Mining may be lifted by global recovery since early this year. Electricity output may have been lifted by a mining pickup. And leading indicators may have turned in 2Q2009, meaning they are off their low bottoms, giving notice of a general turn around later this year.

But economic life remains a struggle, with few hints of vigour and not a few hints of ongoing severe strain. The Minister of Finance indicated last week the economy should be recovering next year, but will be weak, with risk of relapsing.

In late 2006, three long years ago, the motor industry was monthly selling 65 000 units. It did 33 000 units last month. No hint of improvement. Passenger car sales may no longer be plunging, apparently having reached a cyclical bottom but sales aren't lifting.

Consumers are replacing their cars only slowly, with many preferring to still postpone, unwilling to take up new debt, preferring to reduce debt. Banks are repricing their lending risks through stricter terms, both higher rates and deposits required. Even then rejection of deals remains high as many consumers can't meet stricter bank lending criteria.

Turnaround may still be a year away

The same, indeed worse, is playing out in the far larger property market. Nominal house prices seem to be leveling out, with mild recovery expected from later this year. But in real terms, adjusted for inflation, Erwin Rode still expects some years of moderate price declines reflecting housing oversupply, restrained demand, consumer anxiety fuelling debt reduction and banks tighter lending criteria having an impact.

For the building industry, led by the residential sector, this means yet lower activity levels. Though the pace of decline appears to be slowing down, any turnaround may still be a year away, and will likely be weak. Meanwhile non-residential building activity is steadily being restrained by prolonged economic recession, with industrial and shopping space demand dwindling and oversupply a problem. This sector faces one to two years of activity declines before finding a bottom.

Severe financial strains in this industry intensified in recent months as developers struggle to survive in the face of reduced demand and inventories of unsold stock, and this despite aggressive lowering of interest rates.

Indeed, one break with the past is that so far there is little positive response in interest-sensitive sectors to the lowering of interest rates, prime so far falling from 15.5 percent in December to 10.5 percent today.

Consumers are interested in reducing debt

One reason may be tightened bank credit terms, consumers experiencing conditions more reminiscent of a prime 13 percent environment. With global and local conditions feeding deep uncertainties, consumers have been more interested in reducing debt rather than taking advance of lower interest rates by increasing new purchases.

This new found discipline is likely to thaw only slowly, suggesting a weak recovery.

Such weakness also continues to be reflected in low and stagnating retail sales volumes. These remain restrained by reduced household incomes (through less flexible income earnings, reduced dividend and rental income, and increased unemployment not fully compensated by fiscal support and falling inflation) and constrained credit access as the National Credit Act and banks enforce stricter lending terms.

Manufacturing output increased by one percent in 2Q2009, and ferrochrome and steel producers have since signaled lifting activity levels through 2H2009, reflecting improving global conditions and the turning of the inventory cycle, but manufacturing overall continues to face severe headwinds.

Real recovery still some time off

Domestic inventory destocking seems to be slowing down, inducing new order levels to rise, with the Kagiso purchasing managers index now gradually improving, but still in weak territory, hinting real recovery is still some time off.

Manufacturing will continue to be kept back by weak final demand in interest-rate sensitive sectors, while a firm Rand at 7.60:$ creates headwind from foreign competition.

All this weakness and hesitancy is reflected in still dwindling credit growth, with overall credit outstanding only increasing by 3.4 percent in July, bank mortgage books actually declining.

Though the JSE stock market is up 40 percent these past six months, this ultimately reflects a global heartbeat. Local business as yet sees little evidence of real improvement, with confidence struggling under the impact of severe financial strain.

With the Rand firm, and possibly going firmer in the coming year, credit lending terms tight, households and businesses reticent, fiscal policy fully extended, and inflation gradually unwinding with forecast risks possibly less contentious than earlier in the year, there may be scope to extend the interest rate easing cycle for some while yet.

The economy could do with prime 10 percent, if not prime 9.5 percent when going by a simple Taylor Rule estimate, judging by stark evidence from across so many economic sectors.

It isn't business as usual yet.

There looms a recovery but it will be slow out of the gate, with a large lingering output gap, whereas the country needs fuller utilization of available labour. With inflation drifting towards its target zone, there remains scope to cyclically ease interest rates further.

Cees Bruggemans is Chief Economist of First National Bank.

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