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Is the recession receeding?
Has South Africa set off on the road to recovery from its first recession in 17 years, or is it too early to tell? Judging by the contradictory barrage of recent economic data and expert opinions, people can be forgiven if they are utterly confused. But a deputy governor at the South Africa Reserve Bank seems to be convinced the country will come out of its recession later this year.
Just days ago, analysts were saying they expected that manufacturing activity was making a spectacular recovery after the latest purchasing managers’ index (PMI) showed that factory output had jumped from 39.3 to 48 last month – its highest level since May last year. This also was the second biggest rise in the history of this index. Once it passes the 50 mark, manufacturing – the second largest sector in the South African economy – is back in positive, or expansionary, territory.
Some commentators believe this will happen by next month. The picture is made more promising by the fact that in China, which is now South Africa’s main trade partner, similar activity took place. According to the latest PMI – which is sponsored by Kagiso Securities – new sales orders shot up into growth territory, having risen to 50.7 from 39.5. Business activity surged to 49.4 from 38.3 and the inventories index climbed from 37 to 47.6.
This has prompted at least one economist from one of the larger financial institutions to comment that this news reinforced “our expectation” that the recession in South Africa had ended during the third quarter and that growth would follow in the fourth. On Thursday, 8 October, Statistics South Africa will release its manufacturing production data for August – either confirming or contradicting the optimism reflected in the latest PMI.
However, there is also considerable skepticism. Even if the data due on Thursday is positive, some say the longer term outlook for manufacturing remains uncertain. Big institutions such as Standard Bank remain cautious.
“The manufacturing sector is showing encouraging prospects for improvement over the next several months. However, we remain cautious over the ability of the sector to improve substantially owing to the smaller prominence of consumer goods producing sectors,” was the cautious tone in a research note released by the bank.
Meanwhile, the International Monetary Fund has predicted South Africa’s economy would shrink by 2.2% this year and would expand by 1.7% next year. The South African Chamber of Commerce and Industry said in a review released last week that the local economy’s bleeding had slowed, but nonetheless also sounded a cautionary note to business and investors.
So much then for the good news, which was followed by news that private sector credit growth reached its slowest pace in 40 years in August; Standard Bank’s Residential Property Gauge announced that a quick turnaround in the housing market was “improbable”; the FNB/BER consumer confidence index fell by three points in the third quarter with only a slight majority of South Africans expecting an economic upturn any time soon; South Africa’s trade balance slipped back into the red in August after three successive months of surpluses.
The sharp fall in exports is being blamed partially on the strong rand and partially on ongoing weak global demand.
Confidence among civil engineering contractors, as monitored by the South African Federation of Civil Engineering Contractors, has fallen for the first time since 2003 to below 50 on an index of 100, and they are expecting a contraction of 10% next year. It is clear there has been hefty overreliance by the government on the R787-billion infrastructure investment programme.
And figures released on Friday by the National Association of Automobile Manufacturers of South Africa and Associated Motor Holdings show that while new vehicle sales increased slightly by 6.1% compared with August, the market was still in decline of 19.5% when compared with September 2008.
But the South African Reserve Bank’s deputy governor Daniel Mminele believes that based on the composite leading business indicator, which has been increasing for the last few months, we may emerge from recession later this year. However, he adds “there is uncertainty as to the strength of the anticipated recovery.”
According to Mminele, manufacturing appeared to be recovering while business and consumer confidence are rising.
Earlier, Rand Merchant Bank said in a statement it expected the economy to emerge from recession by the end of the year, but that the recovery will be weak, with both consumer demand and private investment largely out of action.
Last month, the Financial Mail reported that it appeared from economic data and market movements “in the US, Asia, most parts of Europe and some emerging markets – that the global recession is drawing to a close”.
It further said that “as long as the global economy stays on the recovery path, the consensus is that South Africa will return to low but positive growth in the third or fourth quarter of 2009”, adding that, ”encouraging is that South Africa's leading indicator, compiled by the Reserve Bank with data from surveys, share prices and South Africa's main trading partners, has now climbed for three successive months”.
Also adding its voice to the chorus of optimism is the Treasury. Director-general Lesetja Kganyago has been quoted as saying South Africa will come out of recession in the fourth quarter of this year, but that recovery is likely to be slow. Bear in mind, however, that the same Treasury was telling South Africans six months ago they had no need to worry: South Africa would escape a recession with its infrastructure programme, sound banking system and healthy government finances.
Perhaps a clearer picture will emerge later this week with the release of yet more economic data – or it may cause even more confusion. Nonetheless, apart from Statistics SA releasing manufacturing production data for August, the South African Chamber of Commerce and Industry was to release its September business confidence index on Thursday and the South African Reserve Bank its September reserves data on Wednesday.
