2016-02-11
It took six years of deteriorating terms-of-trade, five years of less than half-mast business confidence, four years of stagnating and then declining SARB leading indicator, 30 months of falling car sales, two years of rising interest rates (so far by 1.75%), over a year of subpar consumer confidence (a majority recording a LACK of confidence), falling non-residential building plans passed and declining agriculture output as vicious drought bit, a few false starts along the way during 2014-2015 as various sectors tasted the whip of withering labour strikes (such as mining, industry) and abrupt output disruption. But growth lingered. Now, the recession bogey is finally within sight, according to some, in 2016. Two or more quarters of GDP decline to come.
Except it isn't going to happen, demanded by the rating agencies (if we want to avoid being declared junk) and avowed by finance minister Gordhan (tasked with preventing us being junked). A hopeless task or doable?
One isn't supposed to sleepwalk into recession. A modern social-democratic society with a vibrant market economy has far too much dispersed, restless energy for its activity to ebb away and it gradually being forced to a standstill, and then into falling away. Far too many of us are active, in millions of ways, of daily bringing more bacon to the table, which tends to succeed in overcoming even stormy headwinds, and to keep us going.
Recessions are the consequence of shock treatment, shocked withdrawal, in essence defensive in nature, business electing to flee rather than fight danger.
So whether it is a forceful central bank interest rate shock aimed to address rising inflation in an overheating economy, or a crisis and recession shock overseas also taking our exports down and badly knocking confidence, or an internal financial shock inducing many into fearful panic, a fall in output occurs mainly because too many decide from the one moment to the next to defer key purchasing decisions or actually cut order levels and headcount, in turn causing further knock-ons.
We were shocked like that in 2008, 1998, 1993, 1985, 1976 and recession duly followed. But we haven't so far been shocked like that at all, although a thousand cuts have sapped our collective will, and forced growth to start skimming the zero line, with the IMF now down to 0.7% growth in 2016 but a growing chorus of private economists signalling recession this year.
Canute could not force back the sea by telling it to desist. Just so nobody should stand in front of a receding economy. It is an invitation to get bulldozed by many and greater forces.
And yet here comes the finance minister, trying to undo the Zuma Carnage, and the inevitable global punishment following in its wake. Growth steadily slipping away, like life’s blood, and junk beckoning, very close now.
The global commodity cycle must be close to a bottom, if not already there, with weak demand having wrecked its havoc, and supply rationalisation now steadily progressing as weaker producers close and fade, allowing demand and supply to come back into sustainable balance.
That's not the same thing as heralding the next commodity upswing. Commodity surpluses remain evident for some time, keeping prices suppressed, tracing out a prolonged cyclical bottom.
The Zuma Carnage abruptly lifted our long yields by 160 points during those Two Days in December, presumably never to be forgotten. When having to borrow R11bn a week (loans do fall due, and new money is needed to fund the budget deficit of R150bn), that kind of rate jerking costs you (the taxpayer).
Zuma is apparently prepared to face some music over Nkandla, but why not present a bill, too, for reckless conduct unbecoming a head of state, needlessly causing our collective interest burden to rise overnight because some close friends needed a more pliable finance minister utterly unacceptable to the world of finance?
So while the commodity price falls may be reaching a bottom (or is it just dovish central bank prospects and a receding Dollar doing most of the talking here?), henceforth impoverishing us not (much) more, the bond yield lifting certainly will keep impoverishing us, unless Gordhan succeeds in convincing markets of his credible intentions to reform our fiscal stance, worthy of a lower risk premium.
But that is where the rub resides. For it is one thing to drastically rearrange the budget numbers, quite another for the headwinds to the economy to recede, and it switching its engines back on. Yet markets and rating agencies apparently have made future growth their acid test.
Sidestepping the slide into recession, and stepping up activity levels implies more business risk-taking, pro-actively committing to doing more, called growth in everyday parlance. But that flies in the face of the primary reason why we have been backsliding ever since Jacob Zuma captured the purple back in 2009.
Our government’s political paradigm differs fundamentally with the way our economy is organised and does business. The government’s policy templates may make sense within its view of the world and how it wants to transform it, but it isn't a practical tool. Instead, it is a destructive wrecking ball, preventing a quality public sector pulling its weight in delivering needed services, and actively demoralizing a productive private sector, inviting it into defensive withdrawal.
Gordhan’s brief doesn't extend to recasting the greater government policy paradigm. That remains for now rocklike in place, awaiting a future generation of political leadership, that may retain it or recast it, possibly even for the better.
But it is that reality that governs our growth, or rather our steady slide into ignominy. A few changed fiscal metrics suddenly looking better won't give that a facelift, too, even if some among us may see a glimmer of hope down the road where before there was none.
We can only support finance minister Gordhan in his Herculean task to change our fiscal budget reality, slashing spending and budget deficit while doing minimal damage to taxes and morale. That is a needed first step.
To change the growth outlook, however, the world has to turn into a friendlier place (it will take time, years even), while domestically the political paradigm needs to get real, being in need of realigning more closely with our innate capabilities, without necessarily giving up on its ideals (drastically reducing unemployment, poverty and inequality, eradicating the insider/outsider dichotomy).
There will be lots of spin in coming months. Sona-spin this week, pre-budget spin throughout, budget-spin two weeks hence, after which days of post-budget spin, and then months of election spin. If you don't end up with a spinning head, you will not have been tuned in, itself not a bad idea, for mere words won't change the tack of this ship.
Is slipping into coma (recession) in 2016 inevitable? Looks like it, with the world still impoverishing us a bit more, SARB intend on lifting interest rates a bit more, Gordhan lifting solidarity taxes a bit (at least), but most important because the political paradigm remains firmly in place, its recasting presumably awaiting a new generation of leadership taking its time coming out of the woodwork.
Change is clearly in the air, the discredited deeply wounded by their own multiple follies, politics sniffing, taking its measure, slowly starting the elaborate process of loving while leaving you, changing sides, primarily by abandoning sinking ships and looking for new drifting hulks to board.
One doesn't pre-empt the outcome, though awaiting it with anticipation. Could reform be in the air? But it will take time. Could we at least buy time, with rating agencies looking through the numbers as they did post-1994, now again seeing something that many among us may not dare hope. Delay junk?
Of course, all this anxiety about being declared junk is so much hogwash. The Zuma Carnage in those Two Days in December junked us more comprehensively than what mere rating agencies were going to impose twelve months later. Junk is already a reality, embedded in our numbers.
The real question is whether by our own actions, and a bit of serendipitous luck from global forces (a break in the clouds as dovish central banks prevail and the Dollar stands back for a while), we can succeed in talking a hind leg off a donkey.
Can we talk ourselves back into credibility, get markets to give back premiums imposed during the Zuma Carnage, with rating agencies in coming months taking their cue, delaying the inevitable, wanting to see how this will play, but totally fed up by now, and not willing to extend rope indefinitely?
After all, this remains a hanging matter until definitely proven otherwise.
Never mind the IMF. As in the mid1990s, this is between the inner soul of the ANC and global markets. Which way is it going to be, your way or the high way?
There is going to be a lot of pushing and shoving, an awful lot of spin, and even some real progress in shifting metrics and tinkering with paradigms. The real payoff will be further downriver, as politics needs to take its course.
Will markets and rating agencies junk us some more to encourage us to make haste, if worse is not to follow? Or will they hold off a while longer, giving us the benefit of the doubt, and much better fiscal budget metrics shortly, shoring up our tarnished credibility, turning again into a little engine that can?
Stay tuned. The most interesting part of the journey lies ahead, as we skirt (and even tap into) recession.
Cees Bruggemans
Bruggemans & Associates, Consulting Economists
Website www.bruggemans.co.za
Email. economics@bruggemans.co.za
Twitter @ceesbruggemans
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