Two-track econ­omy

But no need to be too de­spon­dent

Finweek English Edition - - Economic Trends & Analysis - GRETA STEYN gre­tas@fin­week.co.za

THE SOUTH AFRICAN ECON­OMY is def­i­nitely not in a re­ces­sion. Nor is it head­ing for one. That much was clear from the lat­est gross do­mes­tic prod­uct fig­ures, which showed growth of 4,9% in the sec­ond quar­ter from a weak 2,1% in the first. The fact that the “R” word isn’t ap­pro­pri­ate will come as cold com­fort to con­sumers, of whom most feel as if the econ­omy is in re­ces­sion any­way. Their pain is ev­i­dent in the GDP num­bers, which show a de­cline of 2,2% in out­put in the whole­sale and re­tail trade sec­tor.

Stan­lib econ­o­mist Kevin Lings says it’s the first quar­terly de­cline in re­tail ac­tiv­ity since third quar­ter 2001 – al­most seven years ago. He says it’s the largest de­cline in re­tail sec­tor GDP since fourth quar­ter 1997.

Con­sumers are tak­ing strain mainly due to a five-per­cent­age point hike in in­ter­est rates since June 2006, which took the prime over­draft rate to 15,5%. High food and fuel price in­creases have also meant con­sumers have had less money in their wal­lets.

The GDP fig­ures for the re­tail sec­tor vin­di­cate the SA Re­serve Bank’s re­cent de­ci­sion not to hike in­ter­est rates. The num­bers show the Bank has achieved what it’s able to achieve with the help of in­ter­est rates – it’s cooled con­sumer de­mand sig­nif­i­cantly. Any fur­ther action would be overkill; some may ar­gue that the ex­treme weak­ness of the re­tail sec­tor is ev­i­dence that some overkill is al­ready ev­i­dent.

So con­sumers are clearly tak­ing strain. But other sec­tors of the econ­omy shone in the sec­ond quar­ter, tak­ing the growth rate close to 5%. (All growth rates are quar­ter-on-quar­ter, sea­son­ally ad­justed and an­nu­alised, un­less oth­er­wise stated.) What the GDP fig­ures clearly show is a two-track econ­omy: the one track, driven by con­sumer de­mand, is bat­tling while the sup­ply side track is do­ing well.

On the face of it, the sup­ply side of the econ­omy is do­ing ex­cep­tion­ally well. Min­ing out­put grew 15,6% in the sec­ond quar­ter while man­u­fac­tur­ing grew 14,5%. To­gether, those sec­tors con­trib­uted 3,1 per­cent­age points to the growth rate in the sec­ond quar­ter.

How­ever, those stel­lar growth rates ex­ag­ger­ate the un­der­ly­ing sit­u­a­tion. You must bear in mind those growth rates are for the sec­ond quar­ter com­pared with the first quar­ter, and then ex­pressed as an an­nu­alised rate. The base in the first quar­ter was ex­cep­tion­ally low (man­u­fac­tur­ing and min­ing both de­clined) due to elec­tric­ity cuts. A re­turn to more nor­mal lev­els of pro­duc­tion re­sulted in mas­sive in­creases in the an­nu­alised growth rates.

You get a dif­fer­ent pic­ture when you look at the GDP fig­ures on a year-on-year ba­sis. Min­ing pro­duc­tion fell 5,5% in sec­ond quar­ter 2008 com­pared with the same pe­riod last year. That fig­ure sug­gests the sec­tor is hardly in the pink of health and that’s un­likely to im­prove, as re­cent de­clines in com­mod­ity prices should put pres­sure on the sec­tor. Af­ter re­bound­ing in the sec­ond quar­ter, min­ing pro­duc­tion is un­likely to re­main a sig­nif­i­cant con­trib­u­tor to GDP growth in the next few quar­ters and could sub­tract from growth.

Man­u­fac­tur­ing out­put on a year-on-year ba­sis grew an ap­par­ently im­pres­sive 9,8% in the sec­ond quar­ter. How­ever, re­mem­ber the Easter hol­i­days fell in the first quar­ter this year and in the sec­ond quar­ter last year, which cre­ates sig­nif­i­cant dis­tor­tions. Though the man­u­fac­tur­ing sec­tor put in a good per­for­mance in the sec­ond quar­ter, the un­der­ly­ing sit­u­a­tion isn’t as healthy as the statis­tics sug­gest at face value.

In ad­di­tion, the prog­no­sis for the man­u­fac­tur­ing sec­tor is far from good. That’s clear from In­vestec’s Pur­chas­ing Man­agers’ in­dex (PMI). The PMI is a lead­ing in­di­ca­tor of con­di­tions in the man­u­fac­tur­ing in­dus­try and is based on a sur­vey of busi­ness peo­ple. The sea­son­ally ad­justed PMI fell to an all­time low since its in­cep­tion in Septem­ber 1999 of 42,8 in July this year, down from 43,8. Any read­ing be­low 50 means the sec­tor is con­tract­ing.

“The re­cent weak­ness in the sec­tor is con­sis­tent with the Bureau for Eco­nomic Re­search’s man­u­fac­tur­ing busi­ness con­fi­dence in­dex, which de­clined to a seven-and- a-half year low dur­ing the sec­ond quar­ter. How­ever, the de­cline is yet to re­flect in the of­fi­cial man­u­fac­tur­ing sales and pro­duc­tion data,” says Mok­gatla Madisha, port­fo­lio man­ager at In­vestec As­set Man­age­ment.

But even though sec­ond quar­ter GDP per­for­mance is un­likely to be re­peated, there’s no rea­son to get too de­spon­dent about eco­nomic growth for the rest of the year. Economists still ex­pect growth of around 3% for the year as a whole. That’s a far cry from the 5% level that we’ve grown ac­cus­tomed to – but that growth was to a large ex­tent built on an un­sus­tain­able con­sumer boom.

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