Strength, weakness, recession, depression
By Cees Bruggemans, Chief Economist FNB
|21 July 2008|
You may have heard the expression. When your neighbour looses his job, it is a recession. When you loose yours, it is a depression.
Especially people in protected employment often show little understanding as to what it is to be unprotected.
There are a fair number of protected, as many as half the formal labour force, going by scarce skill, union membership or political patronage. But that is still only 4 out of 20 million able bodied.
The other 16 million (80%) have to catch as catch can.
When things get rough, as they do this year and next, things can really get tough for some.
Much of this challenge isn’t always visible. But when a really hungry youth knocks on your door, reality has a way of presenting itself in all its nakedness.
It used to be a lot worse before twelve million welfare recipients got their monthly allowances, but even they aren’t fully protected against rapidly changing fortunes.
In the core of a modern economy there remain many struggling businesses, many employees and many dependents who may find themselves on knife-edge when things start wobbling.
One is then no longer engaged in hairsplitting, such as whether growth will be 4.9% or 5.1% (notice the decimal point), whether inflation is indeed 10.95% (notice the second decimal point) or whether the Rand is 7.7589:$ (notice the fourth decimal point).
Personally I care only what comes in front of the coma.
It is when growth dips below 2% (as it did already in 1Q2008 in 98% of the economy) that one should become cautious. Something is going wrong.
When inflation, even when adjusted for coming rebasing and weight changes, starts to outpace wage and salary gains, the borderline with hardship is being crossed by many, especially those with incomes below R4000 monthly (by far the majority of the population).
Formal employment in the economy is shrinking this year. There is a growing list of businesses announcing layoffs or using equivalent wording (such as not replacing those who leave).
We know from data and chronic staff shortages that the state and civil construction are still hiring in these dire times. But overall private employment is already heading south. BER business opinion surveys have been saying so for months.
We are now losing full paypackets, no longer gaining them. Only very limited parts of the economy are still doing well enough to enjoy such advantages.
But how can there be talk of depression if the idea of a possible recession hasn’t even taken hold yet? Surely things aren’t this dire? Besides, negative thinking doesn’t get you anywhere.
An industry losing over 40% of its monthly sales volume isn’t whistling in the dark when it says recession goodbye and recognizes the depression on its doorstep.
That’s what has happened to new passenger car sales in the South African motor trade. August 2006 was the all-time peak with 39 200 units sold. Last month only 22 800 units were sold. And that in a mere two years.
More horror stories abound. There is second-hand cars. Furniture. Household appliances. Home furnishings. Residential property. Building trade. Bricks. Cement.
The reason is not far to seek, with household debt levels relative to disposable income over 50% up, and interest rates at 15.5% also nearly 50% up, making for a doubling in average debt servicing from 6% to 12% of income.
Those shifts make people cautious. They postpone what can be postponed. And nothing is more easily postponed than the replacement decision about a still relatively young asset with a lot of economic life left.
But the replacement postponement has a way of traveling down the priority ranks. House? Car? Furniture? Household appliances? Cell phone? Clothes? Shoes? Leisure goods?
As to travel? Americans have just reinvented having a holiday in their own backyards. One in ten is supposedly doing so this summer.
Eating out? Eat at home. Music? Radio. Visual stimulation? Look at the wife more often.
There is delaying replacement, substitution, buying down and simple old-fashioned belt tightening going on, in some places on the grand scale.
And, yes, none of this is uplifting.
Yet it was in the early 1930s that someone wrote “Happy days are here again”. A tad premature, but when all else fails it helps to retain a positive frame of mind.
So, yes, all this will pass. But not as yet, as most of us aren’t even in recession yet, even though some have already long ago passed into depression.
When the change comes for the better, you will be able to recognize it by the fact that nearly nobody will believe it to be happening, except perhaps the stock market, that oldest of leading indicators.
If that sounds familiar, it is the very nature of all cycles to have their ups and downs.
Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics
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