By Cees Bruggemans
Our recession is probably hitting bottom about now (2Q2009) after a hair-raising plunge in 4Q2008 and a still smart decline in 1Q2009.
This, at least, is the pattern one gets when examining manufacturing and electricity output data.
Manufacturing, the biggest bungee jumper of them all, plunged in sickening freefall from its peak trend level a year ago through 1Q2009 before reaching a cyclical bottom in 2Q2009, an output drop of 16%-18% peak-to-bottom and taking us back to 1Q2004 levels (wiping out in a matter of months five years of joyous advance).
It was driven by electricity interruptions, inventory cleanouts, export declines and reduced sales prospects.
In contrast, when examining retail trade data, its trend behaviour suggests at most a very minor subsidence (recession), trend levels declining 3% this past year, compared to a sideways movement in 2007 and a 25% advance during 2005-2006 (mirroring manufacturing).
Wholesale trade volumes in 1Q2009 are 6% down on a year ago, but have exposure to the non-consumer sector. Most of the falloff occurred on leaving 2008 and entering 2009, mirroring more closely the industrial sectors.
Mining has most in common with manufacturing, except its output plunging began as long ago as 2007, was marked by enormous saber-tooth-like volatility in 2008, with even the hint of a recovery (from the electricity disruption and at the tailend of the global commodity boom), only to plunge anew in late 2008, but also potentially signaling reaching a bottom by 2Q2009.
Of course, when we now examine yet more economic sectors, we get yet more varied patterns.
Agriculture got enormous lift these past few years from good rains, even as the maize crop this year at 11.5mt will come in slightly below last year’s 12.5mt, thereby modestly eroding the GDP performance this year after saving its bacon in 3Q2008.
But considering that in a typical severe drought the harvest may only be 3-5mt, that the last serious drought was in 1996 and that we have a long-term history of big drought cycles of 7-10 years, we may perhaps be living on borrowed time.
Never mind an Australian-type five year severe drought hitting sometime, as has happened historically here as well over much longer periods of time (such as the one that hit a century ago).
As to construction, the pattern changes once again, it being marked by generational speeding up and slowing down. This has been induced by big global booms (the 1960s, 2000s) and slowdowns (1970s) as well as domestic upheaval (1980s and 1990s) and infrastructure revival (1960s, 1970s and 2000s).
Today construction is cyclically topping out after a rapid ascent, still growing but now much slower than during its peak growth years because of the influence of an enormous base effect.
In contrast again is the services side of the economy (government and personal services, financial and business services, communication), amounting to some 50% of GDP when excluding the trades. Its cyclical pattern has paralleled the broader economic cycle in terms of income trends, except that its progress has been somewhat smoother as it doesn’t suffer from the severe inventory, fixed investment and global ups and downs of the goods producing sectors.
Given all those varied influences on the shape of the cycle, including long-term boosters such as construction, short-term boosters such as agriculture, and long-term anchors smoothing progress such as services, the episodic violent lurching ahead and sickening slowdowns are dominated by the industrial sectors and the periodic chaotic pit-stops of the motor trade (which is really more an extension of the manufacturing profile, though not necessarily in sync).
And so when wanting to typify the moment, we come back to manufacturing, electricity supply (and transport), the 25% of GDP industrial hub which with mining and the building trades added on make it a one-third of GDP flywheel shaping the current bust and its bottoming out.
We will need the data for May through September to make it official, but chances now increasingly favour a cyclical bottom having been reached in 2Q2009, with 3Q2009 already giving a hint of lift-off. It would mirror the global experience now shaping.
This assumes that the slight agriculture disappointment this year, and the still skidding motor and building trades, won’t upset this overall impression unduly and that our exports will mirror the global experience.
Also, one has to make an assumption about any secondary weakness still forthcoming from job losses and real income erosion impacting the retail, wholesale and hotel trades and that these do not derail this overall picture.
Even so, we might still have to sacrifice 3Q2009 to the cyclical bottom taking shape, before clear lift off out of the doldrums in 4Q2009.
And so we sit down to outwait the playout, like any expectant parent wondering precisely what and when it will be, presumably with equal impatience wanting to know now rather than to still having to wait so long.
Source: Cees Bruggemans, FNB, May 19, 2009.
