SA 2016 Inward Focus

Six years out of seven on average in the US economy, (according to ex-Fed chair Alan Greenspan, a practiced observer of things practical), the forces of growth prevail. In the seventh year these don’t so much rest as go on the backfoot, to the point of withdrawal (recession) or even at very odd occasions in modern times of derailment (depression). By Cees Bruggemans

South Africa today is very much into such defensive withdrawal, forced upon her by many things, as much the global economy and Mother Nature as from her own free choice in terms of how she manages herself. How low can she blow, and for how long could it last, before the turn is upon us?

In SA, passed mid-2010s decade now and into the final innings of the Zuma era (even if it hasn’t all been cricket…), the forces of growth are few indeed (though they can still be found at micro level, with new technology being introduced, new businesses started, and in select instances personal advancement recognised and rewarded).

These few growth shoots, though, are put in the shade by drought and terms of trade shocks, inventory hiccups, trade and investment cycle retardation, durable household goods purchase postponement, and income losses associated with shrinking output, business failings and job losses.

All of it under the aegis of an overarching political cycle steadily losing its way over decades, best captured as the Era of Nationalism, so far nearly 70 years old and counting (in some respects a much older, costlier phenomenon stretching back at least 100-120 years in modern times, and possible much more into even more distant colonial hazes, depending on who is doing the counting).

Thus 2016 is defensive, as we take (another) step back, regroup, and aim to survive for the longer haul. How bad can it get, and where’s the turn, back to expansion? Even with so many demoralized, beaten troops, many of whom seem to have given up all hope (a typical reality during extensive disorderly retreats).

The thing to recognise is that Greenspan’s comment referred mainly to cyclical volatility inviting episodic regrouping pullbacks of a temporary nature (ending in recession and then back ere long to revival) rather than enduring structural onslaughts.

The first reality for us to face up to is the very size, duration and corrosive nature of many of the forces arraigned against us at present. These are mostly not just short-term hiccups we need to endure. Bigger stuff by far is playing out.

The terms-of-trade shock (export prices in active decline and falling relative to import prices, meaning we have to pay the world much more of our own output for the imports we require, impoverishing us) has been aggressively underway since 2011. With the world economy stabilizing, and more growth materialising even as commodity oversupply is corrected, this year may conceivably see the end of this massive 2011-2016 global adjustment penalising us.

But as the terms-of-trade shock wanes (China willing, for it all mostly turns on her internal dynamics, as well as global supply rationalization), we are running headlong into a far worse external shock (extensive, multi-year drought).

Grain SA last week estimated the maize crop this season at 5mt, half the 10mt of last year, itself a third off the 14.5mt of the year before. And going from a 2mt export to a 5mt import situation, if the public infrastructure can handle it (which it probably won’t, in which case greater reliance on private interests, only just short of famine conditions in places).

The regressive influences of these mining and agricultural impacts are felt in reduced activity in parts of industry, too, exports struggling along with wider job losses and household disposable income.

It creates deepening household and business anxiety, registered in falling BER surveyed confidence levels (increasingly deep into negative territory), reminding of recession pullbacks. This in turn invites negative inventory cycle effects (as overstocking by retail, wholesale and motor trade and caution in industry invites pullbacks). Growing household anxiety invites postponement of durable good replacement, with car, furniture and appliance replacement cycles now steadily lengthening (again reminding of recessionary conditions).

To this we must add investment cycle retardation as businesses lose the faith, disturbed by the clashing confusing policy paradigms, instead prioritising their overseas interests in better performing parts.

Many of these internal forces have been long-running, never fully recovering from the 2008/09 recession and the onset of the Zuma presidency, steadily weakening ere long, creating the impression of an arrested business cycle upswing even before properly getting off the ground in 2010, and by 2014/15 progressively going negative. First and foremost in the motor trade, and in mining and agriculture, but then in stages mimicked in parts of other sectors as defensiveness gained the upper hand.

To keep talking about growth in 2016 while under siege from these many forces is somewhat unreal. It is true that the public sector, the financial and business services sector, and the trade sectors are big (over half GDP), and a moderating influence on output, employment and household spending.

But we find prospects deteriorating in construction and the building trades, and transport is also struggling. The weakness appears to be steadily widening and deepening.

Despite therefore lingering resilience, especially in the large services sectors, and not every business or household giving way, the balance of forces appears to be marshaling on the side of weakness a.k.a. Recession.

It remaining a toss-up identifying when it started. But if it looks, sounds and smells like one, we are probably already in it, even if 4Q15 may still have been positive. But that now is ancient history as we should focus on 1Q16 and beyond.

As to how long a SA recession could last, the terms-of-trade (export prices vs import prices) may start stabilizing from later this year. The massive Rand decline should be a stimulant to redirect business efforts, in displacing imports and creating new export potential.

But will it? There will be some such effort, but businesses too far weakened, or otherwise put off by political concerns?

The drought may not be a fleeting phenomenon, instead being a multiple year reality. That would be extremely corrosive of domestic business conditions. To which we must still add the political cycle playing out, not a short term affair, with any new (unproven) leadership still some years away (though some hoping for the best).

Any 2016 recession is unlikely to be shallow or short. Instead, one would expect going by the balance of forces a deep and prolonged hit. Perhaps not as vicious as experienced by Brazil or Russia, given their worse structurals, but still decidedly severe.

We should no longer talk of 1%-2% growth in 2016. Non-farm SA GDP in the first three quarters of 2015 was still +1.8%, but rapidly losing forward momentum (the Standard Bank Purchasing Managers Index for December for the broader economy falling back to 49), the year 2015 overall being closer to +1.5% for non-farm and total GDP growth below 1.3%. That will probably slow further into 2016, to which must be added the full brunt of the drought impact.

The economy in 2016 therefore feels much more like -1% to 0% overall, even if non-farm GDP could still do 0% to +1%. Better than Brazil or Russia, but certainly no cigar.

The drought will likely put us over the top into recession, but there will be many supporting actors repressing us in 2016. Recovery lies beyond a distant horizon.