than 20% relative to their March lows,
1
while the recovery in the even riskier emerging market equities is more than 60% over the same
period. Important commodity prices have doubled since the beginning of this year. Both
commodity and emerging market currencies have generally appreciated relative to the US dollar
during the same period. The rand and the Australian dollar have appreciated by 16% and 12%
respectively since January.
•
The rebound in sentiment indicators (consumer and producer confidence), the surge in equity
markets, narrowing credit spreads, appreciating commodity and emerging market currencies and
rising commodity prices can be summarized by the now popular phrase “green shoots of
economic recovery.” These variables are leading indicators of the real economy with a good
history of turning ahead of a general turn in the economy. Their recent upward trend increases
the odds of a general improvement in real global economic growth over the second half of 2009
and into 2010.
The worst is behind us
1
•
For South Africa an easing of the rate of decline and the return of stability to global economic
growth over the course of 2009 will have a positive impact on our exports and on the exporting
sectors, in particular mining and manufacturing. As has been mentioned, commodity prices have
risen in line with improving sentiment. This is important because it was our main exporting
sectors, mining and manufacturing which have been the hardest hit, falling at annualised rates of
33% and 22% respectively in Q1 2009. South Africa’s exporting sectors exacerbated the depth of
the domestic recession highlighting the severe negative impact the global recession has had on
South Africa.
•
Internally, there are a number of domestic developments that have occurred that will also
positively impact the South African economy in conjunction with an improving global economy.
Domestic inflation moderated to a Q1 2009 average of 8.5% down from 13.7%yy in August 2008.
We expect this steady downward trend in inflation to continue over the course of 2009 and for
inflation to return to within the 6% to 3% target band in the first half of 2010. Our favourable
inflation forecast assumes the following:
•
Very low imported inflation, a fair assumption given falling GDP growth and negative
inflation currently being experienced by some of our major trading partners.
•
Negative growth, followed by slow economic growth domestically will continue to support
slower growth in prices. In an environment in which actual economic growth is far lower
than potential GDP growth, also known as an output gap, it is very difficult to increase
prices.
•
We anticipate further easing of food prices. Trends in food inflation at the farm and at the
factory gate are already pointing in this direction.
•
And finally, we anticipate a relatively strong rand exchange rate which will support the
moderation in inflation.
As measured by the Morgan Stanley Capital International Emerging Market Index
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Research Economics
South Africa Economic Analyst
June 2009
•
The main risk to this outlook is the threat of higher than expected administered prices
(Eskom and municipal rates).
Figure 4: Lower inflation and interest will improve household disposable income
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2000
2001
2002
2003
2004
CPI %yy
2005
2006
2007
2008
2009
Prime rate %p.a.
Source: StatsSA and SARB
•
With moderating inflation and a reasonable expectation for this to continue, the South African
Reserve Bank (SARB) has cut interest rates quickly and aggressively since December 2008 with
the prime interest rate now at 11%p.a. This is now only 50 basis points (bps) above the last
cyclical trough that lasted between the second half of 2005 and the first half of 2006. The interest
rate cuts we have received thus far have to be given time to impact the economy positively.
Looking forward, the SARB has also indicated that we are nearing the end of the current rate
cutting cycle.
•
Finally, the expansionary fiscal stance will partially compensate for the pull back in the private
sector expenditure particularly through maintaining expenditure on infrastructure and social
grants. The government announced that it will run a deficit of 3.9% of GDP this fiscal year relative
to a surplus of 1% of GDP last year, providing a fiscal stimulus to the tune of 5% of GDP.
•
In sum, a stabilizing global economy, lower domestic inflation and interest rates supporting
household income and an expansionary fiscal stance all suggest that at the very least we are
over the worst. Another important point to bear in mind is that South Africa is undergoing what is
fundamentally a normal cyclical recession that has been made worse by an implosion in foreign
demand with extremely negative consequences for our exporting sectors. There are no insolvent
banks in South Africa, our banking and credit system is not structurally impaired as is the case in
the industrialised world. This means that normal fiscal and monetary policy stimuli should gain
traction quicker here than in the industrialised countries, particularly if the global environment
becomes supportive as seems to be the case. We are likely to see another contraction in GDP in
Q2 2009 but it is likely to be smaller than the decline seen in Q1 2009. This is not to say that
2009 will not continue to be a tough year but that we expect a gradual improvement in economic
growth in the second half of 2009 and into 2010. (Please see accompanying document for FNB
Commercial’s revised macro forecast)
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Research Economics
South Africa Economic Analyst
June 2009
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