SA economic update: The global recession will dictate local performance in 2009

The South African economy ran out of steam in 2008. Real GDP grew by an anaemic 0,2% in the third quarter, after an erratic performance in the first half of the year, which was largely distorted by the impact of severe disruptions to power supply in the first quarter. The economy was dragged down by further declines in retail activity as well as sharp drops in mining and manufacturing production.

Retailers were hurt by fading household demand. Households have been taking strain for some time, with household finances starting to deteriorate in late 2007, as surging inflation eroded disposable income growth while the combination of higher interest rates and heavy debt burden pushed debt service costs sharply higher, placing further pressure on households’ cash flow. The miners’ performance was undermined by the dramatic deterioration in the global economy since October last year, which resulted in a sudden collapse in global industrial demand and international commodity prices. The global implosion also hit the local manufacturing sector, resulting in sharp falls in export sales while local sales were contained by weak domestic demand.

Global industrial production collapsed in the fourth quarter of 2008
The global prices of SA’s key exports plunged in late 2008

This weaker trend intensified in the fourth quarter. Local exporters came under severe pressure as South Africa’s main trading partners sank into what can only be called a deep recession. Industrial production in most major economies – the US, the UK, the EU and Japan - fell sharply in the final quarter of last year. Early indicators suggest there was little to no let up to the devastation in January 2009, with US industrial production plunging by a further 10% y-o-y, after falling by an equally alarming 9,7% y-o-y in December 2008. Despite unprecedented policy interventions in most industrialised countries, there seems to be no quick fix to global financial and economic woes. Most major banks in US and Europe are still bleeding, with significant write-offs eroding capital adequacy and restricting lending capacity in the process. This, in turn, continues to place tremendous pressure on industry across the globe, with some key industries struggling to secure working capital while at same time facing shrinking demand.

Domestic growth prospects for 2009 remain subdued

The current global environment does not bode well for domestic growth in 2009. Exporters’ profitability is likely to decline sharply as export volumes and prices are expected to fall. Most exporters have already responded to the tough conditions by announcing restructuring programmes, cutting both operating costs and capital outlays. Significant retrenchments have already been effected in the mining sector and some manufacturing industries, most notably the automobile manufacturing industry. Many analysts fear more retrenchments in the months ahead, with some estimates putting job losses for 2009 at between 100 000 to 150 000. If unemployment rises as predicted, household demand is likely to remain depressed for much of 2009. Fortunately, inflation is expected to come down to lower levels in 2009, which should create scope for aggressive interest rate cuts in the months ahead. However, monetary easing is unlikely to have an immediate impact on household demand as most households will probably use the savings from lower prices and lower interest rates to repay debt or increase savings. South Africa is probably already in recession, but a mild improvement is expected in the second half of 2009. Real GDP growth of only 0,4% is expected for this year. However, the recovery should gather pace in 2010 as falling inflation, much lower interest rates and more manageable debt levels start to boost household demand. The hosting of the 2010 FIFA World Cup will provide an added boost, creating employment and bolstering economic growth.

Article by: Peter Hewett - Private Wealth Management