Tricky times ahead

Summit TV speaks to Mike Schussler from Economists.co.za about the growing evidence that without further rate cuts South Africa is going to experience a severe recession and more job losses

Erika van der Merwe: Credit extended to the private sector lifted by just over 11% in February 2009 which is well down from the heady days of 20% plus credit growth. Is this another data set that supports additional interest rate cuts? Mike Schussler is from Economists.co.za. Mike, what data or evidence do we have that counts against further aggressive rate cuts?

Mike Schussler: I think the major set we have that’s against cutting is the consumer price index (CPI) - that is the one set they actually have a target on, and unfortunately that increased - but everything else is falling off a cliff whether that’s credit extension or manufacturing. It doesn’t matter - right through the economy we are seeing a lot of signs of weakness, and under these circumstances we need rate cuts to help stimulate growth in the South African economy.

Erika van der Merwe: Looking at some of the details of these figures money supply growth came down - private sector credit extension (PSCE) came down to 11.1% from 11.8% in January - so there’s definitely signs of fatigue amongst consumers and less demand for credit, also having spoken to the banks about their results it’s very clear they’re putting constraints on how much they are lending out…

Mike Schussler: Yes, I think a few things happened. The National Credit Act came into being and that set a limit, and the crazy days of giving people a 108% loan on house prices - and those prices just heading up - has changed completely all around the world and in South Africa. The banks want a 10%, 20% or 30% deposit on a house and a deposit for a car before they are even going to look at you. I think that’s changing the whole scenario because that affects the real estate industry, and the building industry all around - and the banks have a bad credit problem at the moment as well. If you look at these credit figures what we know from the National Credit Regulator is that new credit - people buying new houses and new cars - has actually declined quite substantially. Yes, those figures are old - but the fact is we know a lot of this is people who have access bonds who are letting that pile up, and that’s why we are seeing this slowing down very quickly. If we look at new credit under this it wouldn’t be in single figures - it would be in negative figures - and the latest growth in credit extension certainly on a three-month basis is in single digit figures which is probably the first time we’ve had that since around 2002 or 2003…

Erika van der Merwe: That’s the last three months on a month-on-month basis annualised?

Mike Schussler: Yes, seasonally adjusted and annualised…

Erika van der Merwe: What are our business doing? If you look for instance leasing finance is down - is that an indication that businesses is also borrowing less?

Mike Schussler: There is more and more evidence that small businesses are also struggling - they would typically be in the leasing game, typically they are making use of mortgages to capitalise their businesses - and what we are seeing at the moment is that small businesses are coming under extreme pressure because they’re the ones that get cut first. Firms don’t want to have the big negative numbers of their employees being cut so they’re cutting their contractors and people delivering services to them, and these businesses are really feeling it - whether that’s the advertising industry, in the supply industry in the mining or manufacturing chain - and that is where the real crunch in the South African economy is happening.

Erika van der Merwe: Related to that what about affordability? There’s credit figures on the affordability of new home loans - if you look at wage increases for those who still have jobs, and as Time Magazine says your job is the new asset - for those in employment what are wage increases looking like?

Mike Schussler: Wage increases at the moment if you look at the gross increase year-on-year that’s about 12% - but if you look at the average wage that’s probably gone up about 9% which is a lot lower than it was in the last few years. Certainly this year were going to see one or two over 10% - but we are probably in the main going to see increases closer to the inflation rate than probably before. Although that inflation rate might now be a little bit closer to 7% for the average for the year the fact is wage increases are probably going to be 7.5% to 8% on average.

Erika van der Merwe: Bringing it back to the broader discussion of the state of the economy what is the evidence - the leading indicators and others?

Mike Schussler: Today the leading indicator came out and if you look at it on a seasonally adjusted quarter-on-quarter annualised basis there are signs that we have turned the corner -but the fact of the matter is the leading indicator is now in its deepest decline that we’ve ever had since we’ve collected this data since 1960 which shows that in the next few months the South African economy is in a really deep hole, and the evidence coming through the coincident indicator that’s now had a seasonally adjusted decline for five months in a row, and that’s also getting deeper and its decline is at the deepest level since 1992 overtaking the last little recessionary period of 1998 so for all intents and purposes we are now in a deep recession.

Erika van der Merwe: That’s heavy stuff - how long are we staying in this deep recession?

Mike Schussler: I’ve got this quarter and the next pencilled in as very negative. I’m not too sure about the third quarter - let’s call that a zero with a question mark either way, but probably more down. In the fourth quarter we might start seeing growth coming in on a quarter-on-quarter basis - although on a year-on-year basis it might not yet be growth. Certainly if we have interest rates declining we are going to see a better fourth quarter - if not then certainly the first quarter of 2010 - but the evidence from the leading indicator is that the steepness of this decline has already turned, and that’s actually good news - however the real economy is only feeling that in a few months time so I suspect the depth of this recession to be somewhere in the second quarter and perhaps the beginning of the third quarter.

Erika van der Merwe: Are we going to see those rate cuts? In the Monetary Policy Committee speech last week we saw specific reference made to administered price increases - including electricity prices, the Business Day newspaper saying Eskom is going to apply to the National Energy Regulator SA (Nersa) for a 34% rate hike…

Mike Schussler: That 34% is still very high - no matter which way you look at it that’s four to five times the inflation rate expected in 2009. When coal prices - which are the major input into the Eskom price adjustments - decline by 60% one really has to question these price increases because on top of that we’ve got Treasury giving R60billion to help them create power stations. What we need to do is look at the cost structure of Eskom as a country, and the cost structure of electricity overall. Administered prices have always been a problem in the South African economy - there’s no way of denying that - but if we don’t get interest rate cuts it’s as simple as this then we are going to fight a very big wave of unemployment. We are already going to fight a big wave of unemployment - but we are going to get a huge wave…

Erika van der Merwe: Lots of warnings there from Mike Schussler.

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Article from: http://transcripts.businessday.co.za