The dreaded ‘recession’ word has started to be used again. Yet it would seem as if emotion (sentiment) leads the charge, possibly overly much. Actual activity is still growing manfully, if deeper than ever sunk in mud. Where does this lead us?
Four years into recovery, and nothing is behaving normally.
The South African Reserve Bank’s leading indicator has been flat for three years. RMB/BER business confidence has not had a normal recovery pattern, instead getting stuck halfway. Key supply constraints (electricity and credit access) between them have conspired to keep a lid on growth short of normal potential, and well before achieving full employable resource utilisation.
Exports never quite achieved normal recovery velocity, and have over the past year fallen off anew, reflecting poor global demand and loss of trade competitiveness.
All of this was bad and gave us underperformance.
The clincher turned out to be growing labour unrest, causing output to be lost and confidence to be eroded.
It is the failure of nerve (confidence) that constrains fixed investment and risk-taking generally, instead providing incentive to shift the focus to external growth markets, in the region or even further afield.
That is where many business capex budgets are now increasingly focused.
With real income growth, output growth and confidence drooping, there has been heightened nervousness about fragility and new shocks putting us under.
It does not help that shock potential is visible, in ever more violent and spreading labour unrest and losses, shock declines in our export commodity prices as the world environment turns against us, and credit provider nervousness about overexposed consumers inviting tighter credit criteria and slowing credit growth.
It is these varied exposures, superimposed on already poor growth trends that cause revival of recession talk.
Yet a word of caution may be in order.
Production in the economy continues to expand. Remarkable numbers of people and businesses go about their daily activities, coming up with new creative schemes to do things, cut costs, and introduce new technology (creative destruction).
Not everything has come to a standstill. There is still forward momentum, even if under severe siege conditions.
At least 80% of the economy, primarily it services component, keeps expanding steadily, if by now at the pedestrian pace of only 2.5%.
The shock potential for now resides in our primary sectors (especially mining) and secondary sectors (mainly manufacturing, electricity generation, but not limited thereto), and then primarily its output and export sides.
Meanwhile, the Rand is the ultimate shock absorber. Its growing weakness may mean higher imported costs and less real disposable income to households, but for many businesses it does just the very opposite.
Miners find their output generates more Rand income, farmers get bumper returns for their exports, and import-competing businesses can put up prices and improve their margins.
Whatever else may be eroding business confidence is up to a point neutralised by these sales and earning boosts, creating a sense of suspended animation, in which bad things do not necessarily get much worse for being countered by the boosting effects of a weak Rand.
Obviously not every business benefits this way, with much pain observable in places, but enough do to create the ultimate safety net, at least in the short term.
Remember how during 2000-2001 the Rand weakened by over 100% (from 6:$ to 13.80:$), setting in motion a series of SARB interest rate hikes (4%). It caused enormous fear that prime 25% was coming back (remembering recently vacated 1998) and caused many indices to nosedive.
But SARB did not end up shocking the economy unduly, and the Rand in the end was the main shock absorber, preventing a recession from taking hold.
Today, when looking longer term, much depends on whether wage demands and profit margin elevation erode away the trade competitive advantages created by the Rand slide.
But for now I am not focusing on 2015. I am focused on 2013. Will we go into recession? Short of a major new external shock, I do not think so.
Only a bad shock would cause orders to be cancelled dramatically, order books to shrink abruptly, inventory levels to be shrunk, output schedules to be cut, fixed investment and new hiring to be frozen, and new cost cutting drives to be announced.
That kind of severe abruptness is probably not going to happen without the intrusion of another major shock event.
Could growth disappoint yet more than seen so far? Can the decimal forecast point keep sliding, like the gauge of a steadily emptying petrol tank?
Given current circumstances, this is not unlikely.
There was a time that 2013 was marked for 3.5% GDP growth. Since then much water has flowed under the bridge. SARB is already down to 2.4%, with talk of further downside revisions. Treasury officials are talking closer to 2% (so far as yet unofficially). BER nailed its colours to the mast last week with 2% (with accompanying commentary that this was somewhat of a stretch to be achieved), and enough is happening to make one wonder where in the 0%-2% range the growth needle will eventually settle in 2013.
There are simply too many headwinds for it to be otherwise, with only the weaker Rand providing a major safety net.
So no recession, unless new shocks divine otherwise. But the chill factor this year could end up making you feel as if you were in the Siberian wastes cutting grave stones for Joe Stalin death squads.
Hellish weather. But then winter is here.
*Cees Bruggemans is a consulting economist to FNB.