Industry Insight – The Train to Recovery
The global buzz word some seven months ago was "Economic Stimulus" and now, as we enter spring, it has been replaced with "Green Shoots". The description refers to the positive economic indices starting to emerge in the aftermath of the worst economic crisis since the Great Depression in the 1930's.
However, the train to recovery has arrived at the station and the massive economic steam engine is taking stock of its depleted energy levels after the long upswing we enjoyed before the recession. As with most developing countries, South Africa will take its cue from the developed world, specifically from our major trading partners in Europe and the US.
Last week we attended a function at which Dr. Cees Bruggemans, Chief Economist at FNB, was the keynote speaker. We would like to share some of the aspects that stood out in his speech and our interpretation thereof.
The question most of us cannot answer is: "How did this happen?" Globally, at the time, there were many threatening economic conditions just waiting for the right environment in which to germinate. When Lehman Brothers collapsed in November last year, fuelled by enormous media coverage, the greatest monsters revealed themselves - Fear and Panic. Credit extension dried up, consumer spending was strangled, inventory levels dropped and production output fell to record lows, amounting to thousands of job losses. No country was shielded from the crisis.
Fortunately, central governments stepped up to the plate to restore some stability in the financial system. The big economic steam engine made it to the station, battered but not defeated, and ready to be repaired to take on new fuel supplies for the long journey to recovery ahead.
This is evident from the recent positive figures in the US. The US economy has expanded by 1, 5%, the first time since January 2008, indicating that consumer demand is rising. Inventories depleted by cut-backs are also starting to improve as the demand for raw materials begins to rise. Vehicle sales and property sales are increasing. The US unemployment figure is testing the 10% mark, but indications are that it is stabilising and will drop to between 4-5% in time to come. This will bring the consumer back to the market. This is crucial, since the US economy is largely driven by consumer spending and it constitutes 20% of the world economy. Ultimately it will lead to increased demand for export products from South Africa.
What about South Africa? Do we have a train at all or did Eskom leave our train stranded again?
The passing of building plans in South Africa are at a 40-year low, signalling that housing stock (inventory) will be in short supply in the future. Remember, life goes on and every year tens of thousands of people enter the job market with aspirations of being a first time homeowner or buying a car. The demand for housing will continue to increase, reaching a peak in 2012, with a vibrant and active property market. This should also have a positive effect on rental demand, as the available buy-to-let supply is rapidly being absorbed.
South African banks are the key to getting the property train out of the station. Their credit criteria and appetite for business must improve. Fortunately, we have seen the banks are starting to ease their lending criteria, but caution remains the name of the game. According to statistics released by Ooba, home loan approvals have increased by 36% from April to August 2009. Application volumes have also increased steadily since May 2009.
Our own "green shoots" are also emerging from the ashes after the devastating fire that swept through our economy. Interest rates and inflation have set the stage for positive economic growth and the GDP growth for 2009 is expected to be 1%. Although we were spoilt with 5% growth up until two years ago we have averaged an economic growth rate of 3,5% per year since South Africa started to keep statistics in the mid 40's. The possibility of continuing on this track is very good, despite some cyclical movements and adjustments. History tends to repeat itself.
The SARB is set on inflation targeting and it should be close to the 6% target in the first quarter of 2010. Inflation is currently just below the 7% mark and, in our opinion, most of the anticipated cost increases such as petrol and electricity have already been taken into consideration, mentally anyway, since the market is driven by sentiment.
The rand is relatively stable at the current level of just below R8,00 to the dollar and this signals the confidence foreign investors have in the South African commodity and equity (stock) markets. It also explains why our recovery is expected to be slower than the rest of the world: demand for products from producing countries with a lower (cheaper) cost structure, due to a more favourable exchange rate to the dollar, will benefit before we do.
Now repaired, refuelled and with steam already hissing from the valves, our economic steam train will depart somewhat slowly from the station. But, assuredly, it will gather momentum and pick up speed by the first quarter of 2010. Don't miss the train to recovery, and, once departed, be sure to be on it...
The power of the mind is an astounding phenomenon. We tend to forget the bad times quickly, and just as quickly, fear and panic make way for hope and positive anticipation. The only thing we need to do is: something... anything, it is always better than nothing.
Courtesy: Ian Deyzel, CEO - www.treoc.com