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

With the recession biting deep, some 200 000 to 300 000 formal jobs being lost rather than being created this year, informal work opportunities being lost as money is tight and public service delivery in many areas struggling to bring its side, Mr Zuma provided us with his vision as to how these things will be addressed.

The President crafted his speech around two distinct topics, namely addressing the immediate consequences of the recession, and in a broader context offering a Medium-Term Strategic Framework through 2014 for addressing public sector shortcomings.

Unsaid was the expectation that government spending will continue to increase in real terms, that growing tax revenue shortfalls will be funded through increased borrowing and that as a consequence the national debt will be allowed to cyclically rise before subduing it once again in later years once growth revives.

Besides such direct state support for the economy, the SARB has lowered interest rates, with probably more cuts still to come, thereby also providing crucial support for the economy.

In the final instance, South Africans will be dependent on the rest of the world to similarly take corrective action everywhere, ultimately collectively pulling us out of this deep morass globally.  

This reality makes the public sector and the construction sector (between them one-sixth of GDP) probably the only areas in the economy where there will still be vigorous employment gains this year.

With this as background, Mr Zuma favours minimizing the impact of the downturn on the most vulnerable, whether in formal employment (likely to be retrenched) or out of it.

Besides many of the most vulnerable enjoying access to social grants, with 13.5 million recipients so far but with this tally likely to rise further, Mr Zuma envisions a much expanded Public Works Programme, putting money in the hands of those with minimal safety nets.

In contrast, formal sector job losses will be addressed through various mechanisms, about which few specifics or quantification was forthcoming.

There was mention of encouraging ‘training layoff’, with retrenched workers kept in employment for a period while being re-skilled.

Hope was expressed that the Commission for Conciliation, Mediation and Arbitration could find legal alternatives to retrenchment with the various role players involved.

There is the intention of government buying more goods and services locally (reminding of Obama’s Buy American).

Pride of place was given to the IDC funding companies in distress, apparently meaning otherwise viable companies brought fatally low by recession, but not blanket sector-wide support or support for businesses beyond saving.

There was furthermore mention of a Scaled Up Industrial Policy Action Plan, involving mainly manufacturing (specifically motor industry, chemicals, metal fabrication, clothing and textiles, light manufacturing), but also forestry, services (tourism and other) and construction.

It is not clear how these various action plans will prevent job losses or create new work opportunities. By the time these actions are taken, the economy may well be past its recessionary low point, with labour layoffs mostly completed.

Still, some job losses may be prevented and new jobs created in time.

Much bigger ambitions seem focused on the expanded Public Works Programme, where it is hoped to help half a million people during 2H2009 and up to 4 million people through 2014. This presumably will benefit especially the lesser skilled person with few chances of finding deployment in the formal sector.

Though some of these initiatives are new or may appear ambitious, Mr Zuma was careful to stress these actions will be undertaken within currently constrained budget realities, given the global crisis backdrop and the recession. Still, with government expenditure set to keep growing smartly in real terms, there is obvious scope to do at least something, if only to do existing things more efficiently as every Rand counts, something that was also very carefully stressed.

Whether that means less ‘bezzle’ (an old Galbraith concept meaning a lack of organizational discipline and easy largesse in good times expanding costs unnecessarily) remains to be seen.

Beyond the short term, the Zuma ambition is one of improving public service delivery, both as a service to the people but also in support of growth, in this respect continuing the Mandela and Mbeki agendas.

It is an intimidating list:

• Undertake comprehensive rural development linked to land reform, agricultural reform and food security.

• Improve education

• Improve public health care

• Fight crime and corruption while strengthening the judiciary

• Pursue African advancement

• Ensure sustainable resource management

• Utilise state levers to achieve many things through procurement, licensing, financial support to assist small/medium enterprises, broad-based BEE and affirmative action (its implementation recognizing the need to correct past imbalances)

• Reduce regulatory burdens on small businesses

• Promote National Symbols (sport, names, anthem)

 There can be little doubt that these visions will be guiding the country in coming years, even if our future is primarily shaped by global forces.

It remained unstated, but the recession will eventually end and the country will embark on a new economic expansion in which the national income will again rise substantially, employment will expand anew and the resources will be found for yet more public services.

As such Mr Zuma is catching the cyclical wave at its very lowest point. With him we can look with confidence to the years ahead in which much should be achievable, if not always without a squabble or two.      

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