SOUTH AFRICA – Economic Results Q2: 2021

The local economy grew by 1.2% during the second quarter of 2021 on an annualised basis. This is now the fourth consecutive quarter of positive economic growth which shows us the resilience our economy has against the global COVID-19 pandemic.

Many would by happy to see at least some form of positive news with regards to our most recent GDP growth figures as the most recent unemployment data, published by StatsSA, shows a record high number of unemployment coming in at 34.4%. The disbalance we see between a growing economy along with an increasing amount of people losing their jobs just shows how the economic participants have started to better utilise their infrastructures and essentially produce more with less.

It is important to note that the required changes that were brought about by the global pandemic has forced numerous economic participants to restructure their internal processes in order to iron out any wrinkles within their production lines as there were no excess funds at all, at some instances there were not even funds to carry forward with operations for some participants.

Although the most recent GDP figure of 1.2% does not get anyone excited about a booming recovery, there are a few hard facts we must look at. The first being our current output levels, currently around R1,1Tn which is equivalent to Q4 2017 output level, meaning that it is evident that our recovery period still has a long road ahead.

Growth within the mining sector has been relatively stagnant, even before the COVID-19 pandemic. However, we can mostly thank higher commodity prices for the increased trade surplus that we have seen from Q1 (R451bn) to Q2 (R614bn), 36% higher over the quarter. Fixed investment constraints within the sector continue to be a concern as key maintenance and machinery replacements can only be delayed for so long. However, for a sector that’s been a high contributor to our unemployment level in the past, it is good to see employment figures increasing within the sector from the most recent results.

KEY ECONOMIC INDICATORS – Domestic Economy

Gross Domestic Product (GDP %) –   Industry growth in Q2 2021

Output growth during the second quarter of 2021 has mainly been driven by growth in the Transport, Personal Service and Trade sectors.

Although the mining sector had very little growth, even when measured to 2019 as a more ‘normal’ reference as opposed to 2020, we can be pleased with the fact that employment within the sector is increasing which most certainly helps the economy given the rising unemployment figures of recent.

However, high commodity prices are being utilized by many countries who have similar levels of natural resources such as South Africa, the more vaccinations within the sector’s workforce can take place, the better high commodity prices can be utilised as the workforce will be able to run at a higher operational capacity.

It has been highly debated whether the South African economy should be more reflective of the global economy and how it is getting much more concentrated to a technological environment. Especially as the South African economy has been mostly reliant on manufacturing, mining and construction, as most of the global economy was before the commercialisation of technology. However, this is very achievable for our economy but it would require a considerable investment within our education system and policies around the industry so that we can compete at a global scale.

Inflation (CPI %) – Headline CPI (2021: Q2 % YoY)

The main contributors to the 4.9% inflation rate for June 2021 were food and non-alcoholic beverages, housing and utilities, transport and miscellaneous goods and services.

Food and non-alcoholic beverages increased by 6.7% on a year-on-year basis, contributing 1.2% to the total CPI rate of 4.9%. Transport increased by 12.3% year-on-year, contributing 1.7% to total CPI for the period. Housing and utilities increased by 2.6% year-on-year, which contributed 0.6% to the total CPI Figure.

Unemployment Rate (%) – As measured by the narrow definition
Source:StatsSA

There are numerous reasons why we are seeing the unemployment figure rising as we see the economy growing (recovering). This can be attributable to many sectors whose employees are simply working from home, working longer hours, in some instances are more productive while working from home. Then we have to look at the bigger scope, where industries had to restructure their entire process as they were forced to do so by the challenges presented COVID-19 pandemic. Which means that they are now able to operate at higher output levels with less input, in this instance in the form of labour.

Also, many sectors are still well below pre-COVID levels and are struggling to recover as the demand for their products and/or services just is not there yet in this recovery phase.

SACCI South Africa Business Confidence Index
Source: StatsSA

The most recent looting activity that the country has experienced, which made headlines across the world, was the main contributor to the lower business confidence index levels over the period. The occurrence of such events and the lack of legal enforcements against the parties involved has been and will continue to be one of the main issues which will inevitably make it more difficult to attract in form of foreign investment which is especially much needed given the current state of our economy and our workforce.

The looting activities and the events thereafter shows us that it is now more than ever time for change within the national government and for policymakers to have the economic development of the country as main priority and setting a framework which is accommodative of it. Otherwise, our economy will remain where it is with a lot of political and social unrest across the country. Needless to say, the abovementioned is most likely one of the worst contributing factors at this point in time as we are at a point where we have to collectively rebuild our economy and not further demolish it.

Key Rates – Local Interest Rates
Source: SARB

As we all know form previous ‘economics 101 courses’ there is a negative relationship between interest rates and inflation rates. This means that the central bank of a country decides on interest rates which are accommodative of the inflationary environment of the economy.

This is exactly what the Monetary Policy Committee (MPC) of South Africa is doing by keeping interest rates unchanged for the quarter as the inflationary environment of the economy still allows the SARB to keep interest rates at its accommodative levels which is much needed in order to further aid the economic participants of the country with the road to recovery.

It seems highly unlikely to see any unexpected increases in the key interest rates as our unemployment figures for one is at very fragile levels and higher interest rates will only increase the unemployment level as the cost of doing business will inevitably increase along with a interest rate hike.

DOMESTIC EQUITY MARKET – JSE
Source: Bloomberg

The JSE and its peers have been facing a difficult patch during the last couple of weeks as the global sentiment is weary due to higher inflation across the globe. The key central banks across the world are also of the opinion that short term inflation rate spikes will not lead them to increase interest rates out of short-term panic or fears.

Most of the after effects of the recent supply chain disruptions caused by the global COVID-19 pandemic which has teen since been amplified by the supply stoppage cause by a ship which blocked one of the world’s most important trade routes.

This creates a short-term shortage of products in their respective markets and because the world is so globalised and integrated, any halt to the flow of goods will create short term price hikes which will cause inflation to experience similar short-term increases. However, in our point of view any short-term ‘cool-down period’ the market experiences lead to another buying opportunity as many market participants tend to overreact in these situations which causes the price of the market to over extend at times.

GLOBAL ECONOMY

G10 Countries’ Exchange Rates

The world and its underlying economies are well underway with their recovery plans and vaccine rollout programmes. However, there is a widening gap forming between advanced economies and developing economies with regards to the rate at which their populations are vaccinated but most importantly their access to COVID-19 vaccines which is currently the main contributor behind slowed economic recovery in developing nations.

Think of it this way, many developing nations whose economies still rely heavily on sectors where their workforces are classified as high risk due to the nature of their work, they are prone to be exposed to the COVID-19 virus.  These sectors cannot operate at their full capacity due to operational restrictions placed to protect the workers from exposure to the virus, however, they most likely don’t have a s widespread access to vaccines as mor advanced economies whose populations have almost been fully vaccinated.

In order for the global economy to fully utilise the current low interest rate environment the access to vaccines will have to improve and the implementation of the vaccination programmes will have to speed up as the current gap between the GDP growth figures of advanced economies and developing economies will only worsen.

G10 Countries’ Key Economic Indicators
Source: Bloomberg

COMMODITIES
Source: Bloomberg

Brent Crude Oil

Brent crude oil prices reached the highest levels (around $80 per barrel) during the most recent period, its highest since October 2018. Mainly due to restrictions that had been placed on supply in response to the initial demand slump that was brought about by the COVID-19 pandemic. However, as more parts of the world get vaccinated and their economies return to pre-pandemic levels of output, demand for Oil is increasing at a faster than anticipated rate.

This trajectory is likely to continue and we might experience even higher inflation figures across the globe because of it. This purely means that the excess demand for Brent Crude Oil will lead to higher input costs across the board as there is currently limited supply. As input costs for goods and services rise the prices will rise for the end user which in turn leads to higher inflation.

Gold

The gold price has settled down somewhat during the middle part of the year as we have seen the global economy entering the recovery phase which in turn leads to new economic opportunities and a risk-on environment so to say. We have seen from historic prices that the return of riskier asset classes tends to be negatively correlated with the return of safe-haven asset classes such as gold.

However, there’s never really a bad time to have some gold exposure in your portfolio as it acts a direct hedge against inflation, which will be useful once interest rates have to rise to combat a high inflationary economic environment.

As gold prices are still relatively high compared to pre-pandemic levels, there are still numerous opportunities to profit within the mining sector across the world as this will give investors a  cash generating component by being able to share in profits in the form of dividends due to the current price environment allowing mining companies to generate excess profits without necessarily having to be more efficient with their operations, they are purely getting more for the same output as prices are higher.

Sources:

Bloomberg Markets (https://www.bloomberg.com/markets)

The South African Chamber of Commerce and Industry (https://sacci.org.za/)

Trading view (https://www.tradingview.com/)

Statistics SA (http://www.statssa.gov.za/?page_id=593)

South African Reserve Bank (https://www.resbank.co.za/Pages/default.aspx)

The World Bank (https://www.worldbank.org/en/publication/global-economic-prospects)

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