Not a good day so far. Three less than encouraging bits of economic news and a speech from the Central Bank Governor suggesting new interest rate rises. Stats SA tells us that in April, manufacturing production was down by 1.5% year-on-year. Meanwhile, the RMB-sponsored Business Confidence Index, which is compiled by the Bureau for Economic Research, remains unchanged at 41 points in the second Quarter of 2014 – meaning close to 60% of respondents are unhappy with prevailing business conditions. And earlier today, the Adcorp Employment Index for May landed, showing job losses of just under 27 000. Add to this a speech by Governor Gill Marcus warning (according to the brief reports we have seen – our invitation was lost in the post) of further interest rises. Whether or not the economy is in recession, there is not a lot to crow about. A few comments on sections of the data:
Annabel Bishop of Investec on Business Confidence:
The RMB/BER business confidence index remained at 41 in Q2.14, signalling 59% of respondents (senior executives) found business conditions unsatisfactory. This very poor reading is concomitant with an economy at risk of recession (the Q1.14 reading was also 41). Business confidence gives a good leading indication of the likelihood of expansion or contraction in the economy, and so the impact on private sector employment and fixed investment. India and China, with populations around a billion each, and imperatives to absorb hundreds of millions into the formal sector’s economic net, have found great success with freeing up their economies and privatization of State assets. SA instead is targeting increased state intervention, custodian ownership and control of the economy, with potential erosion of private sector property rights detailed in the Promotion and Protection of Investment Bill of 2013.
Ettienne Le Roux from RMB on Business Confidence:
Special factors continue to distort the data, and so makes it difficult to distinguish between noise and real underlying trends. Still, there is an element of weakness to the economy that goes beyond such factors. While the impact of electricity shortages, supply disruptions in the platinum sector and their spill-over effects to manufacturing cannot be denied, there is also a more fundamental problem in constrained consumer demand. As such, the RMB/BER BCI remaining unchanged at a low 41 points may well be reflective of the economy already being in a technical recession (defined as two consecutive quarters of negative GDP growth). Yet, for the year as a whole, real GDP should still expand by around 1.5% to 2%. If the services sector, coupled with agriculture and construction more or less maintain their first quarter growth momentum, a return to more normal conditions in the platinum industry would give the economy a kicker in the second half of the year.
Peter Attard Montalto from Nomura on the Governor’s Speech:
Overall we would not interpret recent speeches by the governor and others as dovish but as still hawkish within the context of sensitivity around recent low growth prints. The SARB is clearly having to battle a market that doesn’t totally believe it is in a hiking cycle (you can only be on hold in a hiking cycle for so long). It also has to reassure a domestic constituency that sees such weak growth and needs to be persuaded of the need to hike rates while at the same time promoting a SARB that is still sensitive to the political dynamics of growth. As such, we keep our July hike view (+50bp) but believe it will be very much dependent on upcoming CPI prints. Indeed, the Governor’s speech this morning stated explicitly that the SARB is watching for the dynamics around second-round effects into core inflation. We believe there is a group within the MPC who understands they cannot hold off hiking too long and the upcoming expected very high CPI prints will be an excuse to quash any second-round effect and wage round risks early on. We expect this argument to gain a majority. Downside surprises in those CPI prints, however, would complicate matters yet further.
Nedbank Economic Unit on the Manufacturing numbers:
Manufacturing production declined by less than expected, with total output falling by 1.5 % y-o-y in April off the high base established in the same month last year caused by a deviation from normal seasonal patterns around the timing of public holidays in 2013. The market expected a drop in output of 5.5 % y-o-y due to weak underlying conditions and base considerations. Manufacturing production rose by 3.5 % on a seasonally adjusted basis over the month but fell by 1.8 % in the three months to April compared with the previous three months. The main contributors to the annual decline was lower output in the ‘motor vehicles, parts and accessories and other transport equipment’ as well as ‘petroleum, chemical products, rubber and plastics’ industries. According to the Kagiso PMI for May underlying trading conditions not only remained weak but deteriorated further in May. However, the weaker rand and stronger global demand are still expected to lift production and exports in the second half of the year. Growth rates for 2014 may also be enhanced by the low base created in the strike-inflicted second half of 2013. However, considerable downside risks remain given rising production costs, uncertain and insufficient power supply, other infrastructure constraints and the strained relationship with labour. So far there is little evidence of any significant pickup in economic activity early in the second quarter. There is also still no end to the strikes at the platinum mines. This will probably result in another disappointing outcome for GDP in the second quarter. Despite this, with inflation rising and the rand still vulnerable we anticipate mild tightening towards year end. More significant hikes are likely in the second half of 2015 once international interest rates start trending higher.
Adcorp’s Loane Sharp on the Employment Index:
South African employment remains disheartening, primarily because permanent work continues to decline (by 54,184 during May). Employment in non-permanent work, however, was sharply up. Informal employment grew by 8,591, temporary work grew by 27,250 and agency work grew by 4,555 during the month. Overall, the knock-on effect of declining permanent work and rising non-permanent work resulted in a total loss of 26,934 jobs. Significant job losses were observed in manufacturing (3,000), financial services (5,000) and transport and communications (5,000). Only the public sector created jobs during the month, amounting to 4,000 in government and 4,000 in state-owned enterprises. Among occupations, only professional occupations (professionals and management) created jobs during the month (17,000).
Conclusion:
More bad economic data and a gloomy Governor. There is a question mark over whether we are now in a recession, but consensus seems pretty solid on the likelihood of future interest rate hikes. The only question seems to be over the timing of this……
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