# General Business Category > Business Finance Forum >  Heading for a downturn?

## Dave A

I'm not sure that people want to hear this, but the cracks are starting to show through the wallpaper.




> The unprecedented economic growth in Gauteng is fading following a weakening in business conditions within the province, the Gauteng Business Barometer (GBB) said on Wednesday.
> 
> In a statement, the GBB said growth levels had tapered off and the economy was set to experience a slowdown that would last until next year before growth accelerates.
> 
> Economist Mike SchÃÂ¼ssler said the main reason for the decline was higher inflation and interest rates, which pushed up the economic stress index, a sub-section of the GBB that measures negative factors in the province. 
> 
> The economic stress index rose by 1% in May compared with April. It was also 5,7% higher than the level in May last year and suggests that business conditions were as bad as in 2003, he said.
> full story from M&G here


I'm wondering what is being factored in to suggest that growth will accelerate next year - but this little part may be pertinent:



> Standard Bank's chief economist Goolam Ballim said enterprises should not rush out to fix their borrowing rates at their banks out of fear that it would rise further. 
> 
> "The premium that financial institutions charge to fix rates is likely to exceed the potential for any further increases in interest rates. It is also likely that rates may start to fall in a year's time.


Hmmm. I can't help think the drivers that are going to turn interest rates downward in fairly short order are going to involve a fair amount of pain.

Tighten your seatbelts. This could be a bumpy ride.

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## RKS Computer Solutions

Great reading...  What, in everyone else's opinion, is the lookout for online businesses?  National, not just by region...

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## Dave A

Thanks Riaan. Not a call I enjoy making. But I predicted the rise of interest rates right in the beginning when everyone was still talking of them going down.

This is one of those instances again when I hope I'm wrong. But the warning signs are there.

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## Dave A

Well, if there was any doubt, latest vehicle sales figures which is a good indicator of economic activity are _really_ starting to head South.



> South African vehicle sales fell by 13.8 percent, or 7,647 units, year-on-year (y/y) in November to 47,707 units, led by a sharp decline in the passenger car market, new data show.
> 
> Sales for new passenger cars fell 15.7 percent, or 5,461 units, y/y in November to 34,796 units, and compared with October sales during which 34,555 new cars were sold, the new car market showed a decrease of 5,220 units or 15.1 percent.
> 
> "Taking account of new car sales not reported in detail to Naamsa, the November, 2007 total new car market had recorded a decline of 16.5 percent compared to November, 2006," the group said.
> 
> Sales of new light commercial vehicles, bakkies and minibuses at 14,973 units last month reflected a decline of 2,412 units or 13.9 percent compared with the same time last year.
> full story from Business Report here


The drop in light commercial vehicle sales is particularly disturbing.

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## Debbiedle

> Great reading...  What, in everyone else's opinion, is the lookout for online businesses?  National, not just by region...


Online, me thinks is about to spiral.  Read a very interesting article on the boom of online sales something to do with consumer education and trust!

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## Marq

Another view on the rates issue is that we are still going uphill for quite a while yet as we head onto 2010.

This magic year, that everybody is pinning their hopes on, is going to create a crunch as building, related industries, labour and preparations start to feel the shortening on the timeline as deadlines start to get squeezed. This is turn means means higher prices and increased inflation numbers. 

Along with 
increased and unstable oil prices and related knockon effects,electricity and energy problems,municipality rates increases and mismanagement,crime, grime and corruption not tamed,Bulging prison population and justice system problems,Big unknown influx of legal and illegal immigrants,disfunctional education and healthcare sectors,skills shortages and labour problems increasing,High unemployment and perceived poor class gap,Insistence of government AA and BEE policy,the zuma affair and the anc unrest,the interest rate could just take a backseat in the big picture.

When I started this post, I was a bit more positive than I am now that I thought about it a bit and made a list (and probably not a complete list - no external influences in there for example) - Maybe shouldn't have done that.....mmm

I agree  - we are in for a bumpy ride and I think its going to be for a lot longer than everybody is reckoning on right now.

The standard economic models are going to bend (or bent already) with all these negative influences and not much on the positive front. 

The sheeple are starting to squeal about not affording bonds and crying as a dismal holiday season approaches. I don't think we are there yet or even close, but come the second quarter of next year, I believe crunch time could be upon us in a big way. 

Since the last big crunch - (mmm....+- early/middle 80's?) we have a new generation of earners across a different set of demographics with a similar spend pattern. Its going to be interesting to watch how this plays out and what the reactions are going to be.

Optimism rules - will have to be the new motto.

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## Dave A

> Optimism rules - will have to be the new motto.


That's really important. One thing to remember is that we're talking about the mean average here. There is still plenty of money flowing through the system. One is just going to have to be a little sharper and improve your share.

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## Chatmaster

Just thought I'd mention that the NCA was probably a great contributor to the vehicle sales decline.

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## Dave A

More news on emerging general trends.



> South Africa's Business Confidence Index (BCI) dropped to 94,8 in December 2007 after the BCI declined to 95,8 in November 2007, the South African Chamber of Commerce and Industry said on Wednesday. 
> 
> The December 2007 figure is the lowest BCI level since November 2003 and a new low for 2007.
> 
> Of the BCI's sub-indices, trade, residential construction and import volumes "declined substantially", inflation moved higher while the stock market lacked direction, according to a statement issued by the chamber.
> full story from M&G here


Then on vehicle sales.



> South African new vehicle sales dropped by 15,1% to 41 813 units in December compared to the same month in 2006, the National Association of Automobile Manufacturers (Naamsa) said on Wednesday.
> 
> Including sales from Associated Motor Holdings -- total sales were 44 926 vehicles in December.
> 
> New vehicle sales during the whole of 2007 fell by 5,2% to 612 707 compared to 2006, after registering four successive record years previously, Naamsa said.
> 
> "On a market segment basis, sales during December 2007 reflected a mixed picture with the new car and light commercial vehicle markets showing a year-on-year decline of 19,1% and 10,7% respectively, whilst medium and heavy commercial vehicle markets reflected a year-on-year improvement of 19,5% and 8,1%, respectively, relative to the corresponding month last year," Naamsa said.
> full story from M&G here


Finally, Stanlib on investment prospects.



> Investors may face a bumpy ride in the short term, but market prospects for later in 2008 look relatively positive, said unit trust company Stanlib on Wednesday.
> 
> Stanlib forecasts a rise of 18% in the JSE all-share index over the next 12 months, assuming corporate earnings growth stays solid at 17%, that interest rates are close to the top, that the commodity boom continues and global growth predictions hold up.
> 
> "The major concern is that the credit debacle could take the United States into recession and South Africa will feel the fall-out," Stanlib said.
> 
> However, Paul Hansen, Stanlib's retail investing director, does not believe this will happen. 
> 
> "We believe we've entered a correction and the bull-run will re-assert itself," he said.
> ...


Of course, the term "relatively positive" _could_ mean that the rate of bad news just slows given the current scenario.

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## duncan drennan

> New vehicle sales during the whole of 2007 fell by 5,2% to 612 707 compared to 2006, after registering four successive record years previously, Naamsa said.


Down 5.2% after *four successive record years*, is that really such a shock to people? It gets more expensive to buy a vehicle, and everyone (not really, but you know what I mean) has vehicles less than five years old....I don't think they will all be rushing out to replace them before the interest rates go down.

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## IanF

> The sheeple are starting to squeal 
> 
> Optimism rules - will have to be the new motto.


Marq I love that word "sheeple" the image that comes to mind is woolly lemmings.
I agree optimism rules

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## Dave A

It looks like repossessions are on the up.



> Auction warehouses are full of glittering 4x4s and expensive sedans, driving the message home to the previous owners the high price to be paid for over-indebtedness.
> 
> Yes, South Africans love debt and hate saving.
> 
> Household debt reached a record high of 77.4 percent of disposable income in the third quarter of last year, up from 49.8 percent in the fourth quarter of 2002.
> 
> Total consumer debt was at R839 billion, although most of this consisted of bonds and vehicle finance, said Gabriel Davel, the chief executive of the National Credit Regulator (NCR). 
> 
> He said consumer debt had increased by 134 percent over the four years to 2007.
> ...

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## Chatmaster

I am currently doing a business plan for a friend who heads a large investment company. They buy property before it is repossessed. I was shocked when I saw the data on SAPTG. There is allot of people in serious trouble with judgements left right and centre and it seems to be increasing. Well my friend is smiling, they get property at way below market value...

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## Dave A

New vehicle sales still drifting lower.



> Car makers Volkswagen and Nissan will halt production at their assembly plants for several days because of the slump in new vehicles sales, while another motor manufacturer did not rule out similar action.
> 
> Bill Stephens, a Volkswagen South Africa spokesperson, confirmed last week that the company would shut production at its plant in Uitenhage for eight days between last Thursday and May 2.
> 
> Stephens said employees would be required to take five days' annual leave and to be on unpaid leave for three more days during this period.
> 
> The decision was an attempt to adjust the company's production schedule to subdued demand, following a 16 percent decline in new vehicle sales this year.
> 
> He added that Volkswagen's export business remained strong and was unaffected by the shutdown.
> full story from Business Report here


At least new vehicle exports are still steady.

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## Dave A

> Herschel Jawitz, CEO of Jawitz Properties, said the market would find a "fairly significant fall off" in the number of registered estate agents this year.
> 
> "It could be as much as a 15 percent to 20 percent fall off, which translates into around 10 000-15 000 fewer estate agents," said Jawitz.
> 
> He said there were about 80 000 estate agents registered with the Estate Agency Affairs Board.
> 
> He said the challenge for estate agents at the moment was less a matter of property prices and much more the volume of home sales, which had also declined by as much as 20 percent year-on-year.
> full story from IOL here


I suspect in some market segments, the unit volume fall-off has been significantly higher than 20%.

Surely the latest rate increase is going to bring in more forced buyers and press prices lower? The "upside" of that scenario is that unit volume might pick up, though.

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## Marq

From what I can gather in speaking to various agents and readings - the unit volume has not dropped that much. There is an obvious drop at the high end of the market - but the bottom to middle range is going strong as demand has just lowered its sights a bit and people have become a bit more realistic in terms of their salaries and income levels. I think the sales themselves are becoming tougher which is where the usual disinterested estate agent starts to baulk and sees life in fast lane as not for them.   

The level of agents in the country a few years back, if memory serves me, was round about 65,000. This big drop off we are looking at now is a common phenomenon as soon as things get a bit tight. The bored housewives and instant money idea people drop off pretty quickly if they can't cut a deal within the first few months and its also the once a year thing as the registrations come in and they can get a handle on how many agents are out there. I think if one has access to the boards numbers, we will find this to be the trend every year. The ranks swell during the year as people look for something to do and then fade at the end of the year as they do not renew. 

So while there is probably a correlation between drop in agents to depressed house market as intimated by these property 'experts', I doubt it is anywhere on the same level as indicated in the reports. 

I think I saw more agents boards out this past weekend than I have for a while so assume there is more stock than usual which of course could also prove that there is an excess of agents boards as a result of all those leaving and thus more room to manoeuvre in a volatile market which means a buoyant situation ripe for the sensitive buyer with ready cash on hand.

Oh sorry......The last sentence is as a result of listening to too many economists out there telling us about matters of finance and housing.

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## Vincent

To put a light touch to such an emotive subject. 

My economist has suggested the following trends for the next twelve months.

Petrol will rise to R12 -R15/ litre,food cost will rise by another 20% on the things he buys andinterest rates will reach 16-18%.
Very scary stuff if I have to believe him. I have this conversation with him every couple of days when I need to fill up my car with petrol. :Confused:  
I wonder if he knows something that we all don't know.

And this was my 200th post

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## Dave A

> And this was my 200th post


Way to go, Vincent  :Rockon: 
And so many quality posts too.

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## Dave A

First National Bank's (FNB) residential property barometer has dropped to the lowest level recorded for any quarter since its inception in 2003, the South African Broadcasting Corporation reported on Monday.

The bank said the barometer, which measures commercial activity in South Africa's major urban centres, dropped to 4,96 -- on a scale of one to 10 -- in the first quarter of 2008, from 5,09 in the previous quarter.

Up to 83% of people selling their houses had to accept a much lower offer than their asking price.

The bank said the average time a house remained on the market had risen to 12 weeks and four days from 11 weeks and two days in the previous quarter.

The barometer picked up a substantial rise in the number of people selling their properties in order to emigrate, compared with the previous quarter.

"This is especially so on the higher-income end of the market. While it is too early to say how far the latest emigration surge will go, this does pose a greater risk to the higher-priced end of the housing market," the bank noted.
full story from M&G here

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## duncan drennan

> "This is especially so on the higher-income end of the market. While it is too early to say how far the latest emigration surge will go, this does pose a greater risk to the higher-priced end of the housing market," the bank noted.
> full story from M&G here


I wonder how many of those are being snapped up by foreign investors....the irony.

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## Dave A

The M&G headline is *Sales of new vehicles decline*. Yes. The new car sales figures are out, and perhaps the Business Report headline is more appropriate.



> *Vehicle sales hit a brick wall*
> 
> New vehicle sales extended their fall in May, dropping by a massive 23.4 percent to 39 533 units compared with the same month last year, the National Association of Automobile Manufacturers of SA (Naamsa) said on Tuesday.
> 
> Naamsa said while the market remained generally under pressure due to high interest rates, other factors contributed to the massive decline of 12 095 units during the month.
> 
> "These included the public holidays at the beginning of the month, new vehicle price increases over a broad range of product and the social turmoil experienced in areas of the country," Naamsa said.
> 
> New car sales fell by 28.1 percent to 22 647 units as higher interest rates continued to force consumers to tighten their purse strings. Naamsa said new car sales are likely to have fallen by 28.7 percent if sales that are not reported in detail were included.
> ...

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## Dave A

Chatting to an estate agent from the Durban North area, she reckons the property market reversal is quite possibly worse than '97/'98.

Anyhow, CPIX is in - and up.




> The increase in consumer price index excluding mortgage rate changes (CPIX) was up 10.9 percent year-on-year (y/y) in May from 10.4 percent y/y in April, Statistics South Africa said on Wednesday.
> 
> CPIX was up 1.1 percent month-on-month (m/m) after it increased 1.6 percent m/m in April. This is the 14th month running that CPIX has been above the six percent upper target limit.
> from Business Report here


This part from the same story had me giggling...



> Stats SA said the annual increase of 10.9 percent in the CPIX was mainly due to relatively large annual contributions in the price indices for food, transport, housing excluding interest rates, household operations, medical care and health expenses, fuel and power, education, personal care, cigarettes, cigars and tobacco, and clothing and footwear.


Maybe a list of what *didn't* go up would have been shorter.

We've also got some employment stats in:



> Interest rate increases and Eskom's failure to supply power for new construction projects are starting to slow job growth.
> 
> Statistics SA reported yesterday that 174 000 jobs were created in the non-agricultural formal sector in the 12 months to March - an increase of only 2.1 percent to 8.4 million. 
> 
> Job growth in the first quarter was only 0.1 percent, after an increase of 0.8 percent in the previous quarter. 
> 
> Quarterly employment statistics (QES) are derived from a survey of more than 22 000 formal businesses.
> full story from Business Report here


Any bets on negative employment growth numbers for the second quarter?

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## Dave A

Manufacturing output is down  :Frown: 



> South Africa's manufacturing output growth slowed sharply in May, official data showed on Thursday, suggesting the sector remains under stress from higher interest rates. 
> 
> Statistics South Africa said manufacturing expansion fell to an unadjusted 0,7% in volume terms year-on-year from an upwardly revised 10,2% in April.
> 
> "It is lower than expected and I think in general it confirms that the production sector remains under some stress," said Efficient Group economist Fanie Joubert.
> full story from M&G here


I had a quick look at the May summary on Stats SA. There were two things that stood out for me apart from the headlined volume drop - the *value* had increased by 18.6% and manufactured output includes refinery production, ie. fuel!

Given the hefty fuel price increases, I wonder how other manufacturing sectors faired if you stripped fuel out?

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## Dave A

Once again, new vehicle sales figures are not looking pretty:



> New vehicle sales dropped 19.7 percent in July compared with the same month last year, the National Association of Automobile Manufacturers of SA (Naamsa) said on Monday.
> 
> "For the balance of 2008, in the domestic market, new vehicle sales will remain under severe pressure as a result of the cumulative impact of interest rate rises, inflationary pressures, high levels of personal debt and the slow down in economic activity," the organisation said.
> 
> New passenger car sales fell 19.1 percent.
> 
> The downturn in light commercial sales accelerated further during July, Naamsa said. Sales of new light commercial vehicles, bakkies and minibuses reflected a decline of 23.5 percent compared to the corresponding month last year.
> 
> Sales of vehicles in the medium and heavy truck segments of the industry reflected a mixed picture during July.
> ...


It's pretty much an international trend, though.



> The meltdown in the global automotive industry claimed more victims on Friday as General Motors (GM) lost another $15.5 billion (R112 billion), BMW warned on profit and Nissan earnings missed expectations by a wide margin.
> full story from Business Report here


Local manufacturers must be getting some relief out of improved new vehicle exports, though. A total of 28 269 new vehicles were exported, an 85.4 percent increase compared to the 15 247 vehicles exported during July last year.

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## Dave A

The August vehicle sales figures are in.



> New vehicle sales in August dropped by more than 30 percent compared to the same month last year, the National Association of Automobile Manufacturers of South Africa (Naamsa) said on Tuesday.
> 
> The downward trend of recent months continued with the sales of new cars and light and medium commercial vehicles decreasing 30.3 percent from 57 970 in August last year to 40 395 last month, Naamsa said in a statement.
> 
> "However, the industry's August 2008 sales performance should be seen in relation to the fact that August last year had represented a relatively high base in that it had the highest monthly number of new vehicles sold during 2007," it said.


Which is quite curious because that is after the NCA kicked in! Anyway, back to the story...



> New car sales (25 304 units) declined by 32.9 percent, even though August was normally a strong month for new car sales, driven by demand from car rental companies.
> 
> "Despite this, the daily sales rate during August 2008 had continued to fluctuate around the lowest levels experienced over the past four years."
> full story from Business Report here


Exports of vehicles are still looking strong, though - which is good news. The other interesting snippet is that these numbers deal with units. A strong shift to cheaper vehicles is also reported. I wonder how those numbers would look if we looked at value rather than units.

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## Dave A

Here are four stories that to my mind make a case for our local interest rates to start heading down a touch.

The race to zero - we have one of the highest interest rates in the world.
The biggest losers - The JSE has lost over 42% of its value over the past month or so.
Borrow, buy, burn, bail out - we are going to be facing some stern competition in the face of government funding to business elsewhere.
Consumers curb spending - USA and Europe is a shrinking market right now.

And of course our local market conditions have tightened considerably.

Trevor Manuel said that economic policy needs to "lean against the wind." So maybe its time to bring down the interest rates, stimulate our local economy, let the Rand blow out a little to help local exporters and try to reverse the trade deficit, and put the National Credit Act as a credit moderator to the test.

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## Dave A

And to add to my case for interest rates coming down sooner rather than later - this extract from an analysis on where the UK finds itself now:



> Monetary policy was kept far too tight for far too long: something only one member of the Bank's Monetary Policy Committee (MPC), which sets UK rates, appeared to realise as the economy headed unerringly towards the rocks over the past six months. 
> 
> While the Federal Reserve in the US was cutting interest rates aggressively to cushion the impact of recession, the MPC here was twittering away about inflation. The bank normally moves rates in quarter-point moves: it is now under pressure from the markets to reduce borrowing costs by a full point next week in order to make up for lost time. That's how far behind the curve it now is. If Mervyn King had been managing his beloved Aston Villa soccer club rather than a central bank, he would have been fired by now.
> from M&G story here

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## Dave A

Even Tito Mboweni is starting to sound a little less hawkish on the back of recent inflation data.



> South Africa's inflation outlook has improved and it is hoped that an easing since August is the start of a consistent downward trend, central bank Governor Tito Mboweni said on Thursday. He also said in aspeech at a diplomats dinner that while the local banking system had largely escaped the global credit crisis, the real economy was not immune. 
> 
> South Africa's consumers and producer inflation eased more than expected in October, data showed this week, which together with slowing growth has raised speculation of a cut in interest rates.
> 
> The targeted CPIX inflation slowed to 12,4% year-on-year from 13% and factory gate inflation fell to 14,5% from 16% previously.
> 
> Most analysts expect the central bank to start unwinding the five percentage points in rate hikes made since June 2006 early next year, but markets are pricing in a cut in December. The repo rate stands at 12%.
> 
> Mboweni said the inflation outlook had improved to some extent, with previous upside risks -- global food and oil prices -- falling, and domestic demand pressures subsiding in response to previous rate increases.
> ...


But next comes a dampner.



> South Africa's private sector credit growth slowed only slightly in October, official data showed on Friday, dampening expectations of an imminent interest rate cut.
> 
> Central bank data showed private sector credit growth dipped to 16.17 percent in October from a year earlier, its lowest level since early 2005, following a downwardly revised 16.28 percent in September.
> 
> But the slowdown was not as sharp as expected, with economists forecasting growth to slow to 15.4 percent as high interest rates deter households and companies from taking up more debt.
> 
> During the same month, growth in the broadly defined M3 measure of money supply accelerated to 15.59 percent, compared to 15.23 percent previously. A Reuters poll predicted growth of 14.9 percent.
> 
> Analysts said while credit growth had slowed, the fall was not fast enough to add to arguments for a rate cut in December.
> full story from Business Report here


Hmm. Got to ask a stupid question here.

If credit growth is up around the 15% mark, but economic growth is down at 0.2% - what is this credit growth financing?

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Chatmaster (29-Nov-08)

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## Rebel

If Credit demand is up and economy is down - that indicates amongs other things that the BBBEE deals is being bailed out by credit from the institutions. Another thing is that institutions have to up the credit limits of small businessess to keep them afloat to survive the current crunch. Look at small time car dealers - they need more credit to keep stock on their floor.

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## Dave A

Well, credit growth certainly hasn't been for financing new vehicles...



> South African new vehicle sales declined by 28,3% in November compared to the same month last year, in another sign that high interest rates are taking their toll on consumers. 
> 
> The National Association of Automobile Manufacturers (Naamsa) said on Tuesday new sales fell to 34 176 units in November, with passenger car sales alone tumbling 33,6% over the previous year, the worst monthly new car performance in the last five years.
> 
> Including sales from Associated Motor Holdings -- which reports separately -- total sales fell to 36 638 vehicles in November from 52 366 last year, and were down 11,2% from October.
> full story from M&G here

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## Rebel

Dave, I stick to my story. Consumers fail the affordability test under the NCA for bigger ticket items. Thus suppliers sit with more stock and they have to get finance to do so. Credit still under pressure but sales are dropping. Interest rates not the culprit.

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## Dave A

It just goes to show that a slowing economy bites in different parts for different types of business. Being in the service industry, stock is pretty much an on-demand sort of thing - it doesn't factor in working capital much.

Now in retail and wholesale, different story. Turnaround time for stock must be *the* major working capital issue.

But surely you just reduce stock levels to compensate?

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## Rebel

Cutting down on stock is one thing - that is if you are not locked into the normal deals where you sign long term agreements take take x amount of stock for x discount. Difficult to now cancel these deals before they run out. Vehicle traders (secondhand) do business in taking that older vehicle in for something better. They build stock with every deal.

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## Dave A

Inflation figures are definitely headed in the right direction.



> South African inflation braked sharply in December, partly on a big drop in fuel costs, data showed on Wednesday, hardening the case for an aggressive interest-rate cut next week. 
> 
> Statistics South Africa said CPIX (consumer inflation less mortgage costs) -- which will be replaced in January as the targeted measure for monetary policy with a re-weighted consumer price index (CPI) -- slowed to 10,3% year-on-year.
> 
> December's reading was its lowest level since March 2008, dipping from 12,1% in November, and confirms price pressures are fast receding in Africa's biggest economy.
> 
> All-items CPI slid more-than-expected to a one-year low of 9,5%.
> 
> Analysts said the trend -- CPIX peaked at 13,6% in August last year -- opens the way for a 100-basis-point interest-rate cut on February 5.
> full story from M&G here


The big headache now is growth.

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## Dave A

:EEK!: 



> South African new vehicle sales in April 2009 were down 43,1% year-on-year (y/y) compared with a fall of 30,3% y/y in March, figures from the National Association of Automobile Manufacturers of South Africa (Naamsa) on Tuesday showed.
> full story from M&G here

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## Darko

I read on moneyweb a while back that the solution is not all that complicated. Drop the price of new vehicles!! 

There was more behind it than my simple one liner - I will try to find it and post an extract here.

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## Darko

Can't find the bloody article niow...was about 1 month ago. Went along the lines of:

rather get something for your stock - even if at 80-90% of original asking price than get nothing for stock that just sits on the floor, brings in no cash at all, and accelerates the downfall of the industry.

The USA I believe are offering major discounts while SA dealers do not. Instead, they offer a silly service, extended warrant etc etc - nothing of substance. I will also never understand why our cars are so expensive here either. With the ZAR strengthening, shouldn't we see a further reduction in new car prices (in addition to the suggested discounts to save the induustry)?

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## IanF

Look at this site:
USA GDP 13,751,400 million Dollars
SA GDP   283,007 million Dollars
Only 48.5 times larger where do you as a global company concentrate.

This is from the World Bank site, at least we are number 29 not to bad. When I was told one fact from the paper merchant that a few years ago in New York City they consumed more of a popular paper for letterheads in one week than SA uses in 3 years then you get your snotklap. But we are the largest in Africa  :Applaud:

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## Darko

ianF, was that directed at my previous post? If so, I'm not sure I understand.

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## Dave A

A series of posts doesn't always make a fluent conversation, Darko  :Wink: 
They're independent thoughts on a theme, so it can seem a bit disjointed at times.

Interesting point you raised on pricing in hard times. I had thought of starting a thread on it a while back and then the thought leaked off to unconscious places.

I read an article (which I'm not going to bother trying to hunt down) talking to what the international upmarket hotel accommodation industry was doing on pricing at the moment. Basically, despite low occupancy rates, they weren't dropping their prices but were throwing in extras - like breakfast or dinner. The logic behind this is that once you bring down your prices, it's a very long process to get them back up again. 

It gave me some food for thought. My first thought was that with lower volumes you actually need higher margins to get through. I'd suggest this should be achieved through improving efficiencies rather than pushing prices up though.

Ultimately, I'd also suggest that before dropping prices to below cost, you first need a clear strategy to get back to profitable sales again as quickly as possible; to limit your losses and before you run out of money. This might be relatively simple if you are clearing dead stock to raise money to put in more viable stock, but does the motor industry have that escape hatch?

Companies who drop prices in an effort to drive volume by "buying" market share could end up only accelerating their own demise, especially if their competition responds in like manner. And if the market is competitive enough (and I believe the motor industry is), some of your competitors responding is virtually guaranteed.

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## Darko

Dave A,

I guess it is a difficult one with no "right" answer. 

I just don't think that the hospitality / accommodation industry can easily be compared to the motor vehicle industry. The business models are so different. One purchases high value stock items and is very sensitive to FX amongst many other things whilst the other has a relatively small cost base (not taking into account opportunity cost) whether there is occupancy or not. Also, throwing in extras in the hotel industry is one thing, but as for cars its another. It's also a lot easier to get away with throwing in extras for hotels as opposed to motor vehicles - i.e. R1000 per night will now incl breakfast and dinner. lets say the breakfast is normally R50, and the dinner normally R100 - the extras amount to 15% of the occupancy. If motor car dealers were willing to cut 15% of the cost of a vehicle then we would be talking. A few rubber mats and free Park Distance Control does just not amount to the same type of value in extras. 

If I was shopping for a car for say, R300K (max budget) and it was offered at a discount of 15% to sell for R255K i would grab it in a hurry. I would not be interested in paying for that same car for the original price but with some non-essential extras thrown in with residual finance balances that are out of this world.

I just can't get my head around the fact that a dealer would rather go under, with a yard full of depreciating stock, then try to recover what he can by pricing to sell. And i'm not suggesting they should sell at below cost, but as close as dammit to cost.

I would agree that with lower volumes you need higher margins....but that's if you retain the current cost base and expect the same ROI. And from what I'm reading, volumes aren't low - they are almost non-existent. Time to adjust the expected ROI and get what you can, lower the cost base and ride the storm. The alternative is do nothing, don't budge on prices and shut shop quickly with a yard full of stock.

Dropping prices adequately should "theoretically" increase volumes (in an ideal world) and it might not be all that bad. Even if competition does it, fine. It's more about industry survival - and there is always competition in any market conditions.

Car purchasing also differs greatly to hotel accommodation as it is very sensitive to the willingness of banks to finance. I guess this throws a major spanner in the spokes as well. 

But what are your thoughts on car prices decreasing in the wake on a strengthening rand / weakening foreign currency?

I read somewhere that a Nissan 350Z retails here for around R500K. The same car retails in the US for around 26,000USD. So there are taxes, duties and FX considerations - does that really make up the huge disparity in pricing?

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## wynn

Wot I said in an earlier thread.

Gubbermunt drops tax, VAT and HP interest on certain classes of locally manufactured vehicles

Instantly, without giving any bailout grants, they create demand, job security follows and economy churns in the MV markets.

Same with primary residences below a certain price, create demand and churn in the construction industry.

Don't know what to do with mining though?

 :Wink:

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## Dave A

Oh boy!



> The sale of new vehicles declined sharply in May, confirming households' aversion to debt and consumer worries over job security.
> 
> According to the National Association of Automobile Manufacturers of SA (Naamsa) on Tuesday, sales in all segments of the South African new vehicle market, as well as export sales, continued to register sharp falls in May compared to the corresponding month last year.
> 
> Aggregate Naamsa new vehicle sales for May 2009 at 25 819 units reflected a substantial decline of 13 697 units or 34.7 percent compared to the 39 516 units sold during May 2008.
> 
> Factoring in aggregate vehicle sales reported by the AMH Group, the year-on-year decline amounted to 32.9 percent, Naamsa said.
> 
> Sales of Naamsa new light commercial vehicles, bakkies and minibuses at 7 905 units during May 2009 reflected a massive decline of 6 074 units or 43.5 percent compared to the 13 979 units of the corresponding month last year.
> ...


Expected down, I'm sure - but this is really grim.

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## Dave A

> South Africa total industry new vehicle sales fell by 25,9% year-on-year to 34 503 units in July, the National Association of Automobile Manufacturers (Naamsa) said on Tuesday. 
> 
> When stripping out sales from Associated Motor Holdings -- which reports separately -- sales fell 27,4% to 30 731 units, Naamsa said.
> 
> Vehicle sales remain weak, having been in decline for more than two years, knocked by soft domestic demand, while a global downturn has slashed exports.
> 
> Exports were down 60,3% in July at 11 220 vehicles.
> from M&G here


But if I'm reading that right, figures are up substantially on the May 2009 figures.

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## Dave A

> South Africa total industry new vehicle sales declined by 23,2% year-on-year to 33 867 units in August, the National Association of Automobile Manufacturers (Naamsa) said on Wednesday. 
> 
> When stripping out sales from Associated Motor Holdings and Amalgamated Automobile Distributors -- which report separately -- sales fell by 26,2% to 29 667 units compared with August last year, Naamsa aid.
> 
> Vehicle sales remain weak, having been in decline for more than two years, knocked by soft domestic demand, while a global downturn has slashed exports.
> 
> Exports were down 66,7% in August at 9 030 vehicles.
> 
> "This was an improved performance in relation to previous months," Naamsa said, noting that August 2009 contained one less working day than August 2008.
> full story from M&G here


It look like we're at the bottom of the trough, then. Or even starting to recover.

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## Dave A

> Business confidence in South Africa is at its lowest level in 10 years, according to the RMB/BER Business Confidence Index released on Wednesday. 
> 
> The index declined in the third quarter, falling by three points to 23. 
> 
> This was the index's lowest level in 10 years -- a reading of 15 was recorded in the second quarter of 1999, just before the start of the last cyclical economic upswing in September of that year.
> 
> RMB said the third-quarter decline in business confidence was the net outcome of different results for the individual sub-sectors comprising the overall index.
> full story from M&G here


What is interesting is there's a subtle shift in the cause - driven more by decreased margins than adverse changes in volume.

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## Dave A

> Retail sales declined in September, Statistics South Africa said on Wednesday. 
> 
> A decrease of 5,1% was reflected for September 2009 when compared with September 2008, the Pretoria-based agency said.
> 
> In August, retail sales declined by a revised 6,5% year-on-year, Statistics SA noted.
> 
> September's figure came as a shock as most economists had predicted a 4,4% year-on-year decline.
> full story from M&G here


 :Frown:

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## BBBEE_CompSpec

Just a useless piece of info for you guys, the motor vehicles on a new cars showroom floor do not belong to the dealer principal but to the bank that is to finance the vehicle. So when you next visit a showroom and you see plenty of cars, don't believe the dealer principal has money. (S)He has been bullied into taking the cars as the financing bank controls the showroom floor space. The financing bank has the final say and not the dealer principal. The markup on the vehicles is low and the commissions earned by the dealer principal is even lower. Every new car dealer principal has a F & I Manager seconded to him/her to complete the sales.

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## BBBEE_CompSpec

I assist in the maintaining of BBBEE Scorecards. One of our major fights with government is that Dealer Principals are being penalized an extra 50% on their total turnover. The Financing Houses should be taking responsibility for their portions.  If you know any Dealer Principal/Owners who have an issue with this they are to please contact me as I am building a dossier for the DA that must be represented to government for amendment.

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## BBBEE_CompSpec

When you state retail sales have dropped in September, go to StatSA and check the details. It is usually the profit on retail sales has dropped and not the total sales turnover. The banks never lose.

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## Dave A

Then surely the figure would be quoted as retail *profits*?

Vehicles and retail sales have always been good indicators of the financial health of the consumer. If we're trying to assess whether the economy is growing or shrinking, it's the *volume* that counts. The profit of retailers is not nearly as relevant as their volumes.

It would be unsurprising to find that retail profits are affected by changes in volume, though  :Stick Out Tongue:

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## Dave A

Some good news - CPI is back in the 3-6% range.



> South Africa's targeted consumer inflation slowed in line with expectations to 5,9% year-on-year in October, returning to the 3% to 6% target band for the first time in more than two-and-a-half years, official data showed on Wednesday. 
> 
> Statistics South Africa said annual headline consumer price index (CPI) slowed from 6,1% in September while it was unchanged on a monthly basis compared with 0,4% the previous month.

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## sterne.law@gmail.com

> Some good news - CPI is back in the 3-6% range.


This will change very quickly if ESKOM gets its way. Even if the prediction of a 25% increase comes through, it will be tough to perform in this band width

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## Dave A

ESKOM, the forex current account, the exchange rate, price of oil in Rands, food prices, pay increments... No shortage of stuff to burst the bubble.

But at least we were able to claw it back this time around. When inflation starts running you wonder whether it's going to just accelerate away totally out of control.

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## wynn

OOPS!! now Dubai is putting pressure on the world markets????

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## Marq

I still do not believe this cpi number.

As a consumer, out there most days shopping for something or other, I see nothing but increased prices. Twolley for twolley (I buy more or less the same items and stuff on a regular basis) I reckon basic food and household stuff is up over 20% this year. My rates are through the roof at 500%, electricity...well you all know the story there, water - my bill is in excess of 1k every month now, last year was round about R300-R400. Communication costs from telkom, vodacom etc seem to be static. Medical care..wow can anybody afford this anymore, Clothing...mmm...maybe the same to cheaper on the basics. On the plus side petrol is probably about 10% overall down (15% compared to nov last year) But from Dec last year to what it is being increased to now it will be about 8% up year on year. Wages seem to be up about 8 - 10% average, yet no one has any bucks.

This is a 'consumer' price index - I am not sure what else a consumer would configure into the argument for an inflation number......go figure. 

Unless you want to factor into the equation - Gill Marcus and the inflation targeting scenario with the need to impress with soothsayer economists, or the bum stats sa statististics that no one knows where the numbers come from, or a need to reduce worker demands and communist union activities, or how about the need to show we are no longer in a recession and produce some positive numbers out the hat for a great festive season BS.

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## Dave A

Interest on debt is down.
Housing prices/accomodation costs - down or thereabouts.

 :Hmmm:  What's in this measured basket must be published somewhere.

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## sterne.law@gmail.com

The basket of goods used to measure CPI is a HUGE bone of contention. About 3/4 years ago, I had an Accounting lecturer who at the time had just resigned from his post as Financial something or other in a government position here in KZN. He was a contender for Mayor, so fairly high up. On chatting about CPI and teh like, he raised the point that the goods used to measure in no way are indicative of spending patterns of teh nation. A key point to show this, JEWELERY is in the calculation and as a fairly considerable percentage. Will be interesting to know the make up of this basket

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## Dave A

I suspect the answer lies in one of the documents listed on this page about CPI from Stats SA. I had a tough time trying to fgure out which one dealt with the current basket, though.

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