DID SA's economy emerge from recession in the third quarter of this year? It's a difficult question to answer as no recovery moves in a straight line, and the message from latest economic indicators is mixed. But it's a crucial question.
Old Mutual economist Johann Els recently put out a press release predicting a relatively good rebound in gross domestic product (GDP) in the third quarter of 2009. After declines of 6.4% in the first quarter and 3% in the second, he said he believed the economy would grow by 2% on a seasonally adjusted and annualised basis in the third quarter.
However, there are economists who have a different take on the figures, while there have also been further developments in the economy since Els spoke. The picture is murky.
Perhaps the most compelling argument in favour of third-quarter positive GDP growth is the inventory cycle, which Els also mentions. The change in inventories affects gross domestic expenditure (GDE), which is most of GDP. (The only difference between GDE and GDP is that net exports need to be added.)
There was a massive fall in inventories in the second quarter of 2009 (down R52.9bn), which economists say is virtually impossible to be repeated in the third quarter. If there's a rebound in inventories in the third quarter, it's virtually certain that GDP will show positive growth - even the 2% that Els predicted.
But other indicators are providing cause for concern. The manufacturing sector, which accounts for 14% of GDP, is struggling to get back on its feet. Hopes were high when the July figures were released, which showed a good month-on-month rise in manufacturing production.
The month-on-month increases are what count when determining whether we have emerged from recession. This is because the headline GDP number is quarter-on-quarter, seasonally adjusted and annualised. It's the growth that occurred over the quarter, projected forward for a year.
Manufacturing output pessimism
But then came the release of the August manufacturing production figures, which caused pessimism about the performance for the quarter. Manufacturing production fell by a substantial 2.8% month-on-month, seasonally adjusted, compared with a 3.2% boost in July. The big question now is what happened in September.
Here, again, hopes were high when the September purchasing managers' index (PMI) was released in October. (The PMI is a leading indicator of manufacturing production; it's a survey among purchasing managers which gives an indication of what manufacturing production in the month was like.)
Initial figures showed a surge in the September PMI, but this was revised downwards when the next set of figures was released this week. However, we will have to wait for the release of the actual manufacturing output figures for September due later in November to get an indication of what will happen to this key component of GDP.
It's important to note that manufacturing output was the biggest drag on growth in the first and second quarters of 2009, when output fell by an eye-popping 22% and 10.9% in real terms respectively. A lot is therefore riding on the September manufacturing output figures.
The other key sector, accounting for about the same proportion as manufacturing output in GDP, is retail sales. It's difficult to draw any conclusions from month-on-month figures here, as retail sales are highly seasonal and Statistics SA doesn't provide seasonally adjusted figures. The year-on-year figures show a huge 7% fall year-on-year in August. This doesn't augur well for the third-quarter GDP number.
What a difference a decimal makes
Stats SA is expected to release the third-quarter GDP growth number at the end of November. Some economists think it makes little difference whether the figure is a small positive or a small negative. However, nothing could be further from the truth.
In this situation, those decimal points make all the difference, because they affect sentiment. If business people and consumers believe the recession is behind us, they will be more confident about the economic future - which can become a self-fulfilling prophecy.
But even if GDP shows mildly positive growth in the third quarter, we should curb our enthusiasm. We already have the employment figures for the third quarter, and they showed that jobs were slaughtered in the quarter. SA's economy has shed nearly a million jobs in 2009. That's almost half the number of jobs created during the boom.
Even if the economy returns to growth, jobs might continue to be lost, as employment usually tails the cycle because of the lags involved in retrenching people. To make matters worse, few economists expect the economy to return to the boom growth levels of 5% a year. Even when the economy was growing at that rate, we weren't creating enough jobs.
Finance Minister Pravin Gordhan spoke last week of shifting to an "alternative" growth path that would be more labour-absorbing. There is no space now to go into the challenges of doing so without falling for the lure of destructive short-term, populist measures. Suffice it to say that, even if we emerge from recession in the third quarter, the road ahead is going to be long and hard.
- Fin24.com