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Recession over, but sectors still sufferFrom the start of the economic downswing in December 2007 to the exit of the recession in the third quarter of 2009, the manufacturing, mining, and wholesale and retail trade sectors have declined by 12%, 9% and 4% respectively. These sectors were worst affected by the global recession, which had strong negative feedback loops between the financial sector and the real economy.
According to Statistics South Africa, the nominal value added in the economy during 2009 was R2.4 trillion, which is R139.5 billion more than 2008. The most notable performance was general government services, which expanded by R40bn to R336bn; while the manufacturing industry declined by R9.6bn, to R329bn.
Standard Bank economist Danelee van Dyk explains that at the coal face of the recession, external trade sectors were worst affected by the slump in demand for their output. “Broadly speaking, emerging markets like South Africa faced both finance and real economic risks. The trade sectors initially felt the former, as the credit crunch – through reducing the supply of available funds – made it more challenging to access international finance.
“A scarcity of international finance increases the cost of borrowing, with negative consequences for domestic financial institutions and borrowers,” she says.
Reduced access to finance weakened overall demand, created uncertainty and resulted in substantial job shedding and other cost-cutting exercises.
Nedbank economist Isaac Mashego says that these three industries collectively contributed almost 600 000 of the one million jobs lost between October 2008 and December 2009.
“It comes as no surprise that the financial market and the real economy were both in the firing line,” says Van Dyk.
She explains that the weakness in manufacturing and mining sectors along with the negative financial repercussions – falling asset prices – spilt over into the retail sector. “The consumer faced the onslaught of job losses, cutbacks in income, negative wealth effects and tighter credit conditions, which reduced their ability and willingness to spend. This environment was particularly negative for households with large debt obligations.”
Retailers scaled back inventory requirements that had negative repercussions down the supply chain, which further exacerbated the plight of manufacturers.
Econometrix’s Tony Twine says that all three of these sectors have had some bright spots since the mid-point of 2009, but in most instances, the level of economic activity has tended to drag along at the low levels that were reached toward the end of the recession. “There certainly have been some isolated improvements in production and sales activities during the first four months of 2010,” he says.
Twine estimates that we are probably still a year to 18 months away from a consolidated upturn in the major productive sectors of the local economy, which will not be able to recover without a global economic recovery of considerable dimensions. “Before that happens, there is a strong possibility that the second dip anticipated in world economic activity could come into play.
“The major economies of the world have not yet learnt the lessons of how they got into the trouble that they were in during 2008, and appear unwilling to take the politically unpleasant economic medicine needed to restore their long-term growth,” he adds.
Mashego says that mining and manufacturing already are benefiting from more favourable global economic conditions and that exports are benefiting from strong demand, particularly for commodities in China, India and other key developing economies.
“The recovery is still at the early stages and it will be some time before growth in these industries returns to its pre-recession levels,” he adds.
Van Dyk concurs that both the mining and manufacturing sectors have posted growth over the past several months. However, she says that the recovery currently under way in the economy is still largely uneven, with both the retail and wholesale sectors showing declines relative to last year.
The direct and indirect effects of the recession had negative repercussions for all sectors of the economy, some of which are still permeating the economy.
In both the construction and transport sectors, the squeeze on corporate profitability and an envisaged subpar economic recovery suggest that priorities have changed.
“The labour market is unable to restore itself, suggesting that an important pillar for sustainable recovery is still absent. This explains why the retail and wholesale trade industries are struggling to post positive growth rates,” Van Dyk says.
Twine says that although South Africa was faced with economic difficulties and negative growth, it was not nearly as badly hit as the economies of many much larger economies around the world.
He explains that those economies continue to fight the economically damaging fires caused by surplus credit creation pouring more petrol or credit onto the fires. “They have a lot to learn. Although South Africa still carries the debt created by a credit binge between 2004 and 2007, our debt-to-income ratios are nowhere near those of many of our bigger trading partners.”
Mashego believes that South African industries, particularly manufacturing, need to improve export competitiveness. “South African industry needs to focus on expanding its market share in global markets, but this requires a holistic approach which incorporates both macro-economic and industry-specific measures.”
Twine says that industry should be focusing on finding new customers. “Our traditional, mainly Western trading partners, are unlikely to be able to show the same kinds of growth in terms of their demands for our exports as China and India.
“It may take five years or more to switch the emphasis of our existing customer base away from Europe and North America towards Chindia, and the economies that will make the necessary items for Chindia to continue growing at between 7% and 10% per annum,” he adds.
According to Van Dyk, while we are beginning to see broad economic health, the indications are that it will be a lethargic recovery. The willingness to embark on expansive policies is deemed a function of stronger global economic growth and confidence in a revival in internal demand.
“Consequently, the outlook for private sector employment creation remains uninspiring. A recovery in retail sales and other interest rate-sensitive sectors, such as the property market, will start showing a recovery from the second quarter of the year,” she adds.
Dr Andrew Golding, chief executive officer of the Pam Golding Property Group, says that from a housing perspective, access to finance is still holding back a meaningful upswing in the property market. Cash buyers continue to make a significant contribution toward concluded sales, mainly in the middle to upper sector of the market.
“Since the advent of 2010, we have seen a continued upward trend in market activity in terms of sales volumes (units sold), and also have begun to see the first signs of upward price movement in all regions around the country,” he says.
According to the National Association of Automobile Manufacturers of South Africa (Naamsa), the remarkably strong growth in new vehicle sales during the first quarter of 2010 continued during April, with aggregate industry sales at 35 763 units registering an improvement of 36%; compared to the 26 288 vehicles sold during the corresponding month in 2009.
It said, however, that the improvement should be viewed in relation to the low sales registered this time last year, due to the impact of the global financial and economic crisis.
Naamsa said that the outlook for 2010’s domestic sales remained positive and could gain momentum as economic activity levels improved further.
According to the National Credit Regulator, credit bureaus had records for 18.07 million credit-active consumers at the end of December 2009. The number of consumers in good standing at the end of the quarter showed a decline of 0.4%, compared to the quarter ended September 2009. However, when compared to the quarter ended December 2008, there was a 3.7% decline in number of consumers in good standing.
Allison Cooper
