By Cees Bruggemans, Chief Economist of FNB.
Last year’s recession has been hard for many South Africans, judging by employment losses (some 400 000 formal jobs gone), house foreclosures, nominal house price declines, reduced income and spending, the actual contraction in credit outstanding, huge bank bad debts written off, stock market still 20% off its all-time high and falling economic activity generally during 2009.
But not everyone was caught offside by these developments to the same extreme degree even if a deep caution came to prevail widely for a considerable while.
One notices how nearly all the components of the RMB/BER business confidence index reached deep recessionary lows last year, except one. Retailers got caught in neutral, refusing to become truly pessimistic. The business results of some retailers certainly bear this out, especially of late. There was apparently more household income than generally understood.
The FNB/BER consumer confidence index also refused to go into deep recessionary territory these past two years. Instead, there was the shock loss of high confidence in early 2008 as a few realities dawned. Yet throughout 2009 the index mostly hugged neutral territory (the 50/50 divide where pessimism and optimism nicely balances out). But over the past two quarters (since the turning in the business cycle got underway) consumer confidence has climbed by 14 points to a reading of +15.
Throughout this period, urban South Africans kept signaling a highly comfortable view regarding the economy and own finances these next twelve months, rising of late to +23 and +25 levels respectively.
These are reminiscent of 2004-2007 boom time levels.
The only distinctively negative feature these past two years, attracting huge majorities, was the view that the present moment was inappropriate to buy durable goods.
Large majorities of households had become very cautious, and were willing to delay replacement decisions, for which reason the recession bit so hard in the motor, furniture and building trades.
But over the past six months this question about whether now is a good time to buy consumer durables has gone from a reading of -23 to -4, effectively neutral, but with a lot of upside if this mindset gains more adherents.
What’s going on?
Bad news came our way in two waves, to which South African consumers responded with great trepidation, though all did not necessarily see their own situation deteriorate beyond the point of no return (even if many in fact did).
The politics, electricity, inflation and interest rate shocks of 2008 were wake-up calls, which made many people very wary. But at least half of urban consumers did not lose their confidence.
That was most unusual, on the brink of a recession, with so much financial pain clearly being injected into the system. But then the economy’s recession in 2008/2009 was concentrated in inventory levels and export volumes where shock declines occurred.
In contrast, final demand (household, government and fixed investment spending) actually fell by only 0.3% in 2009 (compared to -1.8% for GDP) and when we adjust final demand slightly (by leaving out consumer durables) it still actually rose by some 0.5% in 2009.
So in an underlying sense, many households perhaps never lost their inherent ‘prosperity’ confidence of previous years to such a fundamental degree, even if many did turn cautious. But take away the source of that anxiety and how would households respond? Exuberantly rushing back to higher levels of confidence?
That brings us back to what really happened during 2009.
First and foremost, a massive global financial crisis had occurred in 4Q2008, creating deep misery worldwide. There was financial panic, and this was nearly instantly followed by real sector panic as many consumers and businesses everywhere reacted defensively by cutting spending, ordering and activity levels, also employment.
What then happened played out rapidly, with apparently bewildering consequences.
Policymakers worldwide acted aggressively in supporting their economies, successfully so. Our SARB cut interest rates by 500 basis points, prime falling to 10.5%, and the Finance Minister allowed the budget deficit to balloon to over 7% of GDP as his tax shortfall exploded towards R70bn.
Many of our consumers must have taken these many global and local policy actions to heart, though taking their time unwinding their deep cautiousness.
What apparently really threw the sentiment switch was the ultimate success of policy to end the global crisis. Worldwide, the financial and real sector panics were abruptly followed by strong reversals from 2Q2009 onward.
In the data this may have mostly connected in financial stock markets, exchange rates, company inventory cycles and country export levels, but this is where most of the deep 2008 hits had registered in the first place.
With the cancellation of the global financial panic and the unwinding of real sector panic responses came a revival in confidence, of the kind you expect to see among exuberant survivors who together have survived an enormity.
That South Africans were relatively late (by one to two quarters) of really buying the underlying story despite not really having participated centrally in the global financial crisis, but having been bystanders throughout (if with serious collateral damage), may have much to do with the fact that our export sectors and inventory cycle revival were late (a function of specific market exposures?) and that our policy stimulus was impressive but never excessive.
No clunker program for us (granting subsidies to get old passenger cars replaced), no tax cuts for us, and least of all no aggressive real interest rate cuts for us.
These actions did occur in many other countries, where the comeback was that much earlier (and faster). Our consumers, on the other hand, had to do it mostly the old-fashioned way, by their own bootstraps. That usually takes more time. But it helped that the world came back from the brink so quickly, also eventually rubbing off on our mass television audience.
None of this of course could undo the real hardship visited on so many South Africans during the two year adjustment, in terms of jobs, houses, cars lost and income and wealth impaired.
It wasn’t as if nobody felt the big hits. Many did, with many scars showing. But many apparently did not, could carry their debt burdens, did make defensive adjustments in their purchases (such as trading down to less expensive goods or making do with less) and postponing big-ticket items where this made sense (while paying off some debt).
But importantly many apparently did so without losing their cool, for why otherwise did consumer confidence get stuck in neutral (rather than plumbing recessionary depths) and why otherwise do we now see evidence of remarkable and early resilience back into deeply positive territory reminding most of the 2004-2007 boom years and the post-1994 election euphoria?
For not only are our export volumes and inventory cycle coming back, especially strongly reflected in actual manufacturing data these last few months but also strongly in the forward-looking Kagiso purchasing managers index. New passenger car sales have also suddenly surged (even if distorted by early pre-World Cup fleet ordering), with motor dealer confidence surging on a par with Kagiso’s purchasing managers.
We also find nominal house prices reviving faster than expected from mid2009 onward, and for instance Erwin Rode in a February FNB Fixed Investment Round Table discussion expressing surprise as to how quickly developer sentiment seems to be swinging around.
Once we start to analyse company results, there are various retailers and furniture stores also showing strong revival tendencies. This doesn’t suggest a dormant household sector.
As national income rises anew on the back of higher activity levels, watch households step up their purchases. This could go faster than imagined so far.
As to credit, it will be more expensive than in the past (at least 1%, possibly more) and less easily forthcoming (the equivalent of another 1% interest cost or more). Between them these factors should restrain the pace of consumer durable goods recovery at least to some degree.
Also, even as household disposable income starts rising again, there will be many public entities charging more for their services, leaving less disposable income for other forms of spending, potentially restraining the pace of actual recovery. Indeed, the willingness to spend may revive far more vigorously than the ability to do so, at least for some while.
Then there is government, indicating its intention to slow its consumption growth to 2% (from 5% in recent years). Infrastructure spending also seems to have hit a few air pockets as large projects slow down or where new projects are not entering the pipeline fast enough to ensure continuation of rapid growth in construction activity.
As to private fixed investment, it is being confronted by way too many things it doesn’t like.
Firstly, there is the low level of existing capacity utilization. Secondly, electricity shortfalls should cap expansion in critical sectors. Thirdly, wages and salaries are too high, given overseas competition, resulting in unwillingness to add to employment (also restraining household spending revival) as the emphasis is on gaining more productivity. Fourthly, for many producers the Rand is at least 15% too strong, eating into their earnings. And more generally all kinds of infrastructure are increasingly a bottleneck for too many producers, holding them back in their expansion plans.
These features will keep producers back when it comes to adding new capacity. It may mean in a recovering economy that the structural balance of payments imbalance will show itself early in a rising current account deficit.
When it comes to carrots dangling in front of producers, getting them to re-engage in their own right, these are at first the cyclical inventory and export normalizations now underway, shortly to be followed by more household consumption revival, even if the latter were to be kept back somewhat by a few important drag anchors.
So eventually private fixed investment should also be seen to be reviving, but it may take time, given the many things that worry producers.
So, yes, the leading indicators and especially the forward-looking opinion surveys all hint at strong growth revival potential down the road, but such eager willingness to re-engage and resume an old love affair (with prosperity) must be somewhat tempered in the short term by the realization of a restrained ability to do so.
Even walking wounded, with their feet in plaster, can get excited when the beat is on, impatiently wanting to get back on the dance floor even though they will first have to get their feet right and plaster off. But thereafter there will be no holding them!
Since the economy’s cyclical turning in 3Q2009, officially coming out of recession, we note the following detailed changes in consumer confidence levels (besides the overall impressions already mentioned):
• black consumers from +6 to +20
• white consumers from -5 to +6
• English-speakers from -4 to +5
• Afrikaans-speakers from -13 to +1
• Nguni-speakers from +4 to +16
• Sotho-speakers from +8 to +26
• High income (over R10 000 monthly) from +7 to +18
• Low incomes (below R2000 monthly) from -11 to +8
Noteworthy is that prospects for the economy and especially own finances for Whites, English-speakers and Afrikaans-speakers are already very highly elevated (+20 territory).
The beat is on! Now, if only we could get some extra income into the hands of consumers. The rest of the economy could eventually follow that much more vigorously (if this pathway remains the cyclical model of choice).
Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics
Source: Cees Bruggemans, FNB, March 16, 2010.
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