Business Day has reported that ANC MPs plan to overturn government concessions on labour law, which many in industry believe would have made it easier to employ and retain workers. This would overthrow the compromise reached in Nedlac – the bargaining forum which brings together government, the unions and the employers. The suggestion is that this stance by the MPs is in deference to the ANC’s Cosatu comrades. But if the country’s labour laws are indeed tightened up beyond the existing compromise, what do our experts believe the impact will be?

Expert views:

Mario Pretorius from Telemasters:

Many business people regard Tito Mboweni’s 1996 labour laws as the largest obstacle to liberal capitalism’s efficiency. The tightening of the regulations to remove the last wriggling space of business to accommodate demand fluctuations should not be a surprise. The ANC has a stated economic dogma. It implements its New Democratic Revolution’s as it deems fit. It will continue and accelerate the destruction of a semi-liberal capitalist economy as it has promised. No amount of debate will alter its ideology, shock and horror post facto merely indicates a lack of understanding of the democratic process. In many ways, the complicity of business of ‘not wanting to offend’ is oiling its own demise. If the poison is accepted, it must be swallowed and the consequences borne. Thus we have BEE, the labour laws, employment equity, the CCMA, and soon zero tolerance in employment. The People shall govern, and so we let them without a whimper. This statutory entrenchment of race-based protection will only ratchet up and will not relent. Are there enough cojones to draw a line in the sand before the inevitability of ownership and control is demanded a la Zim? So far there are few takers and many complainers – that gurgling sound is the noose tightening around willing necks.

Mike Schussler from economists.co.za:

I suspect that the labour law "reversal" from what was agreed to at Nedlac is going have negative effects on the South African economy. Already big firms are under pressure to show results in their South African operation in many sectors- as the same firms are seeing better results in other countries. So if we take ever more flexibility away from firms there will be a negative effect, as companies will not invest more here. We need to be realistic and we need people to understand that companies go over borders quickly. Already by 2012 the Top 60 listed companies in SA got 65% of their revenue from outside the country, and this part is growing quickly – not only due to a weaker Rand but because companies are actively seeking more opportunities outside of our borders. Even state-owned companies such as ACSA, Transnet, Telkom etc. have invested outside the country as the risks are consider lower in other countries and the rewards are as good. We cannot afford to have more constraints added to it. Often we live in a false world when we think we can just add rules and regulations and still see major reductions in employment.

Dawie Roodt from the Efficient Group:

It seems there is an unsustainable relationship between organised labour (Cosatu) and the ANC. Government can’t be referee and player. Clearly the forthcoming election clouds their views.

Loane Sharp from Adcorp:

We are still processing the news and checking the details provided in the news report with our sources in Parliament. However, it is important to note that, contrary to what is indicated in the newspaper, the question of “0 months” or “6 months” relates to something quite specific: whether and when a temp will be able to cite its employer (the agency) or the agency’s client (the de facto employer) in any unfair labour practice dispute at the CCMA or Labour Court. The 0-month or 6-month period does not relate to when a temp will become permanent, which the newspaper alleged. This is therefore not a “ban” (on labour brokers) as the newspaper report suggests. For example, labour brokers will typically carry on with business as usual by issuing their clients with indemnities against any adverse award by the CCMA or Labour Court. So, while it is an indication that Parliament is a wild card in labour relations, and that decisions reached at Nedlac are nothing more than window dressing, the practical effects on labour brokers will not be significant.

Statement by BUSA:

We gather with deep concern from the media that the ANC Members of the Labour Parliamentary Portfolio Committee, are swinging strongly in favour of removing provisions for strike ballots, picketing rules and effectively banning Temporary Employment Service Providers, otherwise known as labour brokers. If these reports are accurate, we are deeply perturbed as business because not only does this create further destabilisation in the current fragile economy but also makes a mockery of the NEDLAC process.
These Bills have been subject to negotiations between government, labour, business and the community constituencies for over 3 years at NEDLAC, and were presented to the Labour Portfolio committee in March 2012. While it is understood that the process of public hearings plays a role in law making, care should be taken not to undermine a thouroughsocial dialogue process backed up by comprehensive supporting studies.
Additionally, business went to great lengths to get a Regulatory Impact Assessment study on amendments contained in the Labour Relations Amendment Bill, which indicated that hundreds of thousands of job losses would occur if such amendments were introduced. In Government’s own Regulatory Impact Assessment study of the 2010 proposed amendment Bill, the study indicated significant job losses if labour brokers were to be banned. As a result of this very same study, it was recommended that regulation was a more sensible option that an outright ban, taking into consideration the impact on employment, in particular.
Labour market announcements and inconsistent messages such as these add further damage to business confidence and will impact negatively on South Africa’s already weak economic growth projections for this year.
These pronouncements and the manner in which this is being handled, including the line by line negotiation that is taking place in the Labour Portfolio committee right now, do not do any justice to the structures that have been put in place to deal with these matters in South Africa, like NEDLAC.

Conclusion:

It would be strange if government cannot deliver through ANC MPs on an agreement made at Nedlac. However, this issue does highlight the sensitivity of all employment-related issues in a country which has far too little employment.

Tweet of the Day:

Piers Morgan (@piersmorgan): Remember, you’re not allowed to buy kinder eggs at Walmart because you may choke on the toys. But AR-15 assault rifles? No problem.

When asked during his trip to Japan about the possibility of South Africa hosting the Olympics, President Jacob Zuma gave a positive response. So what might the benefits be? ZA Confidential asked a few experts for their views….

Expert views:

Graham Wood, MD Tsogo Sun:

Can we host the Olympics as a country – of course we can!! We have demonstrated as a country that we can host high-profile mega events, from the Soccer World Cup to the COP17 Climate Change conference. We have superb infrastructure, magnificent stadia and, most importantly, a hospitable approach to all our international visitors who attend these mega events! At some point Africa needs to host the Olympics – and SA is the logical option!

Peter Attard Montalto of Nomura :

SA most likely will make a concerted effort to host the Olympics, and would be able to deliver in terms of building works and projects etc. However the lack of public transport and even hotel capacity I think is far more of an issue for the Olympics – which is geographically much more compact than a World Cup, by definition. We should consider, though, if this is really the best use of money for SA – given there is probably only marginal return on investment for the country. Spending the money on potential growth-boosting infrastructure would probably be better for development in the long run.

Greg Mills from the Brenthurst Foundation:

There are two schools of thought about hosting big sporting and other global events: those who believe it’s a good thing as it promotes the country and focuses infrastructure delivery against a timeline; and those who see it as an investment in unimportant and largely useless bits of infrastructure and a distraction for government. While SA now has some of the necessary infrastructure from the World Cup, and the Olympics would undoubtedly provide an opportunity for a great party for local bigwigs and visitors, the jury is still out on the benefits from the World Cup. Would hosting the Olympics be the optimum use of government resources when we have so many pressing social and economic problems? Why should South Africans be paying for this party? Hosting the Olympics is not a substitute for a failure to deliver better schooling, housing, and other basic services. But none of this is likely to stop those who see the Olympics as offering a feeding opportunity from big government projects.

Michael Tatalias from SATSA:

It’s about time. I am glad to see this idea is back on the table. The Olympics would be of immense benefit in promoting South Africa, and even if we were only finalists in an Olympic bid, it would bring immense benefits in promoting the country.

Leon Louw from the Free Market Foundation:

Few realise what a financial debacle hosting the World Cup was. Only a social psychologist can say whether we benefited enough in terms of national arousal and watching soccer to justify it. The point is that many billions were diverted from welfare, housing, policing, education, health and the like. We are left with moribund stadiums (without maintenance budgets), failed investment in accommodation and transport, and much more for which we lick our wounds. Before deciding to host the Olympics a proper independent cost-benefit analysis should be undertaken, so that South Africans can make informed choices between what we sacrifice in return for what we gain. That calculation must not obfuscate reality with such jumbo-jumbo as “it’s nation-building” or “good for our image” or “brings tourists”. We must know at what price we will enjoy a fleeting “feel-good” high. Like taking recreational drugs, we must familiarise ourselves with all the implications. Having said that, the soccer World Cup was phenomenal and benefits may well have exceeded costs. The tragedy is not so much that we were a nation in denial about costs, as that we squandered the World Cup “dividend” as we did the rugby World Cup dividend, by not sustaining the positive message we sent to the world. We have since been downgraded on every index and by every rating agency. What we should learn from this, but won’t, is that we should not just plan for, say, the Olympics, but ensure that what precedes and follows is in harmony with it.

Conclusion:

The first Olympic games in Africa? It would not just be about sport, but about marketing the country. If it happens there will be a lot of job creation, a lot of construction…. and brown envelopes as far as the eye can see?

Tweet of the Day:

Russell Lamberti (@RussLamberti): Zuma, brimming with confidence at SA’s limitless wealth & prosperity, now wants to channel billions into a frivolous 2-week sporting event

More disturbing data out today with the RMB/BER Business Confidence Index (BCI), which dropped by four points to 48 in the second quarter. The index is now under 50, which means it is in negative territory, with pessimists exceeding the optimists. Meanwhile SACCI’s BCI for May was also released, and is also heading downwards. It came in at 90.4, which is 1.9 index points lower than in April 2013.

Expert views:

Ettienne le Roux at Rand Merchant Bank:

In the context of continued labour unrest, warnings of power outages and the sharp fall in the value of the rand, one could easily have expected a decline bigger than the actual four index points in the RMB/BER BCI. The fact that it did not materialise points to underlying business conditions which, although relatively poor, have not collapsed. Indeed, the performance of the economy can be described as one of weakness, mixed together with some pockets of resilience. Although less vibrant than last year, retail, wholesale and new car sales volumes continue to expand, while manufacturing keeps wobbling along. On a brighter side, the recovery in building activity appears to be gaining some strength. For South Africa to break loose from this low and unsatisfactory growth path, the global economy needs to recover more forcefully and the local constraints holding the economy back must be tackled with greater vigour. Addressing infrastructure bottlenecks, skills shortages, high (and rising) administered price inflation, as well as persistent strong growth in unit labour costs, will have a notable impact on raising the country’s competitiveness and, ultimately its growth potential.

SACCI on the SACCI BCI:

The negative impact on the business climate came mainly from causes exogenous to private business activity but which play a cardinal role in affecting business confidence, economic performance and financial markets. Socio-political events, including on-going militant labour action, are having a harmful impact on the business mood and commercial and industrial activity levels while also distorting financial market performance. For SACCI it is disconcerting that major economic sectors that have the ability to create employment growth, are contracting while others are experiencing exceptional cost pressures resulting from rising labour costs and intermediary inputs like fuel, electricity and water prices that are increasing faster than the general price level as measured by the CPI (5.9%) and the PPI (5.4%). The decline in the SACCI BCI in May 2013 shows that non-economic factors can have a damaging impact on the economy and on the business climate. Ill-disciplined and lawless conduct by economic role players leads to undesirable effects on growth, the rand and unemployment, which could have been avoided. If business confidence is to rise above its current levels of vulnerability, it is essential that economic role players urgently rally around a common vision of sound business values and economic progress.

Mike Schussler from economists.co.za:

Disappointing to say the least, but with all the bad news around it is not surprising. I expect better growth in the 2nd quarter, however, as the 1st quarter was down – on the technicality of seasonal adjustment gone wrong.

Conclusion

Not very cheery news in these two releases on business sentiment. And with mining and industrial unrest on the rise it may get worse before it gets better.

Tweet of the Day

@Genius_Holmes: The past, present and future walk into a bar. It was tense

An important economic indicator came out today – the Purchasing Managers’ Index, or PMI. It is published by Kagiso Asset Management and gives an insight into the state of the manufacturing sector. The index number for May came in at 50.4 points, unchanged from the previous month. This suggests there is little momentum in this key sector of the South African economy.

Expert views:

Chriosto Luus at Ecoquamnt:

The unchanged PMI for May – against the consensus view of a drop to below the 50 point level – can probably be construed as good news. However, the relatively low and unchanged PMI level shows that the manufacturing sector is still struggling. This is borne out by the fact that the PMI’s business activity and new sales orders indices both lost ground, while the inventory level subcomponent increased.

Abdul Davids of Kagiso Asset Management

Conditions in the manufacturing sector remain tough. The outlook, albeit bleak, is quite mixed with the expected business conditions index posting its second consecutive gain.

Coenraad Bezuidenhout of the Manufacturing Circle:

Manufacturers are holding the fort in tough trading conditions. Kagiso asset management is correct in their assessment that the slow international demand, slowing local demand, and significant cost pressures remain significant challenges. Manufacturing costs are still driven chiefly by rapid, bunched-up administered price (those set by the authorities such as electricity tariffs) increases and the productivity that has not kept apace with salary increases. This leads to unavoidable margin squeeze, especially where the local manufacturer is unable to pass the cost increases on to the consumer, as a result of competition in the domestic environment from unfairly-incentivised imports. A more competitive currency will only aid manufacturing growth significantly if the former can be can be sustained, if we address numerous domestic policy challenges, if demand picks up in the Eurozone and America, if we can secure improved access to Asian and South American markets, and the systemic complexities challenging expansion into Africa receive resolute attention. Whereas manufacturing’s employment outlook remains stable at present, industrial unrest in the upstream sectors of mining and agriculture remains a significant risk.

George Glynos of ETM

The reading suggests that upside traction in the manufacturing sector lacks momentum as aggregate conditions remain tough. Despite a relatively sharp increase seen in employment which added 5.1 points to 47.2, the sub-component still remains below the 50 mark for the sixth consecutive month. Labour market dynamics continue to be of concern with the industry remaining hindered by labour unrest. Upcoming wage negotiations are a significant factor going forward as to the extent of employment growth for the rest of the year. Of the past 53 months, the employment index has been above 50, eight times. Had it not been for the rise in expected business conditions which is a very volatile subcomponent which can also reverse quickly, one suspects that the number would have printed sub-50 just as the non-seasonally adjusted reading has done for the past three readings. May’s PMI reading suggests that the manufacturing sector is still struggling to gain traction despite being above the neutral 50 level. With risks to growth tilted towards the downside, the SARB is expected to maintain an accommodative monetary policy stance. In the months ahead, weaker consumption spending will if anything contribute negatively towards internal demand conditions and consequently weigh on PMI. At the margin, this would offset any effects that a weak ZAR would have on bolstering demand for SA exports.

Conclusion

If the rand stays weak, there should in theory be a boost for our exporters, but overall the economy is limping along and manufacturing is in the doldrums.

Tweet of the Day

Token Geezer (@Token_Geezer): A vegan, an atheist and a reformed ex-smoker walk into a bar. Everyone else in the bar leaves.

The Rand

Have you heard? Jacob Zuma is to become a volunteer firefighter. But instead of a fire engine with a big water reservoir, he is going to drive around in a petrol tanker, using Unleaded 95 to try to douse the flames…. The extent to which the rand’s leap yesterday above (below?) that critical level of 10 to the dollar was caused by Zuma is debatable, but there are a number of factors driving down the rand. So ZA Confidential called on our Panel of Experts to assess the chances of an even weaker rand, and whether this would be such a bad thing…..?

Expert views:

John Cairns at RMB:

The rand is now almost certainly undervalued. History shows that things can still get a lot worse. Remember USD/ZAR got to 13.88 in 2001 and 11.84 in 2008. The extent of this weakness and, more particularly, the speed of the adjustment are still nothing like that seen in 1998, 2001 or 2008. When the rand runs, its moves become erratic, extremely volatile and impossible to predict. To some extent, how far we run is completely random. The market has learnt that the rand always recovers strongly from blowouts. Rational investors use rand weakness as an opportunity to buy, which in turn limits the extent of the fall. Consider that the 2008 move was far less extreme than that of 2001, even though fundamentals were a lot worse. The underlying cyclical backdrop for the rand is terrible. At a time when South Africa is running a massive current account deficit, any upset to financial inflows would have major repercussions. A slowdown would hurt; a complete stop would be disastrous; a reversal would be catastrophic.

Mike Schussler from economists.co.za:

Oh yes, it can get weaker. But I think in the short term (the next month or two) a pull-back is on the cards. World growth is not expected to increase enough (particularly in China) to help commodity prices and therefore commodity exporters are seen as having weaker growth and bigger current account deficits, as commodity prices have all declined by around 10% or more in the last two months. The markets are now also scared that QE 3 is going to end, and hence a "flight to quality" again. Having said that, I think the weaker rand will help exports – at least in the medium term of, say, the next 18 months or so.

Mario Pretorius from Telemasters:

Landing in London with impeccable timing as a reluctant tourist, even the border- control person sneered at my currency. If my currency is the barometer of international sentiment towards ZA’s future, then the world is catching up with local expectations and reality. How many Gupta, Marikana, Nkandla scandals will there be before we face up to the very un-PC reality that the Lady is not Chaste? That the ZA cadre-infiltration has now sapped even SARS’ abilities? That there is no, absolutely NO, prospect of turning around the state socialisation of every resource, every asset and every job as if it is Moscow in 1917? I pity every liberal that peddles blind hope and faith – as if we will wake up tomorrow in a liberal’s paradise from our quicksand revolutionary hell. So ZA is leading the pack in the race to the bottom, where weak currencies will triumph as their exports will soar? Dream on Messrs Gordhan and Manuel. If this is the outcome of the National Planning Commission and its implementation, we will need Gideon Gono here to QE us. What shall we export more of in the downward commodity cycle? Platinum? Ostrich? Exactly.

Craig Pheiffer from Absa Investments:

With the negative sentiment prevailing and wage strikes ongoing, the rand could well get weaker, particularly if we see further US and local bond weakness on top of that (we had big bond outflows on Wednesday). Successfully and peacefully concluded wage negotiations – when and if they come – could well see the rand rally from the weaker levels, though. The big issues remain government’s limited ability to improve the social welfare of the state with an already large budget deficit. On top of the that is the widening current account deficit and those are the issues that the ratings agencies focus on – along with the negative effects of the strike actions (which really just impoverishes more of the populace the longer they are drawn out). The theory is that a weak rand makes our exports more competitive and that’s a good thing that should help reduce the current account deficit. But "compulsory" imports such as oil and capital equipment carry a heftier price tag in rand, and that hurts the deficit. Broader than that, though, a weaker rand is inflationary and that impacts household consumption directly (food and fuel are more expensive for example) and indirectly (potentially through higher interest rates – which also hurts investment). So it doesn’t necessarily follow that a weak rand is the panacea that’s going to reduce the deficit and lift domestic growth prospects.

Russell Lamberti from ETM:

Like a neglected house that looks structurally sturdy until one day it crumbles into a heap, so has been the rand’s slump. The seeds of this crash started being sown in 2010 already, but no house crumbles overnight. The beauty of a (roughly) free-floating currency is that it exposes macroeconomic mismanagement with consummate ease; South Africa has plenty of macroeconomic mismanagement to go around. In the past, when the rand has depreciated so sharply, the Reserve Bank has favoured hiking rates, but the class of 2013 has a low interest rate paradigm, and so interest rate protection for the rand may not be forthcoming in the weeks and months ahead. This does raise the prospect of continued depreciation, even if the currency is becoming cyclically undervalued. When the rand gets into these moods, prediction becomes something of a fools game – but if the past is anything to go by, we may have to brace ourselves for R10.50 or even R11.00 per dollar. Does a weak/weaker rand benefit SA? Not in the least. Some pockets of the economy will undoubtedly benefit, but these benefits are on the whole greatly offset by inflation pressures, rising wage demands, soaring fuel prices, and financial panic. It is no surprise that after two years of steady rand depreciation GDP growth has now slumped to below 1%. If it weakens further, recession beckons.

Chris Hart from Investment Solutions:

The rand remains highly vulnerable to further weakness because:

1) There is a huge external deficit

2) Foreigners have big holdings in both the bond and stock markets

3) Investor sentiment is therefore a bigger factor than normal

4) Investor sentiment is being hammered by strikes, policy uncertainty, slowing growth, and the increasing risk of a credit rating downgrade

The rand could weaken by a further rand or two against the dollar – i.e. to 12 or so – in the short term. At that point, SA assets will look cheap again and capital flows should stabilise and the rand start to recover. Externally, the picture is also bleak. Zero yield, recession, sovereign solvency challenges, so South Africa is in a better position. I would think that by year-end the rand would be recovering back below the 10 level again, based on further deterioration in Europe, and consequent inward capital flows.

Conclusion

There is a lot of uncertainty and whatever else, the floppy rand is now a major talking point…..

Tweet of the Day

Viktor Winetrout, Jr (@Cpin42: The Bible says homosexuality is wrong. I forget the chapter. It’s somewhere between the talking snake and the virgin birth

Tiger Brands Results for 6 Months to March

A brief look at Tiger Brands. The company told analysts this morning that the environment remains challenging – with a constrained consumer and intense competition, and this is not about to change in the short term. The slowdown in consumer spending is going to continue. Rising cost inflation is another worry. Diluted headline earnings per share (heps) were up 4.7% in the half year. Revenue was up 20.6%. They have a portfolio of impressive brands, mainly in the food arena, and are working hard on expansion into Nigeria.

Expert view:

Ron Klipin from SA Stockbrokers:

They face major challenges. They are under pressure as consumers buy value. Then there is Nigeria and their brand portfolio.

Conclusion

With the rand having broken through the 10 to the dollar level this afternoon, the economy is a big worry. People will always need to buy food, but will they trade down to less-Famous but equally Tigerish Brands? We should learn more in the second half of their financial year.

Tweets of the Day

Michael Jordaan @MichaelJordaan: Why does everyone all of a sudden want to have coffee with me? Don’t they know I prefer wine?

Ryan @ryguy_smith: 50 Shades of Grey is actually a story about Brussels’ weather.

Discovery Health media briefing.

Here are some bullet points from today’s Discovery media briefing, which gave some fascinating insights into one of those businesses you love to hate. Nobody likes to pay for private health care, but given the dire state of State facilities, there isn’t a lot of choice. But we were told that members who are most most active in working with Discovery’s Vitality scheme can live 8 years longer. A staggering number.

Dr Jonathan Broomberg, CEO of Discovery Health:

– Tariffs are closely linked to CPI inflation levels and are not the only factor in medical inflation
– There will be a Competition inquiry in September, and much comment has identified pricing as a key issue, but in Discovery’s view, utilisation is a bigger issue.
– “High tech creep” means the average hospital admission is increasing in cost
– 350 000 to 400 000 rand for some new types of aortic valve surgery for the elderly – can give 5 or 10 years of good life
– Growth of chronic illness adds to the burden of disease – significantly higher in ZA compared to many countries > – High rates of TB in ZA and of infant mortality. As well as HIV/AIDS
– An awareness of wellness is leading to more screening. Doctors are picking things up earlier
– Inflation is not all the fault of people who are charging too much. There are other issues
– In healthcare you can cut costs and improve quality at the same time, if you eliminate waste. US studies suggest 21% wastage in private healthcare
– 254 million rand recovered in fraud from Discovery members. One way is claims being made for one person on another member’s card
– Big move to generics, with spend on generics exceeding spend on brands in the chronic environment
– Vitality helps to identify people at risk. Once diagnosed there is disease management
– There is a significant increase in numbers of high-cost patients. 2 percent of members account for 50 % of expenditure
– We save money on patient care by ensuring better coordination among care givers, with bette team work
– The most active Vitality members live longer – as much as 8 years of life expectancy
– There is a shortage of doctors inZA. Ned to train 2400 a year to stay at current levels, but graduate levels of 1200 a year for last 2 decades
– Technology can change the way doctors can operate. Doctors have electronic access to health records, details of drugs being prescribed and so on
– You can read brochures and watch videos on the Discovery smartphone app
– Diabetic data from glucose meters can be sent to Discovery and can save lives and reduce the numbers of hospital admissions
– In the US there is an equivalent of Trip Advisor for doctors. This revolution in data will help healthcare consumers.

Dr Craig Nossel, Head of Vitality Wellness:

– 60 percent of deaths globally are related to chronic diseases
– It’s not just about mortality, it’s about how many quality years we are missing
– These are critical issues about the economic development of our country
– “If we can get just people to exercise, stop smoking and eat a healthy diet, we are there. Smoking and obesity are the two big issues.”
– Health promotion has limited impact, the shift is to behavioral economics
– With wellness you don’t get the benefit today. The benefits are down the line
– By giving people a payment to stop smoking, you increase the numbers who stop
– In ZA we have a 20 to 21 percent rate of smoking among adolescents, which is the highest rate in Africa
– “We are less active and we are consuming more, and consuming more of the wrong things.”
– “If you discount healthy food by up to 25%, people will buy more of it
– The extent of diseases is big, the impact is big, so we need big remedies
– A lot of what has been done in South Africa is having a broader impact”

Scary GDP Number

GDP grew by just 0.9% in the first quarter of this year – a scary number. Most experts believe that growth needs to be in the order of 6% for significant job growth to occur. At these levels we are more likely to be destroying jobs.

Expert views:

Goolam Ballim from Standard Bank

South Africa continues to cement its relative underperformance among emerging economies. The confluence of tepid external demand, fragile local consumer fundamentals and constrained policy stimulus has contributed to marked, sustained momentum loss in South Africa. One notable consequence of the generalised economic weakness will be further restlessness among workers, which in itself is retarding of economic activity.

Loane Sharp from Adcorp

According to official GDP figures released today, economic activity in South Africa stalled in the first quarter of 2013. This presents a bleak picture for the labour market. According to Adcorp’s modelling, the economy needs to grow between 4% and 5% per annum just to absorb all the new entrants entering the labour market from the secondary and tertiary education sectors in search of work each year. The economy needs to grow 8%-9% to make substantial inroads into the country’s formal sector unemployment problem. However, at the same time, there are good reasons to believe that Statistics SA is not on top of its game in terms of recording the full scope and extent of economic activity. Based on cash in use in the informal economy, GDP is, in fact, 15.7% – bigger than Statistics SA’s figures suggest. Based on electricity usage patterns, the economy is 10.7% larger than the official figures suggest. There are thus two realities in the labour market: a troubled and shrinking formal sector, where employment (at least in the private sector) is falling; and a vibrant and growing informal sector, where employment (broadly defined to include all available means of obtaining a regular income) is rising sharply. Unless labour laws and income taxes (as the primary causes of growth of the informal sector) are revisited, the economy and labour market will continue to be subject to powerful forces of informalisation.

Shadow Minister of Finance Tim Harris

GDP growth statistics released today by Stats SA reveal that South Africa’s economic growth has collapsed to 0.9% in the first quarter of 2013. This means we are completely out-of-step with growth rates in developing economies like Thailand (5,4%), Indonesia (6%) and Chile (4,1%). In fact, we are now growing slower than several embattled first world economies like the United States (1,8%) and Canada (1,1%). This is the strongest indication yet that this government has the wrong economic policies and lacks the leadership to implement reforms that will grow the economy and create the jobs South Africa needs. President Zuma’s government has only taken us from one scandal to the next, when it should have been putting in place growth-oriented policies such as those set out in the DA’s Plan for Growth and Jobs. The current economic performance of developing countries around the world shows that it is possible to achieve high growth rates today. African countries in particular are expected to achieve exceptionally high growth this year. According to the African Economic Outlook Report Ghana will grow at 7.1%, Mozambique at 7.4% and Zambia at 7.3% in 2013. We are confident that, with the right policies and strong leadership, South Africa has the potential to achieve similar growth rates. The DA’s top priorities remain growing the economy and creating jobs. The GDP figures released today are a reminder of how this government is failing to prioritise either of these. Next year’s elections will allow South Africans an opportunity to show their disappointment with this government by voting for a party with a plan to grow the economy and create the jobs needed to undo the legacy of Apartheid.

Coenraad Bezuidenhout of the Manufacturing Circle

The manufacturing sector’s minus 1.2% contribution to GDP growth confirms that although a more competitive rand presented some opportunities for retaining their ground, a cocktail of high domestic costs, supply constraints and low global demand are still holding the sector back.While domestic costs remain high due to bunched-up administered price increases and wage increases which have not been matched by productivity improvements, supply constraints have been driven by steel shortages, power outages, water scarcity, the emergency shutdown of a liquefied petroleum gas refinery and a shortage of tin plates. Manufacturers also reported shortages of high grade coal, insufficient inbound and outbound railway services, outbound harbour capacity and service delivery constraints, as well as inadequate foundry capacity. While the rand has weakened even further in the second quarter, any benefit to manufacturing growth will remain suppressed as long as domestic cost pressures and supply constraints remain unadressed. In light of the latest warnings on reserve margins by Eskom, the situation is clearly deserving of attention by labour, business and government.

Dawie Roodt from the Efficient Group:

The numbers were a real shocker; much lower than what we expected. It probably means that GDP for 2013 could come in below 2% – less than population growth. This is a recession for all practical purposes. Furthermore, manufacturing was the main drag on the figures, contracting by 7.9% – and it’s the only sector that can really create a significant numbers of jobs. Unemployment will remain high and may even increase further.

Ettienne Le Roux of RMB:

The 0.9% quarter on quarter, annualised, GDP number was much weaker than our forecast (2.2%) and the market consensus projection of 1.6% (Reuters). The negative surprises: contraction in real value-add was deeper than anticipated in agriculture, manufacturing and utilities. Modest growth accelerations in the trade, transport and finance sectors were in line with projections. Elsewhere, growth in employee compensation moderated to 7.4% y/y, from 9.1% in 4Q12 and 8% in 3Q12. Gains in the gross operating surplus (a macroeconomic measure of companies’ earnings) improved marginally, but remains weak at 6% y/y in 1Q13. Both these outcomes suggest the weakening trend in consumer (as well as private sector fixed investment) spending continued in 1Q13. For confirmation we await the release of the SARB Quarterly Bulletin later this month.

As for the outlook: today’s number implies the economy started the year on a much weaker footing than initially anticipated. What’s more, prospects are poor: the 1Q13 rebound in mining is most unlikely to last (labour unrest, strike action etc), while manufacturing output should remain under pressure, despite the weaker currency (tepid global growth, potential electricity shortages and slowing consumer expenditure). The 1Q13 shock forced us to lower our full-year 2013 GDP growth estimate from 2.4% to +-2%. In the context of low (if not falling) consumer and business confidence, as well as a weak (if not weakening) external environment, the risks to our new GDP forecast are skewed to the downside. We maintain our view of another 50 basis point interest rate cut in 3Q13. Slower growth also poses a threat to the government’s budget position (The National Treasury still expects GDP to expand by 2.7% this year).

Conclusion

This is a worrying growth number, suggesting a virtually stagnant economy. The Reserve Bank’s Monetary Policy Committee declined to reduce interest rates last week. Armed with today’s GDP number, they might have come to a different conclusion.

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Famous Brands Annual Results to Feb 2013?

Famous Brands claimed in its results announcement that its performance had been “impressive”. Revenue was up 17%, headlines earnings a share (heps) rose by 22%, and the dividend was boosted by 25%? This food business includes several well-known franchises such as Steers, Whimpy, Mugg & Bean, Debonair’s Pizza and tashas. It operates in South Africa, and beyond, and also manufactures many inputs for its restaurants. It is now making its own mozzarella cheese in Coega – not sure what the Italians think of that? It is planning new tashas outlets in the plush Cape Town Waterfront and probably in Sandton’s Mandela Square, and it is clearly determined to grow aggressively in Africa. So what do our experts think of the group’s performance?

Expert views

1. Chris Gilmour of ABSA Investments

This was another outstanding result from SA’s biggest quick service restaurant chain. Although the local economic background didn’t help, a host of new acquisitions and a strong contribution from the small but growing rest-of-Africa segment helped to produce this strong result. Two new acquisitions – Bread basket and Turn ‘n Tender – kick in from the new financial year. While it is getting tougher to make meaningful acquisitions due to a) Famous Brands’ large size and b) the difficulty in finding good new targets, the group will undoubtedly manage to find something to which they can add value in the coming year, and beyond. The Wimpy chain in the UK continues to under-perform, but it is not proving to be a distraction to management – and the group plans to open its first Steers outlet in Clapham in London very shortly. African operations should continue to grow strongly into the future. This is an exceptionally well-managed company at all levels and, while expensive, deserves its premium rating on the JSE.

2. Independent Analyst Ian Cruickshanks

With heps up 22% on the year, on revenue up 17%, this points to improved operating efficiencies. The company continues the strong growth trend of the past 8 years, as they remain close to their franchisees and their customers. Centralised manufacturing and marketing have led to improved operating efficiencies. Location is vital to this business and they are getting it right as they remain strategically well- positioned for SA’s fast growing urbanisation. Outlets continue to offer value for money compared to competitors. They are already operating in 15 countries in Africa, and this is a high growth area.

3. Ron Klipin from SA Stockbrokers

Logistics, manufacturing and franchising are three profit streams which compliment and supplement each other. They are planning African expansion to tie-up with Shoprite and other developers in Africa, and this has major potential for expansion. They go top to bottom – with offerings for all income groups. I expect the revamp of Mandela square has potential for a major tashas outlet, as well as in the Cape Town Waterfront.

4. Lavan Gopaul from 28e.co.za

A further 55 stores across Africa and entry into India and the UK consolidates a commitment to international expansion. Completion of the acquisition of Fego, Europa, Bread Basket and Turn n Tender affirms their wide network of food brands for the wealthier income groups. The Coega cheese joint-venture helps build a vertical supply chain. Famous Brands is a success story – of growth by international expansion, acquisition, organic growth and right-sizing vertical inputs such as cheese. The fast food giant looks set to deliver healthy earnings growth in the next report.

Conclusion

This is an impressive business, cutting throats skilfully in a cutthroat industry. Hedderwick told analysts that it has been a year of extreme margin pressure in a very competitive environment. Famous Brands has exceeded its 4-year vision of doubling the size of its business. While the opening of a new outlet in Dubai in a few months time is impressive, the Rest of Africa is the real expansion zone. It is happy to trade in just 15 African countries and plans a narrow focus in terms of geography and in terms of brand portfolio. The Rest of Africa now accounts for 7% of its business, and it grew 44.7% in the Rest of Africa in the past year. The emergence of US fast food chain Burger King might be a concern. “We are not petrified,” said Hedderwick. “We welcome competition. If the burger category grows, we will grow with it.”

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