If you thought you had seen it all during 2006-2008, there is yet more bad news to be absorbed and it should especially shape 4Q2008 and 1H2009.
Global industrial production is currently plunging at a double-digit pace, deepening the recession taking hold in the US, Europe and Japan, elevating it to the status of ‘most severe since WW2’. Brace yourself.
This is the fifth big shock coming ashore for us, after the four shocks so far marking 2006-2008.
These initial shocks were the domestic overheating and interest rate tightening of 2006-2007, the Eskom electricity outage of 1Q2008, the great commodity price inflation of 2Q2008, and the great commodity price implosion and accompanying risk aversion of 3Q2008 and 4Q2008 driven by the global financial crisis.
The combined effect of these developments has caused our GDP growth to decline from 5% in 2004-2007 to 3% in 3Q2008 (year-on-year).
The cumulative loss of growth momentum still being imparted by these four shocks could possibly make 4Q2008 the first negative GDP quarter (with year-on-year growth of only some 1%-1.5%).
Excluding agriculture, the change in real GDP for 3Q2008 was already -0.1% annualised. With the maize harvest revised higher to 12.7mt, this good news will support the overall growth picture a little longer, but probably not indefinitely.
The real question pertains to 1H2009. We will probably still see the aftereffects of the early shocks further slowing our GDP growth down. But we will also have to absorb this fifth shock, with even the fundamentally undervalued Rand unlikely providing enough protection to shield us fully.
This fifth shock will likely result in declining export volumes as deepening global recessionary conditions bite.
The fallout from the global financial crisis has abruptly hit the real economies of the US, Europe, Japan, but also Australasia, UK, Canada, China, India, South East Asia (Taiwan, Singapore and Korea especially), Iceland and Eastern Europe.
Regions such as the Persian Gulf (Dubai), Russia and OPEC members in Latin America and North Africa are also feeling the heat. The growth loss is global and still mounting, and in certain instances severe. There now remain precious few parts of the global economy that won’t be feeling its incapacitating effects.
The main pain seems to be located in consumer markets as households cut back their spending drastically. US consumers, for instance, are now projected to cyclically restore their savings level to at least 5% of income shortly (a massive reversal, diverting resources away from demand, output and imports). But the belt tightening isn’t limited to households in select rich countries.
Global businesses, not only in the US, Europe and the UK, appear to be engaged in an aggressive defensive retreat.
There appear to be three legs to the phenomenon. Cut capex budgets (reflecting uncertain sales outlook, with capital drying up). Cut bloated inventory positions (as the sales outlook is deteriorating, but also to unlock increasingly scarce capital). And cut labour forces (temporary staff first, but already plenty evidence of fulltime layoffs as well).
US unemployment has already increased from a cyclical low of 4% to 6.5% today and is set to jump to nearer 8.5%-10% by late 2009. Unemployment in the Eurozone has so far this year only increased from 7.2% to 7.7%, but there’s more to come. Unemployment will also increase in other parts of the world, reminiscent of the dark 1970s.
In various major global industrial pipelines (steel, chemicals, motor vehicles, shipbuilding, computer chips) there is evidence of abrupt, startling deteriorations in market conditions.
There are apocalyptic stories about blue chip global companies having no sales in the 3Q2008, or not this October, or otherwise experiencing at least large order of magnitude declines (-15%) in off-take. In some instances this is felt across the board, in large parts of the world.
There are announcements of global production being idled for two weeks (certain car producers) or 25% of production being idled for two months (large chemical producers) or order books being shrunk, in some instances drastically, due to cancellations (ships, construction, aircraft).
It isn’t as if the world hasn’t been through something like this before. It happened twice in the 1970s. Only this seems to be more abrupt and bigger.
A great fear seems to have descended, already for long reflected in global financial services and real estate, but now also extending to households (record low US consumer confidence levels), and this now spilling over to especially industrial producers worldwide.
The credit starvation in effect since about August this year seems to be one important instigator, in that liquidity hasn’t only dried up for financial companies, but also increasingly for industrial ones of all types.
Liquidity is scarce, is getting very expensive and is key to survival. And thus one sees capex cutbacks because the capital access is dwindling. But even more drastically there starts to be evidence of dishoarding of illiquid assets such as inventories as companies seek cash.
The hit to global GDP in 4Q2008 and 1Q2009 promises to be of historic proportions, possibly extending to 2Q2009.
Not only are the record low interest rates still pushing on a string (the financial folk are hoarding capital, too, still constraining the credit granting process), but the enormous fiscal injections are going to be relatively late (too late by a couple of months).
Many US households have started a Long March to Freedom (away from credit into renewed saving, even only cyclically, though there could be more permanent consequences) while many companies are experiencing a worsening pinch.
Thus there is a great change underway.
Some South African businesses have already seen and felt this hurricane storming ashore, though many of us apparently remain relatively unaware of its full fury.
We are hearing numbers and corporate announcements being made and are left to ponder the full context.
Domestic car sales down 20% for the second year in a row, with a further 15% to go next year, as well as car exports probably shrinking by 15%-20%.
Steel output being lowered by 30%.
Mining ventures becoming dubious as prices drop too low. The electricity shortage is curtailing production, but it seems to be going much wider than that now, at least in specific instances.
Residential building plans are down by 35% in real terms. Brick demand is down by 30%. Overall cement sales are declining, especially noticeable in residential building activity, though good support is still forthcoming from non-residential building activity and civil engineering construction, a typical cyclical pattern for us according to Johan Snyman of MFA.
Petrol demand is already down by some 10% year-on-year, even if a third of that is probably due to the increased idled stock sitting on motor dealers’ forecourts.
But is all of this the tip of an iceberg? Is most of it the cumulative consequence of three years of shocks and forced adjustment thereto, but with the present global industrial interruption still to be felt fully by us?
Besides seeing household consumption dwindling to a halt, and seeing parts of private fixed investment falling away or under pressure (residential building, non-residential building, commercial vehicles), there is likely still more adjustment ahead.
A larger slice of private fixed investment (especially machinery and equipment, over 40% of the total), may see more cutbacks in the coming year.
In South Africa, too, we may see two or three quarters of substantial destocking taking hold, even as export volumes are also under pressure from shrinking global industrial and consumer demand.
Through mid-2009, and possibly through yearend 2009, our growth condition will likely be under siege from all these many sources, as much the shocks that were absorbed during 2006-2008 as the fallout from the global recession that may now increasingly show its evidence here as well.
Lower oil prices, weaker Rand, bigger budget deficits and lower interest rates will prove important counters to the cascading weakness underway, but it won’t be able to prevent all of it. Brace yourself.
This Article is written by:
Cees Bruggemans, The Chief Economist of First National Bank.
