There has been expectation of a somewhat moderate economic growth recovery in 2017. Nothing too impressive, but mildly stronger economic growth compared to the very weak 0.3% rate recorded in 2016.
This expectation has been based upon news of the alleviation of drought conditions in much of the summer rainfall part of the country early in 2017, which should boost Agriculture production, along with recently improved metals commodity prices, which should provide mild support for Mining output.
And indeed, in the first quarter 2017 economic growth numbers, it was Agriculture and Mining GVA (Gross Value Added) growth that rebounded quite sharply to register 10.3% and 6.9% year-on-year growth rates respectively. However, outside of these two sectors the situation was bleak, with four sectoral GVA’s showing negative year-on-year rates of change, and four showing positive but slowed rates of growth. And using a quarter-on-quarter rate of change measurement, the first quarter of 2017 represented the second consecutive quarter of contraction, which implied a much publicized technical recession.
The weak growth rates outside of Agriculture and Mining can, however, merely be due to normal lags, with especially Mining often being a leading sector in the business cycle. However, after surges in the two South African Composite Leading Business Cycle Indicators, there have been some slight renewed declines in recent months, the SARB version’s reading declining slightly in April, while the OECD version has declined mildly for 4 consecutive months from January to April.
While it was actually global factors, including some weakening in commodity prices relevant to South African export sectors, that were largely responsible for a slight decline in the April SARB Leading Indicator, the concern going into the second quarter has been more that negative news domestically will begin to impact on business and consumer confidence, thereby stifling any possible economic growth recovery.
The key negative news has been the widely publicized downgrades of certain of South Africa’s credit ratings to “junk status”, while more recently, the news of the quarter-on-quarter GDP “technical recession” has added to the national “misery”.
And so, perhaps unsurprisingly, the freshly-released RMB-BER Business Confidence Index for the 2nd quarter of 2017 showed a decline to a reading of 29 (on a scale of 0 to 100), the weakest reading since the final quarter of 2009.
So what hints does the Residential Market give about the economy in the near term?
FNB’s key question here is what does the Residential Property Sector show, with certain of their Residential Indicators also being “leading” ones in the business cycle?
Unfortunately, the second quarter FNB Estate Agent Survey provides a further hint that economic recovery is at risk of “stalling” fairly quickly should some fresh news not arise to bolster the national sentiment.
In the FNB Estate Agent Survey, the sample of agents questioned is asked to rate Activity Levels in their areas on a scale of 1 to 10, with 10 being a very strong level of activity and 1 being very weak.
From this, FNB have compiled their Residential Market Activity Rating for South Africa, and more recently Namibia, which has shown itself to be a leading indicator in the business cycle.
In the two summer quarters of 2016/17, this Indicator (For South Africa) began the show a rise, after a prior decline since early-2014. From a multi-year low of 5.59 (5.69 on a seasonally-adjusted basis) in the third quarter of 2016, it rose to 6.31 by the first quarter of 2017 (5.99 on a seasonally-adjusted basis).
However, in the second quarter 2017 survey, it fell back on both a non-seasonally and seasonally-adjusted basis, to 5.69 (5.80 on a seasonally-adjusted basis).
This renewed quarter-on-quarter decline meant that, on a year-on-year basis, the indicator remained in negative rate of change territory too, to the tune of -1.39%.
Admittedly, this year-on-year rate of decline has steadily diminished since mid-2016, as the smoothed trendline shows.
This diminishing rate of decline in the smoothed rate of change has closely been tracked by the rate of change in the OECD Leading Indicator, whose rate of year-on-year decline has also diminished. The two growth rates correlate very well, normally the Residential Activity rating leading the OECD Leading Indicator by a small time margin.
However, should both the OECD recent month-on-month rates of change, and the Residential Activity Rating’s quarter-on-quarter rate of change, remain in decline, this can mean that the two indicators year-on-year rates of change battle to return to positive growth, and the Leading Indicator is usually a useful near term indicator of near term economic growth.
Agents point to sharp deterioration in market sentiment
But more of a concern than first quarter’s Activity Rating decline is that, delving a little deeper into the survey shows agents seemingly reflecting what the FNB-BER Business Confidence Index says about the broader sentiment levels.
In the survey, FNB asks agents for their near term expectations of Residential Activity. This answer is of limited use due to seasonal factors in the sector. However, as a follow up FNB asks them to cite reasons for why they expect what they expect with regard to activity levels.
They are free to provide any influencing factors that they wish. Insightful is the fact that 51.3 of 2nd quarter respondents cited “Economic Stress/Pessimism” as a perceived factor. This percentage has been sharply rising in the past three quarterly surveys. By comparison, those that site “Positive Consumer Sentiment” as a factor are now a far lesser 6.7% of survey respondents.
Potential implications for new mortgage lending
For new mortgage lending, this can all have implications with a considerable lag. Residential activity starts to change when households begin to plan the home buying decision, viewing homes first for a considerable length of time in many cases before starting the home purchasing process.
Therefore, trend changes in growth in value of Household Mortgage Loans Granted (NCR Data) can often lag trend changes in the Activity Rating by as much to 4 quarters.
This should mean that in the near term, given the diminishing rate of decline in the Activity Rating, and two quarters of positive quarter on quarter growth up to the 1st quarter of 2017 (before the second quarter decline), New Mortgage Loans Granted could return to mildly positive growth territory in the near term after recent quarters of decline.
However, whether this positive growth will be sustained for any length of time depends on the second quarter 2017 Activity Rating decline ultimately proving to be nothing more than a temporary occurrence.
Segment and Regional Activity Ratings
Namibia is very mush the weak link in the Rand Area. It has seen its Activity Rating weaken very sharply as its long-lived housing market boom comes to an end.
The Namibia survey was only introduced recently, and while it tracks the direction of South Africa’s Activity rating (as one would expect given how integrated Namibia’s economy is with South Africa’s), from a first quarter 2016 level of 6.39 (which was very similar to SA’s 6.37 in that quarter), the two countries’ Activity Ratings have “parted ways”, with Namibia plummeting to a very low 3.53 by the second quarter of 2017 (compared to SA’s 5.69).
When segmenting and breaking the survey results down into smaller regions, FNB always must caution that sample size becomes smaller and results may thus be less accurate.
In order to address the sample size problem, FNB evaluates the major South African/Namibian regions as well as the two countries Income Area segments on a second quarter moving average basis.
For the first half of 2017, the Namibian Average Residential Activity Rating still came in well lower than South Africa at 4.53 (SA averaged 6), and well lower than any of the major South African cities.
Viewing the four different Income Areas (as self-defined by the agents, FNB sees both South African and Namibia having stronger average Activity ratings at the Lower Income Area end of the area spectrum).
This comes as little surprise, with the customary search for affordability in the housing market to be expected in these tougher economic times.
In short, given the generally good correlation between the FNB Residential Activity Rating and the Leading Business Cycle Indicators for South Africa, a seasonally-adjusted quarter-on-quarter decline in this Activity rating raises questions as to whether a potential economic recovery will be sustained. Of the estate Agents surveyed, there has been a major increase in the percentage of them experiencing Economic Stress/General Pessimism in the market, which ties in with a second quarter drop in the RMB-BER Business Confidence Index for the country as a whole.
It also ties in with a raft of highly publicized negative news in recent months, notably the ratings downgrades to so-called “junk status”, along with more recently the news of a technical recession. Agents appear to be perceiving the dampening of sentiment in the residential market as a result of such factors.