Hopeful signs even as full force hits us
By Cees Bruggemans, Chief Economist FNB
16 March 2009

Early signs of global stabilization are evident as the full force of still deepening global recession hits our exports, employment, household income, corporate earnings and tax revenues.

To end our current woes, we need resolution of the global financial crisis, along with first signs of economic activity stabilising.

Both are complex subjects not well served by sound bites, whose shallow superficiality tends to feed skepticism rather than conviction in audiences.
 
Still, commentary about changing conditions has to start somewhere, and vague sightings conveyed by sound bites are probably the way to go. Deeper explanations can wait.

Especially the Fed and BoE have now embarked on their most aggressive actions yet. Having lowered interest rates to near zero, and assisting their respective economies with special liquidity and credit channels, the latest offensive is to start buying bonds.

This loads their financial systems with yet more cash and keeps bond prices high and yields low, inviting banks to find more profitable outlets for their surplus cash, such as credit lending.
 
Meanwhile, other actions undertaken together with national treasuries have already removed many impaired assets off bank balance sheets.

This probably partly explains Citibank, BoA and JPMorgan reporting profits for January and February (on presumably cleaner balance sheets, fewer write-offs and reduced liquidity premiums), giving a mighty fillip to market sentiment about future bank prospects.

There is a long way still to go in cleaning up banks, with governments injecting a lot more new capital and banks writing off bad debts, but the process seems to be advancing. This is the gradual road back to financial health. Markets are registering their approval by pushing share prices higher, even if prospects still remain uncertain.

Meanwhile, many governments have launched emergency spending plans, and the anticipation of these bolstering actions has also boosted markets.

US consumers seem lately to have improved their core spending (excluding cars), the global car market is bouncing off very depressed levels and global purchasing managers signal slowly improving expectations.

The larger part of falling industrial activity seems inventory related, meaning excess stocks wont accumulate, and production can bounce later this year to come back into line with final demand.
 
Thus even as this global recession is tracing out its deepest activity declines in 4Q2008 and 1H2009, market expectations are already looking forward to cyclical recovery later this year and into 2010, provided the banking and credit strains can ease noticeably by then, reducing global anxiety.
 
While all this is playing globally, South Africa is absorbing the full brunt of the 25% plus decline in global industrial activity. Our mining and manufacturing production were 11% down in January 2009, while car sales were 35% and cement production 18% down in February 2009. Durable consumer spending remains depressed and the building trades heavily in retreat.

 This suggests yet deeper slides in GDP during 1H2009. But lower oil prices and falling inflation are bolstering the buying power of our consumers. Along with higher public spending, especially infrastructure and welfare payments, this may successfully compensate for falling employment and easing incomes this year.

Importantly, falling interest rates (prime eyeing 11%) should ease household cash flows and may induce renewed pickup in durable sales from later this year. Along with inventory drawdowns ending and exports starting recovery eventually, this could signal cyclically turning back to modest growth in 2010 for us as well.

Though tentative, all these signals are hopeful.     

 
Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics