mpc

   ECONOMETRIX ECOBULLETIN

A DECISION SUPPORT SERVICE FROM ECONOMETRIX (PTY) LTD ©
                        7 January 2004 No 00204/0102

      SOLID PERFORMANCE IN VEHICLE SALES CONTINUES IN DECEMBER

BOTTOMLINE:

The extremely favourable performance of vehicle sales witnessed in the second half of last year continued into December. Car sales maintained double-digit y-o-y growth, viz. 12.2%, reflecting the ongoing boost to demand arising out of lower interest rates and lower vehicle inflation associated with a strong Rand.

Double-digit growth was also achieved in respect of MCV's (18.1%) and HCV's (13.6%), reflecting continuing strength in fixed investment, although the rate of growth in respect of HCV's did slow in December compared with the exceptionally high growth recorded in earlier months.

Only in respect of LCV sales did growth continue running at a rather modest, marginally positive, pace. One suspects that the drought in summer rainfall regions and earlier poor agricultural conditions have contributed towards keeping sales in this vehicle category subdued.

With the Rand still strong, vehicle inflation is likely to remain low. Together with the benefits of substantially lower interest rates, this is likely to continue sustaining growth in vehicle sales of 5 to 10% over the coming year.
The relative strength of vehicle sales in December is likely to continue exerting caution at the Reserve Bank not to cut interest rates too aggressively notwithstanding the decline in inflation associated with the strength of the Rand. On the contrary, there is still considerable uncertainty as to whether there will indeed be further rate cuts in the next few months.

Y-O-Y GROWTH IN CAR SALES 12.2% IN DECEMBER
One of the features of the real economy in the second half of 2003 was the exceptionally strong demand for durable goods, partly on the back of increased consumer credit growth. This was clearly linked to the fact that inflation of durable goods, many of which are imported or have a high import component, has been falling sharply on the back of the strength of the Rand. In many instances, prices of durable goods have declined substantially in absolute terms. This may not apply to vehicles, but the fact remains that the rate of vehicle inflation has declined substantially. Coupled with an environment of sharply lower interest rates and the expectation that interest rates might decline still further, this has ensured a fairly dramatic upturn in sales, especially of passenger vehicles. In particular, the months of August, September and October witnessed growth in car sales of well in excess of 20%. This growth slowed somewhat in November since one assumes by then there had been a substantial saturation of latent demand following the boom of the previous three months. A marginal shortage of inventory in the dealer network might also have risen as a result of the huge satisfaction of demand in previous three months. Nevertheless, growth in November car sales was still quite impressive by normal standards, running at 9.8%. This pattern of impressive growth, albeit slower than in the months August to October, was maintained in December. Y-o-y growth in NAAMSA car sales returned to double-digit levels, at 12.2%. Even though this growth rate was about half that recorded between August and October, it was still almost double the average growth rate in car sales achieved in 2003 as a whole, of 6.8%.

TEMPORARY BREAK IN CORRELATION BETWEEN GDP GROWTH AND CAR SALES

At the same time, even this growth was far superior to expectations held by most at the beginning of the year that car sales would decline by a handful of percent in 2003 compared with 2002. In the short-term there has clearly been a marked break in the historical link between changes in growth of GDP and the growth of car sales. Historically, when the momentum of growth in GDP subsides, as was the case in 2003, growth in car sales has dipped substantially. Instead, 2003 was characterised by a slowdown in GDP growth but an acceleration in car sales. This illustrates the unbalanced nature of the current state of the South African economy, whereby consumer spending is booming on the back of lower interest rates and reduced inflation, but wherein the productive sector of the economy, especially that geared towards exports, has been suffering due to the strength of the Rand. Ultimately we believe that this unbalanced economic environment will be addressed by an appropriate downward adjustment in the exchange rate which will restore the correlation between GDP growth and car sales.

STRENGTH OF HCV SALES REFLECTED STRENGTH OF FIXED INVESTMENT

Strong growth in vehicle sales has not, however, been confined to car sales alone. In fact the star performer amongst vehicle sales categories last year was the heavy commercial vehicle (HCV) segment. For the year as a whole HCV sales recorded growth of no less than 27.0% with the number of units sold breaking the 10,000 barrier for the first time in 20 years. Although HCV sales growth in December slowed sharply from the 30%-plus rate recorded in some of the earlier months, it was still comfortably in double-digit territory, at 13.6%. The strength of HCV sales reflects the ongoing high growth in fixed investment generally in the economy. Increased spending by government on infrastructural projects, huge expansion projects in the mining industry, especially in the platinum sector, a residential building boom, as well as the desire on part of businessmen to exploit the strength of the Rand to renew their stock of imported or import intensive capital equipment, have all contributed to the upturn in HCV sales. There have been a couple of further contributors to this boom. Firstly, Spoornet has been struggling to cope with satisfying the full demand for rail transport of mineral and other products to the country's ports on account of an ageing wagon fleet and rolling stock. This has contributed towards a swing to the usage of road transport and increased demand for trucks. Secondly, the existing truck fleet has become heavily antiquated as a result of a lack of investment in years gone by. There appears to have been a sudden catch up to help remedy this drawback.
This process has been further assisted by the uptake of second-hand trucks by international aid agencies serving neighbouring states.The performance of medium commercial vehicle (MCV) sales was also very positive in
December, with growth of 18.1% being the highest of any vehicle category for the month. This growth rate was also well in excess of the 7.7% growth in MCV sales recorded for the whole of 2003.
LCV SALES CONTINUE TO BE ADVERSELY AFFECTED BY POOR AGRICULTURE

In contrast with the buoyancy of other vehicle segments, light commercial vehicle (LCV) sales remained relatively subdued in December, recording fairly positive growth, of 1.2%. This relatively low growth rate for December was, however, not out of line with the overall performance of LCV sales in 2003 as a whole. Indeed, it was almost identical to the 1.3% full-year growth rate in LCV sales. The relative weakness of LCV sales compared with sales of other vehicle categories can be attributed to a whole host of microeconomic factors, but one suspects that one of these has been particularly prevalent, viz. the weakness of the agricultural sector. In 2002 the agricultural sector benefited from sharply higher Rand prices of food commodities resulting from the earlier steep depreciation of the Rand. The opposite situation prevailed in 2003 in the face of strong currency appreciation. For example, the Rand prices of maize on domestic agricultural futures exchanges declined by approximately 50% y-o-y for much of 2003 compared with 2002. Farming profits suffered as a consequence. This situation has now been further aggravated in recent months by a deepening drought in the country's summer rainfall regions. One suspects that farmers have been building a scenario of sharply reduced profits into their own spending plans.

VEHICLE SALES SHOULD CONTINUE GROWING BY ABOUT 5% IN 2004

Several other factors outlined above which influenced vehicle sales in the second half of 2003 should be around in the first half of 2004. The full benefits of the decline in vehicle inflation and sharp fall in interest rates that took place in the second half of last year, have probably still to filter through in their entirety. There has been substantial saturation of latent demand but one suspects that there is scope for a little more demand to come through. As a consequence car sales should be able to sustain growth of at least 5% this year, with double-digit growth still a tangible possibility. Along similar lines, although some of the exceptional growth momentum in HCV and MCV sales might have started dissipating in the past two months, there is probably a sufficient backlog of latent demand to ensure that the growth in these categories too can continue at healthy levels, of 5 to 10%. A largely immeasurable boost to that underlying growth could come from the initiation of the minibus taxi fleet re-capitalisation program, with the new vehicles falling into the MCV and HCV classes. Only in the case of LCV sales is one concerned that the effects of the drought and relatively low Rand prices of agricultural commodities will continue to dampen demand. In conclusion, one is looking to growth of 5% or slightly more in the overall market for vehicles in 2004.

RELATIVE STRENGTH OF VEHICLE SALES TO EXERT CAUTION ON RESERVE BANK

Although there may have been a slight loss of momentum in the extraordinary rate of growth in vehicle sales witnessed between August and October, growth in vehicle sales in December has continued at a near double-digit pace. Especially with regard to car sales, given that much of the demand for new cars has been associated with increased borrowing to take advantage of lower interest rates, the Reserve Bank is likely to be cautious not to loosen monetary policy unduly aggressively for fear of unleashing a potentially inflationary consumer credit splurge. Accordingly, we suspect that interest rates will be cut by at most another 0.5% when the Bank's Monetary Policy Committee meets again on 26^th and 27^th February. Of course, much can happen between now and then, especially with regard to movements in the exchange rate (in either direction) that can affect this prognosis. However, we would caution against undue optimism regarding the potential for interest rates to come down notwithstanding the amazing strength of the currency.







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e c o n o m e t r i x

12-Feb-02

	ECONOMETRIX ECOBULLETIN
A DECISION SUPPORT SERVICE FROM ECONOMETRIX (PTY) LTD © 7 January 2004 No 00204/0102 SOLID PERFORMANCE IN VEHICLE SALES CONTINUES IN DECEMBER

BOTTOMLINE: The extremely favourable performance of vehicle sales witnessed in the second half of last year continued into December. Car sales maintained double-digit y-o-y growth, viz. 12.2%, reflecting the ongoing boost to demand arising out of lower interest rates and lower vehicle inflation associated with a strong Rand. Double-digit growth was also achieved in respect of MCV's (18.1%) and HCV's (13.6%), reflecting continuing strength in fixed investment, although the rate of growth in respect of HCV's did slow in December compared with the exceptionally high growth recorded in earlier months. Only in respect of LCV sales did growth continue running at a rather modest, marginally positive, pace. One suspects that the drought in summer rainfall regions and earlier poor agricultural conditions have contributed towards keeping sales in this vehicle category subdued. With the Rand still strong, vehicle inflation is likely to remain low. Together with the benefits of substantially lower interest rates, this is likely to continue sustaining growth in vehicle sales of 5 to 10% over the coming year. The relative strength of vehicle sales in December is likely to continue exerting caution at the Reserve Bank not to cut interest rates too aggressively notwithstanding the decline in inflation associated with the strength of the Rand. On the contrary, there is still considerable uncertainty as to whether there will indeed be further rate cuts in the next few months.
Y-O-Y GROWTH IN CAR SALES 12.2% IN DECEMBER One of the features of the real economy in the second half of 2003 was the exceptionally strong demand for durable goods, partly on the back of increased consumer credit growth. This was clearly linked to the fact that inflation of durable goods, many of which are imported or have a high import component, has been falling sharply on the back of the strength of the Rand. In many instances, prices of durable goods have declined substantially in absolute terms. This may not apply to vehicles, but the fact remains that the rate of vehicle inflation has declined substantially. Coupled with an environment of sharply lower interest rates and the expectation that interest rates might decline still further, this has ensured a fairly dramatic upturn in sales, especially of passenger vehicles. In particular, the months of August, September and October witnessed growth in car sales of well in excess of 20%. This growth slowed somewhat in November since one assumes by then there had been a substantial saturation of latent demand following the boom of the previous three months. A marginal shortage of inventory in the dealer network might also have risen as a result of the huge satisfaction of demand in previous three months. Nevertheless, growth in November car sales was still quite impressive by normal standards, running at 9.8%. This pattern of impressive growth, albeit slower than in the months August to October, was maintained in December. Y-o-y growth in NAAMSA car sales returned to double-digit levels, at 12.2%. Even though this growth rate was about half that recorded between August and October, it was still almost double the average growth rate in car sales achieved in 2003 as a whole, of 6.8%. TEMPORARY BREAK IN CORRELATION BETWEEN GDP GROWTH AND CAR SALES At the same time, even this growth was far superior to expectations held by most at the beginning of the year that car sales would decline by a handful of percent in 2003 compared with 2002. In the short-term there has clearly been a marked break in the historical link between changes in growth of GDP and the growth of car sales. Historically, when the momentum of growth in GDP subsides, as was the case in 2003, growth in car sales has dipped substantially. Instead, 2003 was characterised by a slowdown in GDP growth but an acceleration in car sales. This illustrates the unbalanced nature of the current state of the South African economy, whereby consumer spending is booming on the back of lower interest rates and reduced inflation, but wherein the productive sector of the economy, especially that geared towards exports, has been suffering due to the strength of the Rand. Ultimately we believe that this unbalanced economic environment will be addressed by an appropriate downward adjustment in the exchange rate which will restore the correlation between GDP growth and car sales. STRENGTH OF HCV SALES REFLECTED STRENGTH OF FIXED INVESTMENT Strong growth in vehicle sales has not, however, been confined to car sales alone. In fact the star performer amongst vehicle sales categories last year was the heavy commercial vehicle (HCV) segment. For the year as a whole HCV sales recorded growth of no less than 27.0% with the number of units sold breaking the 10,000 barrier for the first time in 20 years. Although HCV sales growth in December slowed sharply from the 30%-plus rate recorded in some of the earlier months, it was still comfortably in double-digit territory, at 13.6%. The strength of HCV sales reflects the ongoing high growth in fixed investment generally in the economy. Increased spending by government on infrastructural projects, huge expansion projects in the mining industry, especially in the platinum sector, a residential building boom, as well as the desire on part of businessmen to exploit the strength of the Rand to renew their stock of imported or import intensive capital equipment, have all contributed to the upturn in HCV sales. There have been a couple of further contributors to this boom. Firstly, Spoornet has been struggling to cope with satisfying the full demand for rail transport of mineral and other products to the country's ports on account of an ageing wagon fleet and rolling stock. This has contributed towards a swing to the usage of road transport and increased demand for trucks. Secondly, the existing truck fleet has become heavily antiquated as a result of a lack of investment in years gone by. There appears to have been a sudden catch up to help remedy this drawback.		This process has been further assisted by the uptake of second-hand trucks by international aid agencies serving neighbouring states.The performance of medium commercial vehicle (MCV) sales was also very positive in December, with growth of 18.1% being the highest of any vehicle category for the month. This growth rate was also well in excess of the 7.7% growth in MCV sales recorded for the whole of 2003. LCV SALES CONTINUE TO BE ADVERSELY AFFECTED BY POOR AGRICULTURE In contrast with the buoyancy of other vehicle segments, light commercial vehicle (LCV) sales remained relatively subdued in December, recording fairly positive growth, of 1.2%. This relatively low growth rate for December was, however, not out of line with the overall performance of LCV sales in 2003 as a whole. Indeed, it was almost identical to the 1.3% full-year growth rate in LCV sales. The relative weakness of LCV sales compared with sales of other vehicle categories can be attributed to a whole host of microeconomic factors, but one suspects that one of these has been particularly prevalent, viz. the weakness of the agricultural sector. In 2002 the agricultural sector benefited from sharply higher Rand prices of food commodities resulting from the earlier steep depreciation of the Rand. The opposite situation prevailed in 2003 in the face of strong currency appreciation. For example, the Rand prices of maize on domestic agricultural futures exchanges declined by approximately 50% y-o-y for much of 2003 compared with 2002. Farming profits suffered as a consequence. This situation has now been further aggravated in recent months by a deepening drought in the country's summer rainfall regions. One suspects that farmers have been building a scenario of sharply reduced profits into their own spending plans. VEHICLE SALES SHOULD CONTINUE GROWING BY ABOUT 5% IN 2004 Several other factors outlined above which influenced vehicle sales in the second half of 2003 should be around in the first half of 2004. The full benefits of the decline in vehicle inflation and sharp fall in interest rates that took place in the second half of last year, have probably still to filter through in their entirety. There has been substantial saturation of latent demand but one suspects that there is scope for a little more demand to come through. As a consequence car sales should be able to sustain growth of at least 5% this year, with double-digit growth still a tangible possibility. Along similar lines, although some of the exceptional growth momentum in HCV and MCV sales might have started dissipating in the past two months, there is probably a sufficient backlog of latent demand to ensure that the growth in these categories too can continue at healthy levels, of 5 to 10%. A largely immeasurable boost to that underlying growth could come from the initiation of the minibus taxi fleet re-capitalisation program, with the new vehicles falling into the MCV and HCV classes. Only in the case of LCV sales is one concerned that the effects of the drought and relatively low Rand prices of agricultural commodities will continue to dampen demand. In conclusion, one is looking to growth of 5% or slightly more in the overall market for vehicles in 2004. RELATIVE STRENGTH OF VEHICLE SALES TO EXERT CAUTION ON RESERVE BANK Although there may have been a slight loss of momentum in the extraordinary rate of growth in vehicle sales witnessed between August and October, growth in vehicle sales in December has continued at a near double-digit pace. Especially with regard to car sales, given that much of the demand for new cars has been associated with increased borrowing to take advantage of lower interest rates, the Reserve Bank is likely to be cautious not to loosen monetary policy unduly aggressively for fear of unleashing a potentially inflationary consumer credit splurge. Accordingly, we suspect that interest rates will be cut by at most another 0.5% when the Bank's Monetary Policy Committee meets again on 26^th and 27^th February. Of course, much can happen between now and then, especially with regard to movements in the exchange rate (in either direction) that can affect this prognosis. However, we would caution against undue optimism regarding the potential for interest rates to come down notwithstanding the amazing strength of the currency.

\| Macro \| Financial \| Growth \| Retail \| Motor \| Printing \| Back \|
e c o n o m e t r i x	12-Feb-02