The average South African will not be surprised by the latest economic figures. You only have to drive down the road to see the empty car dealerships and talk to friends whose companies are starting to retrench to know that things are bad. Some wise person once said that data is nothing but the aggregation of anecdotal evidence.
Michael Power, strategist at Investec Asset Management, says when he heard that car sales fell by 40% in the United States he knew something profound was happening in the world. Power says if economic figures move a few percentage points here or there it is just part of a normal economic cycle. But when data figures gap — either up or down — something is going wrong. Our economic growth figures moved from 5,1% to 0,2% in one quarter. That is certainly gapping; no incremental moves there. Our inflation figure dropped from 13,1% to 12,4% — not a small move. These are dramatic indicators. “Something profound has changed. We can’t dismiss it as a monthly oddity. It is too widespread and it is all happening in the same direction,” says Power.
Real GDP grew by 0,2% on an annualised basis compared with last quarter. Economists expected growth of between 0,3% and 0,4%. This is the lowest growth rate since the third quarter of 1998, when South Africa’s economy grew at 0,5% for the year.
Let’s remember that we are still talking about third-quarter GDP, the quarter that ended in September and which has not factored in the economic fallout we have witnessed in the past two months.
If it was not for construction and agriculture we would have seen a recession this quarter. Manufacturing, mining and retail, which make up 35% of our economy, are in full contraction. The Efficient Group says that mining production contracted by 7,3% on average during the first nine months of 2008. Manufacturing and mining are the sectors that will feel the full impact of the global crisis as demand for South African exports collapses and local demand continues to contract in the face of high interest rates and increasing job losses.
In the past two weeks economists have radically cut growth forecasts. While they expect GDP for 2008 to hover at about 3%, many are calling a radical drop next year to less than 2%. Some economic units such as the Efficient Group and Nedbank Capital are as pessimistic as 1% growth, but others are a bit more optimistic. South Africa’s Bureau for Economic Research revised its forecast for 2009 to 1,9% last week. But none is quite as optimistic as our own treasury, which last month set its 2009 growth forecast for 3%.
In February Finance Minister Trevor Manuel took a swipe at the pessimistic economists who predicted economic growth to slow to 3% for 2008. Yet it is the Reserve Bank’s stance so far that is the most worrying, as it controls the one instrument that can have an immediate and positive impact. Yet despite being a member of the G20, South Africa has refused to take part in the globally coordinated response to the crisis.
This week China announced a 108 basis point rate cut. This is four times its usual incremental rate change. Again, more gapping. The United Kingdom cut rates by 150 basis points despite inflation at double its target range. It was said the UK had considered a 200 basis point cut. More cuts could still come. As Power says, world growth is quickly slowing and we are no exception. Central banks of the UK, China and the European Union all followed a form of inflation targeting, but now conventional wisdom has been chucked out the window as they face a different world.
Power says that inflation is an old war; a lack of demand is the new war. “The collective purchasing power of the nations has been undermined by the credit crisis,” says Power, who argues that South Africa’s insistence on sticking with policies made for normal economic conditions suggests an inability to think outside a narrowly defined box and adjust to new information as it becomes available. That is a scary thought — where will that leave South Africa 12 months from now?
Market response
While the economy might be heading for the wall, the equity and bond markets and even the rand have had a second wind. The bond market has rallied strongly, with yields on the R157 falling below 8% as it factors in hopes of a rate cut next month. The announcement that October’s inflation figure came in at 12,4% strengthened that argument. The rand gained 3% on Tuesday as the US introduced further packages to bring liquidity back into the market. After 10 weeks of foreign selling on the JSE, last week saw foreigners turn net buyers for the first time. The beginning of this week saw the JSE showing a strong recovery on the back of stronger global markets, with the All Share Index down only 5% since the beginning of the year.