So have our animal spirits been dealt a fatal blow then?  

Was it a death blow, from which you don’t come back (rest in peace, my trusted friend), or was it a glancing blow (good for a monumental headache but not much more)? Have we in James Bond’s drink tradition merely been stirred, not shaken? 

Judging by events last October through December, the world certainly gave every impression of being mortally wounded. But was it after all a flesh wound in the butt rather than something more painfully accurate?  

Judging by the joyous, dare I say euphoric, rebirth since March on show in global equity markets, it is difficult to even find a scratch on the old carcass. But people have been known to die of fright and fear before. Cardiac arrest can be brought on by just the right kind of shock.  

The real economy took more time and effort than financial markets to come back from the brink. But then the latter operate in real time in a very transparent manner. 

The former nowadays also nearly operate in real time, courtesy of unbelievably well integrated modern communication technologies, but its data flow is as yet anything but in real time. It is still in dinosaur time. 

National car sales data only after month end (why not daily?). Manufacturing production and retail sales data six weeks after month end (why not weekly?). GDP data six weeks after quarter end (why not monthly?). National census data three years after mid-decade (why at all)? 

You get the picture? We operate mostly in the dark, a lovely invitation to those with too much imagination to pontificate on the state of the economy while having absolutely no links to the wheels, except the transparent financial markets, which themselves thrive on rumour, innuendo, gutfeel and imagination, besides fact, and not forgetting emotion (the real high-octane fuel of all human enterprise). 

Does it matter? 

But certainly, if you have read your Keynes (with a forthcoming new book by Robert Skidelsky, “Keynes: The Return of the Master” (Allen Lane), September 2009, sounding like something straight out of Star Wars, the Return of the Jedi). 

According to old Keynes consumption is a mere derivative. The real engine of growth and the cause of business cycle fluctuation in a closed economy is business investment and behaviour generally, blowing then hot, then cold, and a lot of one-way momentum in between. Thus the Master saw animal spirits as ruling the engine room. 

Which raises the question just what the state of the animal spirits in our business engine rooms really is?  

If potential/trend growth is 1% annually, we will double GDP every 72 years (three generations!). With any capacity expansion good for five years (a simple assembly line) or 100 years (a steel mill) that kind of demand growth shouldn’t excite too much repeat business. 

In such an environment, business is mostly becalmed, squeezing annually more operating productivity from technical innovation to the old existing plant to meet the very slowly expanding demand. There is no self-invigorating renewal and growth driver in sight, only endless marginal tinkering.  

At 3.5% growth we double GDP every 20 years. That’s better, as demand can’t be entirely met from technical tinkering to existing plant. Businesses probably have to make big expansions every decade or so (probably in the middle of a euphoric business cycle upswing once the animal spirits have become sufficiently animated by so much good news, in particular rising capacity utilization rates beyond design capacity and extrapolating such happy conditions a little too eagerly, mostly led by hope over experience). 

Just over 5% growth doubles GDP every 14 years. This is certainly getting exciting. One now has to make big expansion decisions nearly every three to five years, looking through the business cycle, taking ups and downs in one’s stride, ignoring deviation from trend, keeping pedal to the medal, going hell for leather – if you get my drift. Our animal spirit aggression becomes institutionalized. No more sleepy hollow stuff. One is nearly continuously expanding, like beavers in spring felling whole woods of timber. 

At 11% growth (the current Chinese trend pace), one doubles GDP every 6.5 years. That means big bi-annual expansions, now continuously in expansion mode, with scant attention to the state of the world. Any periodic overbuilding, as growth hiccups modestly, is fine as the spare capacity won’t be slack for long, with growth catching up ere long. 

So where does our business mentality currently reside on this remarkable spectrum? 

We used to be in 1% mode (in the greatly interrupted and slowing 1970s followed by the even more deeply interrupted and then mostly stagnant 1980s and early 1990s). There was no need for business expansion, as any growth during the short business cycle upturn was basically eroded away during prolonged slowdowns. 

Emphasis was on maintenance (hopefully) and technical tinkering to incorporate at least some of the advancing knowledge and productivity improvements. The danger of sales outstripping supply capacity was minimal, except in the heat of short-lived gold booms, which implied little risk of permanently losing market share due to underinvestment.  

It was a time of long liquid lunches, much golf, extensive holidays, no cell phones or email, though people did feel pressured (they have felt so through the ages, ever since the Vikings, Huns and Vandals came calling). 

We have known 5% growth momentum for periods of a few years only, last in 2004-2007 and before that in the 1960s, and before that in the late 1800s (just to show it doesn’t happen too frequently to our dynamic backwater). 

It is quite remarkable how that kind of growth and urgency invigorates the animal spirits and its hormone rushes improve the general complexion (in addition to the absence of liquid lunches and more exercise chasing deals and meetings, always in a great hurry). 

We don’t really know what it is like to do 10% growth plus. Of course, Cecil John Rhodes, Barney Barnato and friends did, but that is so long ago it is all hidden in dusty history books which the modern generation would not dare to be sampling, so how could they ever know such real excitement such as what the Chinese (and shortly the Indians, eventually, who knows) know as their daily fare? That frenetic sense of being only a Sol Kerzner ever really exhibited (and he exported himself, though lately he seems to be back for another expensive bite at the cherry). 

So truth be told, our kind of excitement is the 3.5% variety, our proven speed for 90 years data wise, with little in the institutional make-up suggesting anything faster soon, no matter how enticing the global windfalls, with always the ever present political danger of slip-sliding on Latino-like banana peels into stagnation (or much worse). 

Now, 3.5% growth can be quite exciting, although it won’t put the place ablaze. Aside of wanting to argue whether it is fast enough for our political needs (it could never be fast enough for someone in a hurry or a population suffering from rising aspirations wrapped inside a growing entitlement syndrome), it is simply the only real reality we are apparently capable of in our current mental and institutional frame. 

So the question is not whether we have already lost the exuberance accompanying the 5% growth spurt (we probably have in the private sector, though not in the public sector, going by our long-term infrastructure needs). 

The real question is whether this latest disappointment has been vicious enough to completely eradicate our natural momentum, with our collective animal spirits sinking back into a 1% kind of stagnation? 

On this score one can really overdo the pessimism, which of course is one outstanding characteristic of enduring backwaters. 

Instead, consider that we probably outperformed trend (overheated the economy) during 2007, and still even last year. But this year through 2011 we may underperform trend by a cumulative 8%. 

That sounds bad, but it is magically about equivalent to the outperformance of 2004-2007 when the economy was running at over 5% rather than matching its long-run average of 3.5%. 

A long-winded way of saying that provided we return to 3.5% growth shortly (2010-2011) and thereafter for a while modestly outperform trend (4%) so that we can again catch up with our full potential in President Zuma’s second term of office (you got to look forward in this world), we have probably not fully destroyed our only recently restored ‘natural’ 3.5% animal spirits. 

Our 3.5% growth performance probably sits deeply embedded in our business bones, given the many generations who became used to this pace of advance. It was an outsized event (Apartheid’s demise in the crumbling 1970s and 1980s), something you don’t encounter everyday, that brought on the 1% stagnation reality implanting it on the generation that went through it, but apparently not deep enough to rub off on following generations. 

At least my kids remain in a tearing hurry, which I don’t associate with 1% growth stagnation, even if it is the natural pace of our bureaucracies.  

For this past decade we clearly came back, phoenix-like resurrecting our 3.5% animal spirits after a generation of stagnation. At least, that’s how it feels at present. The proof will be in the eating of the pudding. 

The real test will come over the next twelve months, whether business in this country, just like overseas, picks itself up, dusts itself off after the great stumble, and resumes with its innate animal spirit dedication to invest and expand, perhaps no longer a 5% to 6% mentality, but certainly not degraded to a 1% mentality either. 

We are 3.5% people. So get on with it, will you, resurrect those capex budgets, stop firing and start hiring, invest at your natural pace (and a bit extra ere long for catch up). We are the 3.5% generation and we should act accordingly! 

Unless you aspire to 6%-9% and want to overtake India and safeguard forever your Parliamentary seat, the dream of all politicians. But that would mean real change, and not only of the populist and entitlement variety, but imply rather hard work, quality human capital, passion and dedication. 

Stuff you probably rather invest in your golf handicap.      

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

The only thing cyclical turns have in common is that they turn. Other than that, the way of their turning can be pretty unique.

Consumer confidence has proven itself a leading indicator at most turning points of the business cycle, leading by up to three quarters at the upper turning point, and with much less of a lead at lower turning points.

But each cyclical turning remains pretty unique, and today’s turning is probably no exception.

With the economy having completed two quarterly GDP declines (4Q2008 and 1Q2009), with the current quarter (2Q2009) also shaping as a decline, and with the next quarter (3Q2009) probably being touch-and-go, we are still in recession and some way from exiting, probably only from the 4Q2009.

Yet the FNB/BER consumer confidence index allegedly signaled the coming cyclical upturn BEFORE the economy was even close to entering actual recession.

Some of this may be optical illusion, to be blamed on Eskom, OPEC and SARB (fun partners indeed). Their doings early last year were shocking enough to trigger a near record decline in the FNB/BER consumer confidence index to -6 in 2Q2008.

That marked a cyclical low, if still in pretty much neutral territory, especially considering previous cyclical lows these past three decades.

In contrast, full-blooded consumer recessions in the past have shown confidence readings of closer to -30 (1985) or even -20 (1993). The 1998/99 cyclical low point (supposedly no recession) was much less intimidating. The even lower 2001 low point probably mainly reflected anxiety about events (shocking Rand decline and its possible implication for interest rates, on past experience) rather than the reality of recession.

If the 2Q2008 rate of descent had been just a tad less shocking and the consumer more gradual in her loss of confidence, 4Q2008 may have been the cyclical low at -4.

That would already have been more believable as a turning point signal, coinciding with the worst part of the global hit to our industrial output and mining exports, and the start of the SARB interest rate cutting cycle.

So perhaps write off a 2Q2008 turning point in consumer confidence to coincidence and exceptional shock value of preceding events which ultimately had little bearing on the recession of 2009 (triggered as this ultimately was by the late 2008 global events, really).

Even so, we have to use the data we have. What makes 1H2008 so extremely unique is that the entire descent in confidence was achieved in two quarters of uninterrupted rapid decline (something widely remarked upon at the time, everything happening so shockingly fast), with less than a year distance from the peak exuberance.

The last time South Africa experienced catastrophic decline in consumer confidence was in 1984/85, but it took at least four quarters to fully reveal itself and the low point was at least five years removed from its 1980 peak.

The 1993 collapse also took four quarters, and again five years removed from its 1988 peak.

The 2001 low (two years past the growth recession of 1998/99 and six years after its earlier peak), is even more of a bizarre slow coach.

So the bad news of the past year has to be the abrupt nature of exuberance loss in early 2008, but thereafter the recession was very focused (in industrial export activity and interest rate sensitive sectors). Over the subsequent twelve months consumers started to signal better times ahead even if the economy was still in the full grip of a globally induced recession.

Even though a growing majority of consumers continue to indicate the present is not a good time to buy durable goods, they did so unfailingly as well in previous cyclical downturns and continued to do so long after their forward-looking views about the economy and their own finances had started to improve.

On this score, therefore, we should not read too much in the very depressed confidence readings about buying durables today. Such sentiment seems to lag as caution lingers. Meanwhile, actual cyclical recovery starts elsewhere in the economy (inventory destocking slows, ends and eventually reverses thereby boosting output).

Indeed, such sentiment seems to generally lag as well the early birds which start the consumer revival in durable consumer buying. Apparently, the majority of consumers seem to take their time being converted to more positive readings about the present being a good time to buy durable goods.       

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