Tough road ahead for businesses

Johannesburg - Local demand should begin to recover marginally in the third quarter of 2009 as lower interest rates begin to take effect, while hopefully an apparent stabilisation in the global cycle will similarly assist, according to Luke Doig, senior economist at Credit Guarantee Insurance Corporation.

"Moderate risks to the inflation outlook may curb additional interest rate relief to 50 basis points as opposed to 100 basis points, and a 2% decline in GDP for 2009 as a whole, holds no silver linings. However, by the time the soccer World Cup 2010 kicks off in a year's time, we should be in a much healthier state," he says.

"We would not be surprised if second quarter 2009 GDP delivers a 3% to 4% contraction following the first quarter's -6.4%," says Doig.

He feels the almost 22% year-on-year fall in manufacturing production and sales in April 2009, hard on the heels of the sector's similar contraction in GDP for the first quarter of 2009, provides the starkest evidence of the precipitous decline in the domestic business cycle.

"While it would be folly to assume that no further shocks by way of negative economic indicators may emanate, the vital issue is whether we are currently at the bottom of the cycle."

After recording a record low of 35.6 in April 2009, the Kagiso Purchasing Managers Index (PMI) ticked up to 37.3 in May and should manage to "eke out further gains in the months ahead".

Doesn't mask the pain

Three of the nine sub-indices perpetuated their poor performance in April, with employment and purchasing commitments remaining subdued, reflecting weak demand and a lack of short-term confidence. However, expected business conditions indicated net optimism for the first time since September last year.

"But this does not mask the pain that many are experiencing: manufacturing sales of iron and steel products (22.9% contribution to total sales) declined 26.4% year-on-year, while motor vehicle products (10.9%) fell by almost half and furniture (5.2%) saw sales plummet 31.1%. Food and beverages (15.4% weighting of sales) managed to contain their sales losses to 4.8% in April 2009 compared to a year earlier. In March, we were forthright in warning that April would be adversely affected by disruptions caused by public holidays and advocated front-loading interest rate cuts at that time," says Doig.

"The business environment is going to remain challenging for months to come," he adds.

Doig says "outlandish" labour union wage demands do very little to help matters. "Rather cognisance should be taken of efforts by Bell and Volvo, among others, in which practical solutions were fashioned by all parties. Bell management have taken pay cuts in order to reduce additional potential retrenchments while, at Volvo, shorter working hours and gross wage cuts have seen redundancy numbers reduced.

"Everyone needs to have their hand on the tiller now from a productivity perspective as well as making sacrifices. Attempts to provide ideological solutions to problems need to take account of the tax burden. Further pressures to costs in the short term may also be expected - fuel price under-recoveries of almost 40c per litre and 31c per litre for petrol and diesel respectively, underline these fears," concludes Doig.

- I-Net Bridge