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It looks increasingly likely 4Q2008 was a major growth disappointment. Confirmation awaits GDP release in two weeks time.
Domestic spending gradual gave way during 2008 and too many local sectors were recording output losses in 4Q2008 for it to be otherwise.
And then there was of course from October onwards the horrific implosion abroad, with industrial production and exports nose diving in country after country. It all hit us very hard as well, even if with a minor lag.
Locally, our retail trade, mining and manufacturing activity were all at least 4%-5% down in real terms. Motor trade sales and residential building plans approved over 30% down. Financial services slowing down.
If GDP actually declined in 4Q2008, recession would have started sometime in 2H2008 (that is six months ago).
Although GDP growth for 2008 could still have come in at a disappointing 3% overall, it would have mainly been held up by a low base effect.
There is growing concern about what actually happened during 4Q2008. Industrial production worldwide went into a screaming dive, with exports following.
How would that have played here?
My best estimate for consumption growth in 2008 is 2.5%.
Fixed investment held up well in the first three quarters, but stories abound how private fixed investment went into rapid retreat since then. This could have limited fixed investment growth to 10% overall in 2008.
Government consumption probably was a steady 5% growth.
These are still relatively high numbers, but inventory cutbacks and residual adjustment became increasingly negative with every passing quarter during 2008. This suggests total domestic demand did not grow by more than 3.5% in 2008.
The difficult questions concern exports and imports. Both held up reasonably well during the first three quarters of 2008. But exports may have fallen heavily during 4Q2008, also independently reflected in changing container traffic fortunes.
Even if imports also gave way, it may not have been as much as for exports. This suggests a negative hit on net exports, pulling overall GDP growth down towards 3%.
What will 2009 offer us?
Despite consumer buying power improving due to falling oil prices, increasing support from an expanding budget deficit and now rapidly falling interest rates, national income erosion through employment losses may still limit household consumption growth to 1%-1.5% in 2009. In addition, fixed investment growth may slow to 2%-4%. Government consumption will probably keep growing at 5%, making it the outperformer.
If inventory and residual downside corrections remain large, total domestic demand may not grow by more than 1%-2% in 2009.
If we could assume that export and import trends were similar, this could still translate into 1%-1.5% GDP growth in 2009. But even these already low estimates are becoming more suspect by the day.
Durable household consumption and private fixed investment spending may still be falling away, pulling import levels lower. But public infrastructure efforts will remain strong, thereby probably still sustaining import levels overall.
Meanwhile, what’s happening to our exports?
Mining volumes will decline further, gold and platinum probably modestly, but diamonds heavily, with coal mostly unchanged. Motor exports may be down by 30% this year, if not more. Steel and chemical exports should be down.
If overall export volumes actually decline by 0-5% this year, GDP growth would be further eroded. Thus one arrives at 0-1% GDP growth for 2009, with many forecasts now populating this range.
New Year 2009 didn’t start well, with new passenger car sales 32% down in January and commercial vehicles over 40% down, for a combined -35% decline year-on-year. And this now off an increasingly weak base!!!
As 1Q2009 unfolds we may encounter one of the weakest growth performances in many years, thereby confirming a deepening recessionary condition.
SARB leading indicators give us little reason for joy, with an accelerating decline noticeable through October-November 2008, probably tied to the growing misfortune of our exporters, but also suggesting spreading weakness domestically.
Such weakness is projected deeper into 2009, with so far no real hint of recovery identified (except the stock market), with global news also remaining bad (except for stabilising Purchasing Managers Indices).
But fiscal boosts are being imposed in country after country now, totaling over $1 trill worldwide in 2009. Lower energy prices have also restored some of the lost consumer buying power. And many countries are currently rapidly cutting interest rates.
If Big Bang banking programs were to be launched soon, aimed at detoxifying bank balance sheets while recapitalizing banks, and terrifying housing foreclosures and slides in residential housing values could finally be ended, ‘normalisation’ and the ending of confusion and subsidence of generalized fear might be closer at hand.
All this magic should be having its strongest effects from midyear 2009 onward. It is therefore with some hope that we remain focused on 2H2009 for signs of global revival, eventually also transmitting its effects here.
But for now we remain firmly mired in recession.
Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics
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