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VIDEO: SA’s stagnating economy not necessarily a good or bad thing – FNB economist, John Loos

By Marc Jacobson - May 19, 2017
VIDEO: SA’s stagnating economy not necessarily a good or bad thing – FNB economist, John Loos

FNB Household and Property Sector Strategist, John Loos, was the keynote guest speaker at the South African Property Owner’s Association (SAPOA) breakfast at the PE St. Georges Club on Friday morning.

Loos gave a talk on the economy property outlook in South Africa, and with this onset, he spoke of the stagnating phase the South African economy, in regards to property development, has experienced over the last decade.

He emphasized that prior to the last decade, when South Africa underwent the radical political change in post-1994, the country’s economy went into a super cycle upswing, which was helped greatly by the consumer and residential property boom.

“Since 2008, we [South Africa] have been in that stagnating phase again and that would mean some property super cycle correction as well. This business cycle upturn that has occurred variously this year is just short term noise,” Loos addressed at the SAPOA breakfast.

“There are short-term fluctuations in a better economy and a worse economy, but the difference being that nowadays when we are in this stagnation phase, an upswing would take us to 1%-plus GDP growth, but back when the economy was booming, an upswing would take us to 5%-plus growth,” Loos said.

Loos also stated that in a stagnating economy, there will be higher inflation, due to governments running bigger deficits and creating more inflationary environments, with more inflationary policies – which the country has longingly in the last decade experienced.

“Interest rates then move up radically to try curb inflation, and capitalization rates then starts to lead it more pronounced. Increasing capitalization rates don’t only get driven by long term or short term interest rates, but also by a stagnating economy and rising vacancy rates.”

Regarding its forecast period until 2019, local government bond rates were also said to rise gradually when, the US gradually lifted its interest rates and then as a result, local government debt increases as a percentage of the GDP.

“The Rand then comes under some renewed pressure as a result of US interest rate hikes, capitalization rates also rise slowly during this forecast period, as well as the increase of bond yields and vacancy rates,” Loos said.

Loos added that in tough economic times, with regards to property value and the development model, retail space outperforms industrial, while both outperform office space, which has been seen over the last two decades. The enhancement of technology has also to an extent up-yielded office space, with regards to productivity and filing systems.   

He then goes on to say that structural changes in these sectors, may not fully validate that model.

“Gone are the days when we had dingy corner café’s in suburbs, but instead, major upgrades have been done and now have major consumer brands, meaning the major shopping malls [retail] do not any longer have such major shopping currents.”

“The bigger malls have to do some reinvention, as they face the threat of online shopping and of these smaller centres more and more.”

Regarding the economic super cycle as mentioned, Loos expressed that the stagnation is not a matter to warrant complete negativity, but rather, as he describes, “it’s not negative, it’s not positive, it’s a way of life.”

“Everything works in cycles, and we have super cycles, because in booms, we feel its constant, that it will never end and complete optimism takes over where we see good structural change.”

“As a result we make stupid business decisions, we then create imbalances, we land ourselves into debt – too much this, and too much that, and then we cause the downturn, because of that."

"Then on the downturn, we start making good decisions and start building lean and competitive businesses and so gradually over the next few years we set ourselves up for the next good period,” added Loos.

Watch what else Loos had to say regarding the stagnating economy and radical political change