Economy: is there light at the end of the tunnel?
EVERYONE knows that 2018 was a tough year. They feel it in their pockets, their savings have shrunk, jobs were lost and they feel betrayed by politicians. But just how bad was the South African economy in 2018?
Statistics SA this week announced that the economy grew by 0.8 percent, helped by positive growth annualised rate of 1.4 percent in the fourth quarter. The positive growth in 2018 was driven by the finance, real estate and business services industry and government expenditure. The rest of the economy was treading water.
Let us hope that the numbers are not revised downwards in future as a contraction in the economy in calendar 2018 would have been the first since calendar 2009 during the global financial crisis and only the second time since calendar 1992 (26 years ago).
In recent years it became evident that the South African stock market as measured by the all share index is an indicator of the market’s perception of the performance of the underlying South African economy.
It is justifiably so as a company’s share price reflects virtually all factors that may influence the company’s current profit potential, including: domestic consumer demand, domestic fixed investment, strikes by the labour force, the strength or weakness of the local currency, the country’s sovereign rating, lending rates and the global economy. Yes, it also prices in the immediate impact of load shedding by the woeful Eskom.
I use a weekly smoothed annualised growth rate of the all share index as an indicator of how the economy is performing based on the quarterly smoothed annualised growth rate of the gross domestic product, adjusted for inflation. The indicator tends to lead the economy by two to three months, but is also prone to wild swings in investor sentiment.
The reading for the last quarter of 2018 came in slightly better than what the bourse was saying.
The sharp downturn of the weekly indicator in November and December is corroborated by manufacturing production that, according to iress’ data, grew by a paltry half a percent in December compared to a year ago, while mining production, including gold, also contracted sharply, compared to the previous year. Over the same period, electricity distribution by Eskom in South Africa contracted by 0.3 percent.
Although the weekly smoothed annualised growth rate of the all share index hit a bottom in December it does not bode well for the economic growth in the current quarter, and specifically due to the Eskom’s woes.
With hindsight, it seems that the SA Reserve Bank’s (Sarb’s) decision to hike interest rates in November was a bit premature and in light of the tough Budget by Finance Minister Tito Mboweni, the hike in interest rates acted as another and unnecessary burden on the consumer and businesses.
The Sarb, the Treasury and the Presidency will need to perform a balancing act to help to restore confidence in the economy, both from inside and outside the country, especially in light of the headwinds that we are facing.
We cannot argue away major external threats such as Brexit or the China/US trade war, nor can we argue away the major internal threats such as the paralysing impact of the state capture inquiry as well as the PIC inquiry on parastatals and a backlash of the rent-seekers ahead of the upcoming elections.
In the past it was the major turning points that mattered. Is the bourse saying that a bad first quarter may herald the trough of the cycle and that the worst is past us? Only time will tell, but I am fairly positive.