ECON­OMY WATCH

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There was no stop­ping the flow of bad eco­nomic news in July. How­ever, SA’s fi­nan­cial mar­kets largely avoided con­ta­gion from the Grexit drama which, like China’s eq­uity rout, has abated for now.

But while the worst global risks ap­pear to have been dodged, key do­mes­tic eco­nomic in­di­ca­tors con­tin­ued to de­cline over the past month. This sets a grim tone for SA’s sec­ond quar­ter GDP num­ber, which will be re­leased at the end of Au­gust. And on July 23 Re­serve Bank Gover­nor Le­setja Kganyago hiked in­ter­est rates by 25 ba­sis points.

Of the slew of neg­a­tive data re­leased in July, the most shock­ing was the col­lapse in the First Na­tional Bank/Bureau for Eco­nomic Re­search con­sumer con­fi­dence in­dex (CCI) and the SA Cham­ber of Com­merce & In­dus­try’s busi­ness con­fi­dence in­dex to around 15-year lows. Both are lower than at the start of the 2009 re­ces­sion.

For Rand Mer­chant Bank chief economist Et­ti­enne le Roux, the sharp drop in the “time to buy durable goods” sub-in­dex of the CCI is “a ter­ri­ble omen” for the con­sumer-fac­ing sec­tors.

For in­stance, it sug­gests a con­tin­ued, if not faster, de­cline in new pas­sen­ger car sales vol­umes. The pas­sen­ger car mar­ket has been in de­cline since mid-2013, with the av­er­age daily selling rate in June the low­est since May last year. Real re­tail sales also re­mained flat in May for the third month run­ning when ad­justed for sea­sonal pat­terns.

“Con­sumers are clearly quite frag­ile at the mo­ment,” says Le Roux. “Wor­ry­ing too, is that the bad news was not only lim­ited to the de­mand side of the econ­omy. Man­u­fac­tur­ing out­put again con­tracted in the month, as did min­ing pro­duc­tion. The econ­omy is be­ing buf­feted from all over — a most un­for­tu­nate sit­u­a­tion.”

Econ­o­mists are braced for another dis­ap­point­ment when the sec­ond quar­ter GDP num­ber is re­leased later this month. SA achieved growth of just 1,3% q/q in the first quar­ter. The Reuters con­sen­sus is for growth of no more than 1,9% this year, ris­ing to 2,2% in 2016 and 2,6% in 2017, as­sum­ing an eas­ing of the elec­tric­ity sup­ply con­straint.

Con­firm­ing the im­pres­sion that the econ­omy is headed for con­tin­ued stag­na­tion at best, the Re­serve Bank’s lead­ing in­di­ca­tor con­tracted in May for the 20th straight month by a sig­nif­i­cant 3,4% y/y (against April’s de­cline of 1,5%). This is its weak­est level since Novem­ber 2009.

Cru­cial to SA’s growth prospects is the health of its key trad­ing part­ners, China and Europe.

Bar­clays’ cur­rency strate­gist Mike Keenan says the best guide as to whether China’s slow­down is gain­ing mo­men­tum is not the per­for­mance of the Chi­nese eq­uity mar­ket but the ex­tent of fall-off in its de­mand for com­modi­ties and hence the move­ment in com­mod­ity prices.

At the time of writ­ing, gold had fallen be­low the psy­cho­log­i­cal $1 100 bar­rier, tum­bling to $1 072/oz — its low­est level in nearly five-and-a-half years. Sil­ver, plat­inum and pal­la­dium had also hit mul­ti­year lows.

The weak­ness in com­mod­ity prices is be­ing fu­elled not just by China’s slow­ing, but also by a resur­gent dol­lar. (A strong dol­lar raises the price of com­modi­ties for buy­ers with rel­a­tively weaker cur­ren­cies, de­press­ing global de­mand and hence prices.)

The dol­lar’s rise has been given fresh legs by Fed­eral

Sharp drop in sub-in­dex of the CCI is ‘a ter­ri­ble omen’ for the con­sumer-fac­ing sec­tors

Re­serve chair Janet Yellen’s re­cent state­ment that she ex­pects the Fed to raise in­ter­est rates be­fore the end of 2015. This goes against the ad­vice of the In­ter­na­tional Mon­e­tary Fund, which in June urged the Fed to wait un­til 2016, cau­tion­ing that there was too much un­cer­tainty to jus­tify a hike this year.

Mar­ket-watch­ers will have noted the lan­guage used by the Fed at its meet­ing this week, as well as on US data on wages and em­ploy­ment over the com­ing month in or­der to ob­tain greater clar­ity about the lift-off date.

US eco­nomic data has been im­prov­ing steadily, sug­gest­ing the Fed could lift off as early as Septem­ber (fu­tures mar­kets are pric­ing in a 50% chance of this) but the strength­en­ing dol­lar im­plies an im­plicit tight­en­ing of the US econ­omy since it re­duces the com­pet­i­tive­ness of US ex­ports.

Also, rais­ing US rates now would be detri­men­tal to global growth. With the eu­ro­zone’s frag­ile re­cov­ery threat­ened by the tur­moil in Greece, and China’s growth out­look in ques­tion, this would seem to count against the pos­si­bil­ity of an early hike.

“The US is not an is­land. It needs to keep a very close han­dle on the growth prospects of its main trad­ing part­ners,” says Keenan. On the other hand, he con­cedes that it is un­clear to what ex­tent the US fac­tors in global con­sid­er­a­tions when mak­ing mon­e­tary pol­icy de­ci­sions.

As a for­mer trea­sury sec­re­tary fa­mously once joked: “My cur­rency, your prob­lem!”

Keenan be­lieves that the cen­tral banks of the US and SA are both fac­ing “a wa­ter­shed mo­ment”. Nei­ther is fac­ing the ex­po­nen­tial in­crease in de­mand that jus­ti­fies the need to hike rates at their next meet­ing, in his view. Yet, for cred­i­bil­ity rea­sons, there is a limit to how long both banks can keep talk­ing tough but do­ing noth­ing.

Speak­ing at the an­nual BER con­fer­ence in Johannesburg in June, Re­serve Bank deputy gover­nor Daniel Mminele warned that US pol­icy nor­mal­i­sa­tion could re­sult in fur­ther weak­ness in the rand against the dol­lar, and could also neg­a­tively af­fect port­fo­lio flows by re­duc­ing the will­ing­ness of fund man­agers to hold un­hedged po­si­tions in South African bonds and eq­ui­ties.

At the same time, a weaker ex­change rate would prob­a­bly raise im­plied rand volatil­ity, adding to over­all risk aver­sion and weak sen­ti­ment to­wards rand-de­nom­i­nated as­sets.

This risk was il­lus­trated dur­ing the 2013 ta­per tantrum, he said, dur­ing which the rand lost 10% of its value against the dol­lar and port­fo­lio flows into SA re­versed from an R85bn in­flow in 2012 to an out­flow of R55,5bn in 2014.

In the year to date, for­eign­ers have bought R41,5bn worth of eq­ui­ties and R11,6bn worth of SA gov­ern­ment bonds. SA’s de­pen­dence on these con­tin­ued in­flows to fi­nance the cur­rent-ac­count deficit makes it vul­ner­a­ble to US pol­icy tight­en­ing.

Also, any sig­nif­i­cant weak­en­ing of the ex­change rate in re­ac­tion to US mon­e­tary pol­icy tight­en­ing could worsen SA’s in­fla­tion out­look.

The other chief do­mes­tic risk to the in­fla­tion out­look is higher-than-ex­pected wage set­tle­ments. As such, the on­go­ing wage talks in the gold and coal sec­tor have be­come an im­por­tant barom­e­ter of sec­ond-round in­fla­tion risk.

Af­ter four weeks of gold min­ing wage talks, the par­ties are still far apart — with em­ploy­ers hav­ing re­fused to re­vise their wage of­fer of 7,8% to 13% at the en­try level against the unions’ de­mands for in­creases of up to 100%.

With con­fi­dence in tat­ters and eco­nomic growth be­set with down­side risks, SA needs to avoid a min­ing strike at all costs. In this re­spect, Au­gust looks set to be­come a cru­cial month.

Cru­cial to SA’s growth prospects is the health of trad­ing part­ners China and Europe US eco­nomic data has been im­prov­ing steadily, sug­gest­ing the Fed could lift off as early as Septem­ber

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