And now for the good news

The economy is not in such a bad shape, argues Ian Cruickshanks, head of strategic research at Nedbank Capital. He says the times are tough and consumers are definitely feeling the pain, but things are not as bad as the headlines suggest.

A few months ago headlines were dominated by comments from rating agency Moody’s that South Africa was heading for a recession.

“It was absolute nonsense. If you looked at the analysis there were a lot of provisions about what would have to happen for South Africa to go into recession. The report actually estimated growth to be around 3,2%,” says Cruickshanks.

Recession is defined by two quarters of negative growth. So far this year South Africa has had positive growth of 2,1% and 4,5% in the first and second quarters respectively and Nedbank estimates growth for 2008 will be more than 3%. Cruickshanks points out that even when the mining sector was closed down for a week in the first quarter, we experienced positive growth rates as the economy continues to be powered by massive infrastructure spend. “This is a slowdown, not a recession.”

The recent labour force survey showed that 106 000 jobs were created in the second quarter. Although we are not creating nearly enough jobs to combat unemployment effectively, job creation is continuing, suggesting there is still strength in the economy.

It is headlines around property prices and vehicle sales that are painting a bleak picture this week. But the picture may be a bit distorted. Car sales on a percentage basis are bad news, falling by 32,4% in August compared to the same month last year. Monthly car sales are at just over 40 000, compared to a peak of nearly 60 000 in 2007. Though the drop may be dramatic, the figure of 40 000 is a clear sign that the economy is not yet dead—even if half as many vehicles were sold each month it would still represent the fourth best sales year ever.

What we are not taking into account is the base effect of an overheated consumer market last year, which saw property prices and vehicle sales rise well above the long-term average. When prices or sales run ahead of themselves there is usually a period of consolidation.

With regard to the slowdown in property prices, Cruickshanks points out that in the past four years property prices surged 200%. If property prices had to fall by 25%, prices would still be 150% higher than four years ago.

Although Standard Bank’s residential property gauge showed the median house price declining by 1,8% in August, this was an improvement on the previous month when house prices fell 2,6%. It is certainly a major improvement on the 13% fall in June, but the report says that the dramatic drop in the median house price in May and June was a technical issue, and that the figures for July and August are a more accurate reflection of the price trend.

Yet these numbers remain negative, confirming the fact that households are under pressure and the good times are over. On the positive side, property prices appear to be stabilising, but the report says positive prices will only be seen once fundamental drivers such as disposable income and interest rates turn the corner.

The other set of negative data, the Purchasing Managers Index (PMI), which surveys manufacturing activity, showed that activity remains in negative territory, clocking in at 47 points (any number below 50 is seen as contraction). But it was an improvement on last month’s figure of 42,8.

The index is a good measure for future manufacturing output as it measures sales orders and expectations among purchasers of supplies for factories, hence is an indication of what manufacturers are expecting in terms of future output. These numbers suggest that they may have hit the bottom and that this could be the beginning of a recovery, albeit not a dramatic one. That fact that, in the survey, inventories climbed from 46,6 to 53,8 points (turning positive) suggests that manufacturers are expecting to sell more goods. Third-quarter manufacturing figures may still be disappointing, but the directional change in the index suggests that the bottom may have been reached.

Company results out this week show that consumers are taking strain, but that a well-run company can still add to economic growth.

Woolworths results showed that after taking inflation into account, the company experienced negative real turnover growth of -2,4% in the clothing and general merchandise division and slightly positive real turnover growth of 5,7% in the food division.

This highlights the fact that consumers are under pressure and higher-income earners are down-trading to other food retailers. But Shoprite’s figures show that people can still buy food, and it posted a 54% increase in headline earnings. Shoprite cut margins on basic foods in October, which resulted in higher sales volumes.

Cruikshanks is expecting demand for commodities to remain strong as Asia and China continue to grow.

“There will be continued demand for food and housing, which will support commodities.”

Local construction is expected to continue to expand. Cruickshanks says Murray and Roberts, one of South Africa’s largest construction firms, currently has an order book of R55-billion, which includes projects well into 2015.