The most recent BankservAfrica Economic Transaction Index (BETI) indicates that economic activity over the short term is in retreat, despite still being positive when compared to a year ago.
This latest quarter was the weakest quarter-on-quarter change since November 2013 and shows how deep the decline in the South African economy is, according to economic transactions as measured by BankservAfrica.
There was a 3% year-on-year decline in the number of transactions reflected by the BETI, making this the second consecutive month of decline in the number of transactions.
“The BETI indicates that monthly changes are declining at the fastest rate. Three consecutive monthly declines are unusual when an economy is not in decline. This has happened only once in the last four years,” Mike Schüssler, Chief Economist at Economists dotcoza.
“Should there be a third quarter measuring a decline, this would put the South African economy into a technical recession. It is highly likely that most people have begun experiencing the effects of the current continuous decline in the economy already.”
The South Africa economy is being hit hard by lower commodity prices, low consumer confidence as measured by FNB, and business confidence as measured by RMB. The Standard Bank PMI is also negative, as is the SARB lead indicator.
“The BETI is a good co-incident indicator which confirms the overall decline in the domestic economy. When five of the last nine months have indicated monthly declines with four quarter-on-quarter declines as well, the BETI is certainly not indicating a strong economy. This is in spite of the fact that, due to strike action in 2014, we are comparing current figures to a low base, making the annual changes seem artificially high,” says Dr Caroline Belrose, Head of Fraud and Data Analytics at BankservAfrica.
The evidence suggests that there is unlikely to be a quick turnaround of the situation.
Forecasts from official sources such as the IMF and the South African Reserve Bank indicate much slower growth for 2015 and 2016. These predictions are backed up by the BETI, which predicts that the growth forecast may decline further.
Comments Patrice Rassou, head of Equities at Sanlam Investments, “Global equities experienced their worst quarter in four years, down close to 10% to the end September 2015. Disappointing global growth, falling commodity prices, extreme market whiplash and a weakening rand all contributed to a sharp pull-back of the JSE in the quarter, with emerging markets seeing half a trillion dollars in capital flee out. This is the first net outflow from emerging economics since the 1980s.
“Our estimate of fair value for the rand is between 10.50 and 11.50 to the US dollar. The SARB added fuel to the fire by hiking rates despite an SA economy which contracted in the second quarter with macroeconomic imbalances not being helped by mining and manufacturing sectors hamstrung by load shedding and labour unrest.”
The turbulence in global markets may be the result of hitting the air pockets mentioned above. However, what market participants are bracing for is the potential buffeting that a Fed hike would unleash towards year-end. Financial markets have benefitted from years of quantitative easing and the timing of the first rate hike has been the cause of great anxiety. This culminated in the volatility index (VIX) hitting four-year highs towards the end of August.
Towards quarter-end, financial markets took a further blow with news that German car maker VW, which has only overtaken Toyota as the world’s largest vehicle seller this year, had falsified various emission tests in the US, leading to a massive collapse in its share price and shaking investor confidence further. This put further pressure on the price of platinum metals used in diesel auto catalysts.
“But before raising the white flag,” he says, “it is worth pointing out that the global economy survived a worse scenario four years ago. After the Great Financial Crisis valuations for equities were more extended than now after suffering a massive earnings collapse. Before quantitative easing kicked in, the equity risk premium was not as attractive as it is now and investors felt the need to de-gear over-leveraged balance sheets. Now we have a lot of cash sitting on the side-lines and both individual investors and companies have had time to repair balance sheets.”
However, softer global growth has led to weak demand for our exports and dumping of various products on our shores, ranging from steel, poultry, and cement to sugar, he adds. Industries already hamstrung by load shedding and difficult labour relations have been attacked by cheap imports. “This has forced a number of companies into business rescue with the whole of the steel sector on the brink and the precious metal sector under huge pressure. While this is not unique to South Africa, our small open economy with a huge unemployment problem can ill afford such a blow. It is no wonder that Business confidence is at four-year lows and debates about the impact of inequality following Thomas Piketty’s visit to our shores have been raging.”
Equity markets have experienced the highest level of volatility since the Lehman Brothers collapse seven years ago. The JSE has been caught in the downdraft of the emerging market sell-off with the rand weakening some 21% against the greenback year to date. And given the slew of new listings on our exchange, it would appear that investor demand for risky assets has not waned. The risk of capital loss is now greater than ever and a disciplined approach to investing remains key.