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Wednesday, November 25, 2009

Where is South Africa going in the next few years?

By Cees Bruggemans, Chief Economist FNB
25 November 2009

Remember 1978, 1986, 1999?

The first year of economic recovery can be frigid affairs. Too many people are still experiencing hardship (the unemployed, the overindebted, the asset-impaired, the underpaid, the cash-flow-constrained, the otherwise-challenged) while the rest is inclined to be backward-looking, daily remembering the disaster that overtook them and clobbered them hard only so very recently.

It was the anxiety of the Soweto uprising and the recession that accompanied it in the mid-1970s that for long cast its spell, preventing spirits from lifting.

Just so the Perfect Storm of 1985 when our foreign debt was pulled, prime reached 25%, the Rand halved, and the Rubicon speech made South African history. Thereafter humpty-dumpty felt quite broken in spirit.

The Asian Contagion of 1998 also swept ashore here, ambushing the Rand and the SARB, whose answer to anything big and bad appears to be prime 25%, in the process putting an awful lot of people once again under water, burning many deeply.

And such searing sensations tend to linger.

For the better part of 1979 it felt no better than the last year of recession (1977) and the first year of supposed recovery (1978).

And 1987, 1988 and 1989 were really one long depression, marked by political death struggles and minimal economic recovery, eventually encountering the political rapids of 1990-1993 and the deep unease and prolonged recession that then took hold.

As for 2000 through 2003, it felt we were never going to escape mediocrity again, achieving at best 2%-3% GDP growth, with fixed investment staying stuck in a rut, and the consumer dull.

Only 1994 stood out as different, but then the occasion gave rise to remarkable hope, lifting all spirits in ways probably never seen before in this country (and sadly yet to be encountered again since it was lost in the hit of the late 1990s, after which Mbeki ruled and political correctness turned things deeply sour).

So what is all this supposed to mean? That all normal economic recoveries in this country are always destined to be frigidly loveless, mired in lingering despair, for years and years?

But then, you will notice, these deep biting Russian winters of discontent never stayed a ‘permanent’ fixture. Something always turned up, a new love perhaps that had the knack of warming things up.

And then, magic of magic moments, at some critical point someone or something switched all the lights back on (it certainly wasn’t Eskom) and it was party time again, with all the loveless frigidity and backward-looking preoccupations completely forgotten in a rush to the head that in nearly every instance was memorial indeed (1980-1983 especially, and of course 2004-2007 as GDP averaged 5.5% as we now officially know, having long done so unofficially).

After a huge disappointment and much pain we apparently take time warming up or being warmed up. No shortage of willing candidates, though, as the SARB usually tempts us with many love bites as it attractively reduces interest rates in the hope, no doubt, that we will bite.

But once bitten, twice shy, by the looks of it over and over and over again (but that, too, sounds like a familiar refrain).

So what does this have to do with 2009 and 2010 and probably 2011 as well while taking a rain cheque on 2012?

Well, just about everything. You may have noticed we exited recession as of July-August 2009? You didn’t? Then you haven’t been speaking to your favourite motor dealer, furniture salesman, real estate agent or banker. I have. They are all claiming things turned up about then.

From horrific depths, of course. Don’t get me wrong. Give a hypochondriac a pinkie and he will grab the whole hand, drowning man that he is. But recovery has to start somewhere, and the first positive number, no matter at what dismal depths of activity, is that first step back on the ladder to happiness and all that.

Meanwhile what resides between the ears is quite a different matter, at least going by past appearances, and current headlines. The way of heralding the new recovery dawn is apparently by moaning that it is going to be a hard, long slog.

Yes, we know that the journey will be long and arduous, but why can’t it be with a spring in one’s step? It is because times remain hard for many, and yes, too many remember vividly what laid them low only very recently, with many unresolved anxieties about these problems not having been quite resolved yet. For the hardship could still come back in waves, overcoming us again (and again) and known as double dips and W-shaped recoveries refusing to get off the floor.

Modern economies actually have proved far more resilient than that, boosted by active policy measures and natural recuperation powers. But psychologically such starts remain for long very unhappy periods, just like a Siberian winter which towards the end feels it will go on forever (not unlike the darkest night even as the dawn is about to show her presence).

So will this time be different?

We don’t have a unique political experience and Madiba on tap to cook up a positive storm of emotions. Instead at every turn we are invited to look into Julius Malema’s mug shot. Not quite the same thing, now is it? Even if Julius is a great hit where it matters most to him and the leadership, in the townships.

But surely we have something better up our sleeve this time? For sports-mad South Africa the world cup soccer in mid-2010 is ready made to lift all spirits?

It will be, but perhaps not quite, given the long billing that the whole thing is probably already fully absorbed in the national psychic (though a month of football awaits that should soften even the hardest sentiments).

But that pleasing touch has to overcome something that was truly awesome, the biggest financial crash ever, Eskom putting out the lights, Julius rearranging the political furniture and the Greatest Recession since the Great Depression (at least in the West which also touched us deeply, going by daily appearances).

That’s an emotive cocktail that reminds of the late seventies, the mid eighties and the late 1990s. Man, this sense of the world ending, being hit by a truck, connecting with the canvas and feeling you will never get up again (aside of watching a bit of good soccer while in deep convalescence, of course).

Feeling sorry for oneself is an old habit, especially after a big hit, and this one couldn’t have been bigger in its unnerving, sudden, catastrophic impact.

But the historic record shows clearly that after these episodic stays in the fridge, something tends to turn up that starts to warm the cockles of our hearth, even if initially we don’t quite catch on that the weather is changing.

Asset prices start to rise, with stock market but also property having a fine nose for change in the air, sniffing its presence and starting the process of repositioning.

Yet most of us tend to be doff after ten rounds with painful depression, not seeing the lightening dawn until it suddenly bursts upon us. As if someone throws a switch, and the wintry landscape overnight makes way for late spring and early summer.

There are parts of the world where the seasonal changes are that abrupt. And I notice in our economy similar symptoms, especially among households (despite early birds) and usually with a considerable lag also in business (despite the ongoing robustness of so many enterprising entrepreneurs).

In the closing moments of 1979, and as January 1980 opened with a record $850 gold price (Russia was belligerently entering Afghanistan), there was such a moment when our collective psychological switch was finally thrown (a full 25 months after recession ended).

And sometime in the spring of 2003, a full 50 months after that recession ended, the same thing happened.

After 1985 the magic moment never happened (we had some unfinished political business to complete first while being put on a starvation diet).

And after 1993 it took exactly one night (28 April 1994) to throw the switch. But I will take the liberty of claiming that it was really the super permafrost finally melting, 100 months after the horror that was 1985.

This is quite a choice, between 25, 50 and 100 months of post-natal depression before welcoming the new dawn.

In what category will 2009-2012 fall?

Well, first things first. Though the horrific experience only so recently left behind is still fresh in the memory, with Eskom and Julius apparently doing their best to remain in our daily consciousness, one should ask whether someone or something has come into our presence that is actually gently working us over, to the point of asking when this realization will finally dawn?

And yes, there is, and it probably will, shortly.

Gentle Ben Bernanke over at the Fed sure has the golden touch, with his bond buying and zero interest rates and seemingly wanting to go on forever and ever.

Our equity prices have responded joyfully, up 50% so far this year from their trough, even if we underperform our better peers by a factor of two (China, Brazil).

Then there is gold, setting new records as it approaches $1200, with breakout potential to the upside as long as Gentle Ben keeps it up. Even platinum playing catch up again after halving early last year from record dizzy heights. And house prices having bottomed and rising now. Ask any estate agent (anytime).

Something is warming us up, our economy is starting to rise again, even if most of us derisively insist on focusing on what matters most, the present and recent pain, thank you very much.

So our collective switch hasn’t been thrown quite yet. But the moment is coming. And I don’t think it will take another 25-100 months. Nine will do this time, thank you, just in time for the soccer final (especially if your favourite African team were to be there).

Let the fun begin. But first some more serious despair this summer as we contemplate the wreckage that was 2008 and 2009. Wow, it has been bad, not so?

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on

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