Despite my forecast a few weeks ago that South Africa’s financial markets might have more going for them than last year’s dismal time, don’t be misled into thinking the “real” economy is in anything other than an unmitigated mess.
If the effect of the financial sector is stripped out of the calculations which make up the growth or shrinkage in the economy (gross domestic product, or GDP) then the result demonstrates that we are in serious retreat. Indeed, I think our situation is so comprehensively awful that I am now convinced that the economy’s managers simply aren’t looking at the right sets of numbers.
The best place in which to look for early evidence is what are called “leading indicators” and, in my book, the best of these is delivered by the packaging industry, because it measures the extent to which people are out there buying a wide spectrum of consumer goods. And the answer is that the packaging industry is seeing falling demand, a trend which is accelerating in the new year.
Overall, manufacturers of carbonaceous soft drinks, beers, fruit juices and all those items which are collectively and quaintly labelled “share of throat” are now reporting negative growth – probably for the first time in more than a decade. There is also a fall- off in purchases of general dry groceries – household items such as breakfast cereals, washing powders, soaps and the like. The retreat is estimated by one senior packaging industry executive at as much as 4% in real terms – and that means a very substantial decline in volume sales.
Two further trends have been noted. First, it was always assumed that, as increasing numbers of new houses became available using water-borne sewage, growth in demand for toilet tissue would consistently outpace the GDP. And that’s what happened until recently when the reverse occurred with the market shrinking 3% in real terms, evidence that hard-pressed families are trading down.
Second, the industry count of supermarket check-out bags has slumped by as much as 6%. This runs counter to experience in previous recessions when the downturn wasn’t so severe as to record shrinkage, and it may indicate that people are visiting supermarkets less frequently and buying less when they do.
The conclusion, therefore, isn’t that the economy is in trouble – we all know that. It is that the economy is in a lot worse shape than many of us thought. This retreat in consumer demand also means that, as volumes decline, so production over-capacity grows. And as that happens, so more and more manufacturers will sell products at rates approaching their marginal cost.
Inevitably this means margins will fall with a simultaneous impact on the profitability of the producers. It is a feature of all economic entities that they seek to maximise profitability. Faced with this kind of situation, their only route is to cut costs – and that means a retrenchment spiral from which escape under the present environment will prove quite difficult.
For South Africa, the point of attack must now be the very high real interest rate policy for so long espoused by the Reserve Bank. There is talk on and off about a succession of interest rate cuts – one week they’re on, the next it’s all gloom again. But the fact of the matter is that we need interest rates of no more than 12%, as opposed to the current prime overdraft rate of 22%. There simply is no other way for this country to resume steady and dramatic growth in its economy unless the terrible burden of never-ending high interest rates is ameliorated.
Purists will argue that a large fall in interest rates will lead to a revival of inflation. Reserve Bank Governor Chris Stals points particularly at imported inflation because the conventional wisdom is that as interest rates are reduced, so the rand will weaken, and as its value declines, so the price of imported good will rise.
Elements of this argument are open to challenge. As I’ve already described, we have an over-capacity in our stock of fixed assets – and it is in capital goods that imported inflation shows itself. But since we won’t need to import new capital equipment for the next few years, it is hard to see how this argument can be justified (unless it’s taken to mean that an increase in the price of imported whisky is sufficiently serious to warrant the maintenance of the rand’s value).
A strong case can also be made for a sharp devaluation in the rand. If it’s big enough, it will encourage import substitution on a substantial scale, and that could kick-start a period of economic growth and job creation.
Far too much lip service is paid in this country to the holy grail called “job creation”. The unpleasant truth is that we are now well into a job destruction spiral which will continue until some bold policies are adopted in the critical areas of our approach to interest rates, inflation and currency value.
ENDS
— End —