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Short Note                                                                              2 March 2016

Running on petrol fumes 

by Cees Bruggemans          words 750

It is getting to be thin gruel indeed. The 4Q15 tells us the SA economy is in deep trouble in places, while having little momentum left in others and that little is now steadily being cut off. The sense of drifting into recession this year is a strong one.

Meanwhile, our markets are a playball of global emotions (down in the dumps the one moment, recuperating the next) and local political twists & turns. Makes for substantial volatility, and tail scenarios (very bad, potentially worsening the Rand undershoot, as well as good clawback potential). Hellish on the nerves.


Deep into recession are agriculture (recording its third negative quarter in 4Q15 at -14% yoy) and the motor trade (Feb16 some -8% yoy, going down since mid-2013, with the prospect this year -10%).

Mining output 4Q15 was -0.6% yoy, but with the unhappy prospect of continuing downside to iron ore exporting, mine rationalisation generally and labour union wage negotiations capable of interrupting output later this year.

Manufacturing output has for 12 quarters (THREE years) been drifting in and out of near recession, one quarter positive, next quarter negative. The latest (4Q15) quarter was another negative one at -0.8% yoy. Not obvious what can keep this drifting hulk afloat much longer.

Electricity generation in recession, with 4Q15 output -2.9% yoy, and possibly still going lower as consumers respond negatively to excessive tariff increases cumulatively well above inflation, and weak economic activity bites into the power intensive parts of primary and secondary sectors.

Retail sales may still have been fairly robust into Christmas, but was that the last extra bit of support coming from last year’s big public sector wage increase and the low petrol/diesel prices pulling inflation lower and enhancing household real purchasing power? That is fading rapidly now, with tax & interest rate increases eroding real disposable income, the public sector applying a job freeze (indeed in many instances not replacing what falls vacant) and large parts of the private sector also reducing jobs.

More weakness can therefore be expected throughout the services spectrum, affecting demand as much as output. It puts a question mark behind any growth projections over 1% this year, making it much more likely to skim the zero line.

Such growth weakness isn't good for our market profile, warned by rating agencies to up our game even as our politics gets ever more destructive, with the finance minister trying to improve our fiscal finances.

Though the budget offered a credible framework for lowering the deficit through 2018 to 2.4% of GDP, arresting the national debt spiral, this was done within an unchanged larger policy paradigm, it not being entirely clear who would be delivering on wage bill and procurement savings of R50bn and turning around the governance and performance of many State Owned Enterprises.

Such questions creates more Rand weakness bias in the short term, though any generational regime change in favour of genuine political reformers who could see the struggle paradigm recast and growth getting a much better hearing, in which case our market acceptance could experience euphoric rerating and see rather substantial Rand clawback (also reflected in equities and bonds).

Thus our local doings make for extreme scenarios through 2016-2017 rather than quiet middle-ground stuff. In the meanwhile, we are also subjected to ever complex global cross-currents.

Markets question US recession downside (though data doesn't bear them out), with exactly what kind of President commander in chief next year?

Markets question the viability of central banks continuing with bond buying (sensing reduced returns), some going ever deeper into negative interest rates (fearing negative hits to banks), yet central banks preferring to ignore such sniping.

There remain questions about Chinese growth downside, Yuan depreciation intentions and banking destabilization potential.

Europe increasingly looks a very loose arrangement, with refugee strains and a Brexit risk looming in June.

These and other strains, especially out of the commodity complex, create complex influences, at times pummeling risky EM currencies like the Rand, while at other times giving lift to risky assets.

This widens the Rand risk envelope this year considerable. We are no longer just straddling 16:$, but potentially are moving in a 12-20:$ range, with the outer reaches quickly reached, depending on how the news breaks.

Makes it very difficult for SARB to steer a steady course with interest rates. Probably taking a leaf out of the Yellen book. Raising rates very gradually, at times standing back and taking stock. One more Fed hike this year, two for SARB, prime ending at 10.75% at yearend?


Cees Bruggemans

Bruggemans & Associates, Consulting Economists



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Short Profile Dr CW Bruggemans

Chairman, Bruggemans & Associates Consulting Economists

Consulting Economist, Avior Capital Markets

Consulting Economist, Ince (Pty) Ltd

Consulting Economist, Hellmann Logistics (Pty) Ltd

Consulting Economist, Bureau for Economic Research (BER), Stellenbosch

Honorary Professor of Economics, University of Stellenbosch




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