SA Recession Drill

2014-06-02

After the sickening 0.6% GDP drop in 1Q2014, most of SA pulled out their best funeral clothes, adopted appropriate brace positions, and prepared for the worst.

The 2Q2014 could only give us another major GDP dip, the reasoning went, and that would fulfill the technical definition of recession: two or more consecutive quarters of GDP decline.

The reasons are not hard to find. A debilitating platinum strike. Weakness in manufacturing. Motor industry inrecession. A consumer under pressure and slowly giving way yet more. Too little lift from elsewhere.

So how far from Armageddon are we actually? Very close, or not so?

Here we appeal to the data and make heroic assumptions about things we know not, even if they are robust assumptions, probably not far off reality.

All the data are indexed or 2005 prices, seasonally adjusted, and where necessary annualised.
GDP excluding mining and manufacturing increased R7.3bn in 1Q2014 at an annualised clip of +1.8%. It had done so steadily throughout 2013 as well. Such steadiness of purpose one needs to respect.
In order for total GDP to dip into recession therefore, we needed a decline of bigger than R7.3bn in mining/manufacturing. During 1Q2014 we did. Mining alone dipped R7bn. With manufacturing also dipping R3.4bn, overall GDP went over the edge by R3.1bn.

So that's in the bag. But what awaits in 2Q2014?

GDP excluding mining and manufacturing (some 80% of total GDP) looks still pretty determined to me to also achieve another gain of R7bn in 2Q2014 (basically the average pace of quarterly gains since early 2013).

So before we make too many additional assumptions about that 80% of the economy, whether it will be slowing somewhat or even lifting, let's just for the moment keep it rock steady.

For the economy overall to show another GDP decline in 2Q2014, any mining and manufacturing declines need to best the R7bn gain assumed for the rest of the economy. On top of that we may want to relax the assumption that the rest will be steadily performing, perhaps pencilling in a (slight?) easing?

We can tell many stories about mining. Let's see how the following grips you.

The top five mining commodities (platinum group metals (PGMs), gold, iron ore, diamonds and coal) between them contribute 85% of total mining output.

Over the past 12 months, the seasonally adjusted output indices for gold, iron ore and coal moved up and down as usual, but in a fairly narrow band, and frankly quite neutral from an overall perspective. The remaining 15% of total mining output, although very diverse, also roughly matched that.

The lion share of the explanation for the 25% annualised decline in mining output in 1Q2014 was due to diamonds and then specifically PGM strikes.

And the big question: can there be a FURTHER decline in total mining output in the 2Q2014?

Not knowing any better, I am assuming all the non-belligerents in mining to be up and down monthly but likely to cancel out, giving a neutral return.

Diamonds did make a step down monthly in 1Q2014 compared to previous quarters, but I have no way of knowing whether it will take another step down or in fact a step up. I am assuming neutrality here, too, in 2Q2014.

That leaves platinum (PGMs).

Here the monthly indexed output proceeded as follow: 99 (Oct), 88 (Nov), 94 (Dec), 91 (Jan), 80 (Feb), 53 (Mar).

Spot normality still (Jan) and the real onset of the strike (Feb).

The average for 4Q2013 was 93.7 and the average for 1Q2014 was 74.7, a decline of 20.3%. With platinum taking (roughly) 23% of total mining output (R103bn), this 20% drop suggests it explained R5.6bn or 80% of the 1Q2014 mining output drop of R7bn. Diamonds explained a large part of the rest.
So what can we already say about platinum in the 2Q2014?

I cannot think April and May output being better than March. Indeed, could they still be slightly worse? Also, at the rate the boys keep talking, even with ministerial participation, I suspect this thing will still go deeper into June (and possibly beyond). After which a few weeks more will still be total loss as things need to be assessed. Write off June, too. And feel optimistic that 3Q2014 looks like 1Q2014 in reverse.
And all that on a hope and a prayer that they can do a wage deal well north of 10% and well south of 100% shortly, if with considerable job attrition suitably dressed up as bananas or fig leaves.

But that gives me at best indexed output of 50 (Apr), 50 (May), 50 (Jun), for an average of 50 for 2Q2014, yielding a decline of 33% over 1Q2014.

With all other mining output neutral (heroic but doable), total mining would still be pulled down by R95.8bn (1Q2014) x 23% x 33% = R7.3bn.

So, frankly, the platinum strike ALONE can still fully neutralise the steady gain coming from the non-mining/manufacturing GDP in 2Q2014.

That would leave in the first instance manufacturing the deciding arbiter as to whether overall GDP will take another dip in the 2Q2014, heralding recession.

Here we encounter, as usual, the good, the bad and the ugly.

Oil refining was 9.5% down in 1Q2014 from late 2013, as there were a lot of shutdowns of refineries, some planned and some unplanned or lasting longer than planned (there is a lot of old capacity that regularly needs nursing). At one point only two out of six may have been working, with one unit on reduced production due to a lack of feedstock.

Some of these shutdowns continued through April, and June may have its own surprises. Hopefully, though, on average things may be less bad in 2Q2014. That would lift the manufacturing game, if only slightly.

Ditto for car exports. Heavily down in 1Q2014, but promises of new launches and export ramping up later - but mostly only in 2H2014. It makes for a mostly neutral 2Q2014 (or perhaps even slightly better).
Domestic car sales, however, have been sliding this year, but as most of it is imported this may affect local output only slightly?

Basic steel, fabricated metals and machinery output was down in the 1Q2014 compared to the previous quarter, possibly mainly negatively affected by motor industry and platinum mining? Will that continue to decline or stabilize?

These key sectors together are about a quarter of total manufacturing and took the biggest hits in 1Q2014. The remainder did up and downs that mostly neutralised each other.

On balance, manufacturing output could be neutral in 2Q2014, but with modest risks either way up or down for the quarter.

That still leaves 80% of the economy (non-mining/manufacturing GDP). Will it keep performing steadily, or is there going to be erosion of forward momentum (not seen so far)?

The household sector is not in a happy space. Nominal wages may still be rising by 7% but job gains are minimal (at a standstill), overtime and bonuses have been cut (going by overall income gains in the 1Q2014), household credit use is very constrained, and higher inflation is eroding overall income gains. With households cautious to very cautious, there is more trading down.

One does not want to overstate the downside to the retail outlook, but at the same time there still appears room for some more loss of growth momentum.

With government and corporate spending steady, if cautious, it would have to be export gains that neutralise such domestic weakness. There may well be such lift, but one doesn't want to overstate it either.

The final word may be with inventories, and therefore with managements and their confidence levels. It wouldn't take much of an inventory hit to turn the 2Q2014 into a 1Q2024 kind of GDP hit. Watch the Kagiso purchasing managers index (PMI) shortly. Three months of heavy negatives is getting a bit too much?

In summary, 1Q2014 was a slam-dunk certainty of a GDP decline, with mining (platinum and diamonds) and manufacturing (oil refining, steel, motor industry especially) weakness combining to overcome still steady gains in GDP excluding mining/manufacturing.

The 2Q2014 also still looks highly intimidating in terms of the platinum strike, with its full quarterly impact only now becoming evident during this  quarter and potentially in its own right overcoming gains elsewhere in the economy, perhaps on its own already giving us a VERY minor further GDP dip.

It is the actual behaviour of various parts of manufacturing, and the rest of the economy, that will decide whether the 2Q2014 will be really negative and even on a par with the 1Q2014 (giving us technically recession) or whether it will turn slightly positive.

My vote, on this evidence, is for another negative GDP quarter, but only just (finely balanced), confirming recession. How much so is to be determined by all the detail put out here.

But it promises to be a short lived recession indeed, if the mining minister succeeds in twisting arms, securing a deal that will see platinum output retracing its earlier descent back to normality during the 3Q2014, topping out in 4Q2014 (though will Rustenburg production ever be the same again, suggesting still lingering platinum underperformance into 2015?).

This would be accompanied by ramping up of car output for export. Together, these tendencies would also positively impact steel and associated sectors.

But before we talk ourselves into a roaring GDP revival in 2H2014, allow that Numsa is also currently engaged with Seifsa in wage talks, with there already being talk of a July strike, potentially depressing 3Q2014. There is many a spill between cup and lip, as AMCU has taught us. So 2014 is hardly safe yet.
Especially if the new mining minister also fails to break the platinum deadlock. Give him time, though. There is more talk of interest arbitration.
 
Cees Bruggemans
Consulting Economist
Bruggemans & Associates
Website   www.bruggemans.co.za
Email  economics@bruggemans.co.za
Twitter  @ceesbruggemans
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