South Africa keeps cautiously moving ahead

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It is interesting to see how relatively well we are doing (in some respects) and yet how much difficulty we have in fully owing up to it.

Manufacturing production grew by 4.6% in March, not at all disappointingly, indeed mostly surging ahead, led by cars +30%, rubber products +19%, petrochemicals/oil refining +17%, metal products +13%, furniture +7%. Steel and food moved sideways and textiles still declined.

Especially manufacturing trend growth shows good momentum. This looks likely to continue, led by consumer demand and reinforced by inventory restocking.

Manufacturing capacity utilization gained 1% on a year ago, rising to 79.4%. This was down on November’s 81.6%, but mainly for seasonal reasons. The trend in capacity utilization continues rising as higher demand keeps taking up available capacity.

Mining’s 1.4% year-on-year dip was disappointing, but the 1Q2011 (seasonally adjusted) was 1.5% higher than the previous quarter (suggesting a 6% annualised recovery from last year’s subsidence).

What’s more, mining earnings surged 35% year-on-year compared to the 1.4% output dip, indicative of the strong contribution commodity export prices are making.

These huge income gains favour tax authorities, mining houses, mining labour, mine suppliers and THEIR labour forces, and public corporations such as Eskom and Transnet (reflecting sizeable annual tariff increases). 

The mining earnings surge in February was led (in order of importance of industry contribution) by Platinum Group Metals +50%, coal +24%, gold +16%, iron ore +101%, manganese ore +66%. Overall the gain was 35%.

More disconcerting is mining output not gaining more than it has. Regulatory issues are one aspect, constrained rail export capacity a major other constraint (with the industry in some instances relying on fleets of thousands of trucks to daily wheel their output to export harbours – the large dip-trucks passing through on Gauteng roads).

New passenger car sales growth slowed down to only 8% in April, compared to 30% gains last year and still 20% gains in 1Q2011.

That sounds disappointing and is, but one has to allow for the remarkable sequence of public holidays this April. Although Easter last year also fell in April and should not unduly distort the year-on-year comparison, the very nature of the sequencing this year probably induced more people to take extended holidays and businesses to suspend car buying activity.

Still, motor dealers are noticing a softer tone in the market, but this shouldn’t come as a major surprise as the extensive replacement delay has been reduced these past two years and car demand is probably transiting to a more ‘normal’ replacement demand in a cyclical upswing.

That said, Wesbank quarterly surveys show motor dealers concerned about rising fuel costs, supply shortages and potentially higher interest rates ahead slowing things down further. Indeed, could the price of fuel soon reach “a tipping point for the industry”?

Even in the constrained electricity generating sector things continued well. Seasonally adjusted electricity output reached a new March record high in absolute terms, rising 1.7% year-on-year. Buffer reserves apparently remain inadequate at present.

Electricity availability remains constrained and is an important inhibitor of energy-intensive expansion plans in mining, heavy industry and property development.

Credit growth was only 5.4%, though 7.4% for households. The motor industry has not suffered unduly from credit availability, with unsecured loan facilities another important consumer outlet.

Especially property and the building trades continue to experience restrained credit access. This looks unlikely to change for the better soon. 

The labour market remains a major contradiction, with high nominal wage increases demanded at a time of much formal unemployment. 

With CPI inflation of 4.1%, public sector unions demand 10% plus benefits, mining unions ask for 16%, metal engineering unions look for 20%. These demands partly reflect the wish to ‘close the wage gap’, but there are also cost-of-living wishes to be compensated for higher electricity, petrol and food costs.

Yet the Quarterly Labour Force Survey for 1Q2011 showed total employment of 13.1m, mostly unchanged since 3Q2009. 

Formal employment has been hugging 9.2m ever since the late 2008 peak of 9.5m. With population and labour force still growing, total unemployment (including discouraged work seekers) has rebounded to 6.6m (not far off the 7m level of the early 2000s).

And yet news media warn to “expect a winter of industrial discontent after local elections” (Business Report 13 May) as unionized labour keeps applying its market power, seeking high real wage gains for its surviving members.

The good news is the still high level of commodity prices (and their yet higher prospects ahead on the back of ongoing easy Fed money, global debt scares and concerns about oil supply security). This translates into good household income gains, as does the accommodating fiscal policy and high union demands.

SARB held off raising interest rates last week, even with inflation expected to double to above 6% within the year. 

The economy is still only growing modestly at about 3.5%. Besides, one doesn’t really know what lies ahead globally. In the event of greater commodity price surges, capital inflows, stronger Rand, more export and inflation suppression, one may want to be cautious about starting to raise rates too early too fast.

Time will tell when action is required. 

For now SARB is satisfied to indicate its vigilance and watch cautiously how events play. The markets expect 2% higher rates by mid-2012. Thereafter, uncertainty prevails?            

Contact Cees Bruggemans, Chief Economist FNB Cees@fnb.co.za

 


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