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We get a lot of questions about where the South African economy is headed and whether or not it is in good shape. People want to know if the future is bright or not so bright or dim. Economies are complex systems, made even more complex by government meddling in the monetary system and generating malinvestments by creating artificially cheap credit and subsidising losing sectors.
In light of this it seems appropriate at this halfway point in the year 2010 to assess the state of play as it stands and try get some clarity on where we’re headed. SA has just successfully hosted the World Cup (successful for the tournament, not for the national economy), and with that behind finally the country recognises the need to lift off the blinkers and realise there is life after 2010.
Let’s pull the lens back and see were we are. From 2003 to 2008 South Africa’s economy boomed. The problem?… it was mostly fake. On the back of rampant credit and money growth, SA consumers and companies ramped up debt spending, maxed out credit cards, over-leveraged, and basically binged. It was good while it lasted, but episodes like that never last too long before Mr. Reality comes a knockin’.
Left with overcapacity in manufacturing, malinvestment (specifically into property), and a forced inter-temporal swing in household savings (lower) and consumption (higher) preferences created by the distorted incentives from bad macro-policies and profligate banks, SA was ripe for a recession.
Guess what, we’re still really in the recession. Yes, officially GDP growth is rising again, but that means less than you think. After all, most of the GDP recovery in late 2009/early 2010 was driven by mining and manufacturing export exposed sectors, themselves driven by a credit boom in China as that country ramped up the same failed policies tried and failed everywhere else. China’s credit growth remains rampant, spilling out a vast trail of its own malinvestments in everybody’s darling country.
Digging deeper into the true underlying state of the SA economy we see one particularly important issue. Money supply and credit aren’t growing at all, and haven’t been for a long time now. That means that all those unsustainable economic endeavours that during the boom relied on cheap and easy money, no longer have that luxury. The longer money supply stagnates, the longer the recessionary clearout will play out. This means that retailers remain under pressure, that inventories and stocks, while probably recovering somewhat in recent months, remain tight, and companies continue having to manage cash flows with a fine-tooth comb. This won’t change for a long time.
So if by recession we mean GDP numbers as reported by StatsSA, then no, SA is not in a recession any longer. But if by recession we mean correction from the boom phase to the clearout of malinvestment and capital re-allocation phase, then we are still in recession.
Take the construction sector. This was the poster-child sector of the boom. Now it’s rapidly becoming the poster-child sector for what a lingering recession looks like. The residential property market peaked out sometime in early 2007, meaning that building projects probably started to drop off in late 2007/early 2008. Then there was commercial property, which kinda had legs for a bit longer but also hit the skids, maybe around late 2008. Then there was retail property (malls, shops etc). Retail spending started topping out as far back as 2006, but credit remained easy well into 2007, meaning lot’s of big mall developments were only getting started around late 2006/early 2007, projects that in many instances would only be scoped and breaking soil in 2008, and getting finished up in 2009 and 2010. With retailers under the cosh it’s hard to see many more mega-malls springing up for while.
The construction sector is probably the worst placed sector in SA. Massive order books are thinning out and there is little private property activity to speak of. Govt contracts remain in play but are becoming fewer and farther between. Soft investment levels from companies add to the gloom for construction. The sector was a classic beneficiary of the boom, and now must undergo a classic right-sizing period. A lot of jobs will be lost in this process.
Speaking of jobs in SA, large companies are not hiring. In fact if anything they’re laying off staff. Strikes are being turned into a positive by many companies: They simply cannot afford to meet wage demands from unions so they are going back to the unions and saying “fine, we’ll give you your X%, but then it means we fire 700 people or the business cannot operate and everyone loses their jobs.”
Once they’ve laid off workers many of these firms realise just how much more efficiency they can get from fewer staff and actually get the same job done. These staff will never need to be rehired on current output levels at current prohibitive wage rates. Big companies in SA are instead engaging in capital deepening, a natural consequence of technological progress but also the result of onerous labour laws and union demands. Capital deepening simply means using relatively less labour and more equipment to get the job done. Big firms much prefer dealing with technical machine problems than labour and union problems.
The economic recovery is very much being driven by the efficiencies being achieved by the top SA companies, and part of that is lightening up on labour costs. So, in effect, we are recovering in part because of shedding jobs, not despite shedding jobs.
The retail environment remains extremely tough. Consumers are still ‘trading down’ to cheaper products. Value still beats branding and will for a while to come. Pricing power at the point of sale is still very weak and as a result stock inventories are still being managed to the bone. Trailing profit margins should keep falling in the months ahead. Pipeline price pressures, although not terribly strong, remain stronger than consumer pricing power thanks all the monetary mayhem going on in the US and China, meaning margin squeeze will remain a feature of the 2010/h1 2011 landscape.
Make no mistake, this is no easy period for businesses.
Manufacturers created far too much overcapacity during the boom and are sitting with a lot of room to grow into. At the same time households obliterated their savings and racked up debt, meaning that spare capacity will find future income in the wallet willing to be spent on the products it hopes to produce hard to come by. This means that new private investment levels will keep falling as there simply is not the need to ramp up capacity building projects in SA right now. Isolated pockets maybe, but not on the whole. Whatever investment is taking place is more likely a function of greater mechanisation and labour substitution than a need to create new capacity.
Whatever recovery the politicians and pundits are speaking of is more bottom-line efficiency driven than top line revenue driven. This kind of recovery runs out of steam quite quickly. According to demographic trends and trends in productivity growth, SA is structurally limited in real sustainable GDP growth to around 2.5-3.0%. Long term growth over 3% in SA is usually unsustainable and needs to unwind. This would of course change if we deregulated the economy and unleashed the innovative potential of the private sector, but that is another rant for another day.
However, while this may all seem quite gloomy, the correction phase is actually quite beautiful. It flushes out the malinvestments and reorganises the economy to better meet the needs of the people. SA companies are becoming very lean & mean in this recession and are shaping up to be good long term growth prospects. The key is patience and time, which often policy makers don’t have enough of, especially when jobs are being shed. This can raise the risk of an unnecessary heavy-handed policy response, creating a new round of badly allocated investments and unsustainable stimulus.
Let’s hope patience wins out, because if it doesn’t, get ready for the roller coaster ride to begin…
A great synopsis, nice to get an understanding beneath all the metrics flouted in the media.
I suppose the great problem is that elections occur every 2/4 years, and for the politician, he needs to appear to be acting on the various issues at hand. Thus creating irrelevant departments and crazy legislation, resulting in further government bloat.
The greater interest then always falls second to self-interest. Indeed it would take a great orator with sound economic intelligence and political bravery to do and explain the correct course of action, in this case, patience. The question is, does such a man exist? Unfortunately it seems not.
A woman perhaps?
Indeed, perhaps it is not political balls that are required, but something ostensibly different, with greater economic acumen and who reads this blog.
With 20% – 25% *official* unemployment, SA, despite Clever Trevor’s puffery and preening, has not actually been out of recession since 1990. And that is not counting *under* – employment.
With the vast majority of South Africans having no discretionary income, how effective can the Reserve Bank’s attempts at money management be?
“SA has not actually been out of recession since 1990″
Say what? That’s just plain ridiculous. By the end of the 1980’s SA’s economy was in a sclerotic state, about to implode in on itself. There were great black and white and coloured and Indian political heroes of the struggle, but in reality the Apartheid state and economy collapsed under the weight of its own inadequacy.
While SA has only achieved a part freedom under the ANC government, the economy is a lot less regulated and tied up in red tape than it was in the 1980’s and early 1990’s.
Real value has rocketed tremendously in SA in a more free society. Much of our growth in the past 10 years was indeed frothy to the say the least, but recession since 1990, that’s just an idiotic statement with no grounding in any understanding of the way the world actually works.
High unemployment we may have, but that is a matter for another day. The escalation of real wealth in South Africa in the past two decades has been tremendous, despite lingering poor state policies, mass emigration of skilled people, and high crime rates. Say what you like, but in SA we seem to know how to beat the odds.
South Africa has been riding a freak wave of good luck since the 1990’s. We have been in trouble for a long time and it will only worsen exponentially as time goes by. Here’s why:
1. We have no more key manufacturing industries. We manufacture almost nothing, relying mostly on export mining commodities. It’s the best strategy to stay a poor country.
2. We are destroying our commercial farming operations with bad politics. The very same people begging for land to squat on will be the very same people burning down everything in sight due to famine.
3. The current educational system is rubbish. There are loads of university students who is functionaly illiterate. To prosper, we need engineers, and then some more engineers and then even some more engineers.
4. With the whole of Africa suffering under mismanagement, the myth up north is that SA is the land of milk and honey. Millions of foreign Africans are already here, and millions more will flood the country. Most of them earn money here, and send it home to families. Our infrastructure cannot accommodate the flood of people and our economy can’t afford the outflow of cash.
5. On all levels government has things in control almost like a monkey flying a space shuttle. Collapsing local services is a reality. Budgets not spent is a reality.
6. It seems more and more likely that we will follow Zim down the drain, due to above mentioned points.
10 Years ago I decided to stay in the country trying to defy the odds. Lots of university friends moved to Austarlia at the same time. I lost almost everything I worked for over 20 years. They are living in a country that is steadily building a future for their children. I am not. I was a fool.