Economic growth could spring a surprise

ACCORDING to Finance Minister Malusi Gigaba’s medium-term budget policy statement, the Treasury’s economic growth projection for 2017 is 0.7 percent – slap bang on the consensus forecasts of economists.

While the Treasury expects growth of 1.9 percent in 2020, the consensus forecast of economists for 2018 is 1.2 percent. Are they too pessimistic?

The Economic Cycle Research Institute (Ecri) in the US is the leading authority on business cycles.

The components of their Weekly Leading Index (WLI) are proprietary but are rumoured to consist of various economic pointers such as unemployment, money supply, industrial materials prices, mortgage loan applications, bond yields and stock price indices.

The Ecri WLI (www.businesscycle.com) is designed to anticipate the turns in the business cycle. In essence, if WLI growth enters a cyclical downturn, US economic growth is likely to do the same.

The WLI growth rate is a very good indicator in regard to the global economic environment due to the impact of the US economy on the rest of the world. It is therefore not surprising that global stock markets, including the FTSE/JSE All Share index – as measured by their smoothed annualised growth rates – closely track the WLI growth rate.

The meltdown in Chinese asset prices and oil price in 2015 and 2016 caused a major divergence between the weekly smoothed annualised growth rates of emerging market equities, including South Africa, and the WLI growth rate. While other emerging markets rebounded strongly in line with the WLI, the rebound of the JSE was mooted as it was bogged down by rising interest rates and political uncertainty affecting business and consumer confidence.

Since August this year the weekly smoothed annualised growth rate of the FTSE/JSE All Share Index rose strongly despite continued political uncertainty, a grim economic outlook, despair and warnings by credit agencies.

Yes, the bond and currency markets are already pricing in further credit downgrades but what is the stock exchange telling us about the local economy?

The weekly smoothed annualised growth rate of the stock market is a relatively good indicator of the current state of the economy and currently points to the economy growing at approximately 2 percent quarter-on-quarter annualised in real terms. But what are the risks, you may ask? The Ecri WLI growth rate has fallen from 10 percent in March to 0 percent at the end of the third quarter and although the growth rate accelerated somewhat since then it is apparent that slower economic growth in the US lies ahead.

Low recession risk

Lakshman Achuthan, co-founder and chief operations officer of the Ecri, is of the opinion that the US is not at risk of sliding into recession for the time being. What it actually means is that the US has entered the late cycle stage of the expansion.

The Eurozone, on the other hand, is still at the stage where economic growth is accelerating. Output has been growing at the fastest pace over the past six years and job creation is the best in over a decade.

In the meantime, the European Central Bank indicated that although a gradual winding down of stimulatory activities such as bond purchases will continue until the end of 2018, the stimulatory activities could continue well into next year.

Consumer confidence in China is at the highest level since 1995 and the Peoples Bank of China is further pump priming the economy by lowering the amount of funds some banks must hold as reserves to encourage more lending to smaller firms and to energise the private sector.

In other emerging economies the Russian Central Bank embarked on a new interest rate-cutting cycle, while Brazil’s central bank slashed interest rates to a four-year low to get the economic recovery going.

Although global turmoil, or Black Swans, may damp economic prospects, the tailwinds of the global prosperity may mean that the South African stock market may be right in its anticipation of higher economic growth.

The removal of political uncertainty and resultant improvement in business confidence may lead to economic growth, surprising even more on the upside.

Easier monetary policies by the South African Reserve Bank will be an added bonus. May the markets be right – as usual? Ryk De Klerk was co-founder of PlexCrown Fund Ratings and is currently a consultant for PlexCrown Fund Ratings.