After the shocking Mini Budget by Min Tito Mboweni followed by Moody’s downgrade of our economic outlook from stable to negative, we needed good news. After the Springboks’ victory in the RWC, Springbok Ramaphoria hit SA. It was followed by Pres Ramaphosa’s second Investment Conference in Sandton.
Consumer confidence, measured by the FNB/BER Consumer Confidence Index (CCI), fell into negative territory in the third quarter (Q3) for the first time since Q4 2017, when uncertainty over who would take over from Jacob Zuma as leader of the ANC weighed on sentiment. The CCI dropped from +5 index points in Q2 to -7 in Q3. Consumer sentiment initially rocketed to a historic high of +26 at the height of “Ramaphoria” in Q1 2018, but then started to backpedal shortly afterwards. The decline in consumer confidence signals a further deterioration in consumers' willingness to spend, which combined with weak income growth, could weigh on total consumer spending during the second half of 2019. With household consumption making up about 60% of gross domestic product, the decline in confidence could further weigh on an economy forecast to grow by only 0.5% this year. Household budgets are increasingly being strained by rising unemployment, slow wage growth, high tax rates, and soaring electricity prices. Consumers are delaying high-value purchases and cutting their unessential spending to ensure basic needs and services are covered. The expected deterioration in consumers' willingness to spend, especially among the higher income groups, may impact sales of new vehicles, jewellery, furniture and household appliances, and other expensive luxuries. Meanwhile, the pricing power of retailers in general will likely remain constrained during the festive season.
Manufacturing production disappointed in September, dropping by 2.4% year-on-year. Nine of the ten manufacturing divisions reported negative growth rates over this period. The largest negative contributions were made by the following sub-sectors: basic iron and steel, non-ferrous metal products, metal products and machinery (down 4.8%); wood and wood products, paper, publishing and printing (down 6.5%); petroleum, chemical products, rubber and plastic products (down 2.8%); and motor vehicles, parts and accessories and other transport equipment (down 3.6%). The only positive contribution to annual growth came from the food and beverages sector which increased 2.9% on the year. Quarter-on-quarter manufacturing output contracted by 3.6% (seasonally adjusted and annualised). The contraction in the third quarter follows the 1.6% quarter-on-quarter expansion recorded in the second quarter. While other important data releases such as retail sales, wholesale sales and mining production are still outstanding, the latest release points to a potential flat third quarter GDP with the possibility of a contraction during the quarter.
Business confidence, measured by the South African Chamber of Commerce and Industry (SACCI), recorded a slight month-on-month drop in October from 92.4 to 91.7, attributed primarily to load shedding, rand depreciation and lower imports and exports. Year-on-year, the business confidence reading is down 4.1 points from its October 2018 reading of 95.8. Business confidence continues to be negatively affected by uncertainty over government’s management of the escalating debt trajectory, ballooning state owned enterprise debt and the slow implementation of market friendly economic policy. The prospect of an imminent credit rating downgrade by Moody’s adds to the pressure on business confidence.
SOUTH AFRICA: THE WEEK AHEAD
Contributed by Werner Erasmus
Retail Sales: Due Wednesday 13th November. Retail sales are expected to have shown no major improvement in September following the disappointing figures in the two prior months, indicating a slowdown in the third quarter of 2019. The consensus forecast predicts an increase of 1.9% year-on year and 0.6% month-on-month. The diminishing growth results from weak household income growth stemming from a depressed labour market.
Mining Production: Due Thursday 14th November. Following disappointing figures in the previous month, mining production is expected to have contracted in September for a second consecutive month by 2.18% year-on-year, according to consensus forecast. The decline would build on the 1.9% year-on-year pullback already recorded year to date for 2019. The pullback in mining production is exacerbated by the back of persistently high input costs and lingering economic uncertainty.
Contributed by Nick Downing
Confusion over the terms of the “phase one” trade deal between the US and China increased after president Trump denied rumours that the US would be willing to roll back some of the existing tariffs. China has all along insisted a roll back in tariffs as a precondition to any trade deal and reports suggested the US had conceded on removing tariffs on $112 billion worth of imports. While the outlook is now less certain, both sides are under increasing pressure to negotiate a deal given the slowdown in China’s economy and the approaching 2020 US presidential elections. Trump will be anxious that the trade war, which has so far affected the manufacturing and agricultural sectors of the US economy, does not spread to the household consumer sector.
Global equity markets have been buoyant over the past month, driving the FSTE All World Index to within touching distance of its 2018 record high, boosted by a combination of synchronised central bank easing, declining geopolitical risk and improving economic data. The People’s Bank of China joined the party this week, announcing the first cut in its key medium-term lending facility since 2016, helped no doubt by a firming in the yuan/dollar level back below the 7.00 threshold. The US and China appear close to finally signing “phase one” of a trade agreement, and the Brexit impasse is closer to being resolved following approval by the EU and the British parliament of the government’s proposed Withdrawal Agreement. Meanwhile, the slowdown in manufacturing activity appears to be bottoming out, according to a broadening improvement in regional purchasing managers’ survey data. The JPMorgan global manufacturing purchasing managers’ index has regained the key 50-level, which demarcates expansion from contraction. The bond market is sending a positive signal, with yields rising sharply in anticipation of strengthening economic activity. The total value of global bonds in negative yield territory has decreased from a peak of $17 trillion three months ago to $12.5 trillion. The inverted yield curve, which has a good track record in predicting recessions and had been in place in the US since November 2018, has now un-inverted, with the 10-year US Treasury bond yield now comfortably above both 2-year and 3-month rates. Provided bond yields do not rise spike significantly higher from current levels and geopolitical risk does not flare up unexpectedly, the conditions are ripe for further equity market gains.
Contributed by Nick Downing
The latest Wall Street Journal economists’ survey, conducted in the first week of November, from a sample of business, financial and academic economists, assigned a 30.2% probability to a US recession over the next 12 months down from 34.2% the prior month. On the question of the Fed’s three interest rate cuts implemented in the current easing cycle, only 9.6% of economists surveyed said the Fed should continue to ease policy while a much larger 40.4% said the Fed had already eased more than necessary. On the labour market, 45.3% attributed the slight slowdown in jobs growth to the rising scarcity of workers while a smaller 37.7% attributed the slowdown to falling job opportunities. The Labour Department’s Job Openings and Labour Turnover Survey (JOLTS) recorded a decline in unfilled jobs to 7.02 million, the lowest since March 2018, suggesting a decline in job opportunities. However, job openings still exceed the total number of unemployed but active job seekers by 1.26 million, indicative of continued firmness in the labour market. The overall survey data suggests the current economic expansion is sustainable.
Labour productivity, measuring the economic output per labour hour, disappointingly fell in the third quarter (Q3) by 0.3% quarter-on-quarter annualised, in contrast to the 2.5% gain in Q2. While the number of hours worked increased by 2.4%, output grew by just 2.1%. Meanwhile unit labour costs increased by a sizeable 3.6%. The productivity decline is the biggest since Q4 2015 but is not entirely unexpected. Some pullback was likely after the strong Q2 reading especially as it was revised higher from the initial estimate of 2.3% to 2.5%. Meanwhile the number of hours worked was inflated by a surge in self -employment, a volatile data reading, which is unlikely to be sustained. Nonetheless, productivity growth has been a missing ingredient in the current 10-year economic expansion, rising at an average annual rate of just 1.3% well below the longer-term post-WW2 average of 2.1%. President Trump’s 2017 corporate tax cuts were implemented to boost investment spending, in turn leading to productivity growth, but investment spending is currently at a low ebb due to concerns over the US/China trade war and loss in global economic momentum.
The Institute for Supply Management (ISM) non-manufacturing index, measuring conditions in the service sectors of the economy, rebounded strongly from a three-year low of 52.6 in September to 54.7 in October, comfortably above the neutral 50-level, signalling expansion. Among the ISM sub-indices, the employment and business activity indices increased to 53.7 and 57.0, both healthy readings, while the forward-looking new orders index increased to 55.5, indicating continued buoyancy in the service sectors over coming months. The data suggests the service sectors of the economy, which contribute almost 90% of US GDP, have not been harmed by the current manufacturing slowdown.
Contributed by Nick Downing
China’s trade data showed some signs of improvement in October, reflecting a moderation in the rate of decline in both exports and imports. While exports fell for a third straight month, the year-on-year decline slowed to 0.9% compared with 3.2% in September. Imports fell for a sixth straight month, but the 6.4% decline was an improvement on the prior month’s 8.5% drop. Trade with the US continued to slow but also at a reduced pace. Exports to the US fell 16% on the year compared with 22% in September while imports from the US fell 14% versus 16% previously. Meanwhile, exports to other regions showed a considerable upturn. To Southeast Asia they increased 16% on the year up from 9.7%, and to the European Union, they grew by 3.1% after showing nil growth in September. The bottoming out in China’s trade data signals both an encouraging recovery in China’s domestic demand and a stabilisation in global demand.
The People’s Bank of China (PBOC) announced the first cut in its benchmark one-year medium-term lending facility (MLF) since early 2016. The MLF rate cut will translate into a reduction in the newly adopted Loan Prime Rate, set on the 20th of each month, used by commercial banks to determine customers’ lending rates. While the PBOC interest rate cut is modest, with the MLF rate dropping just 5 basis points from 3.30% to 3.25%, it likely represents the start of a protracted rate cutting cycle. The PBOC will be emboldened by encouraging trade talks with the US and a stabilisation of the yuan, which has regained the psychologically important 7.0 level versus the dollar. In addition, central banks worldwide have embarked on synchronised monetary easing. The MLF is likely to be cut by a further 50-70 basis points over the next few months, which combined with ongoing fiscal stimulus will help to reflate China’s economy.
Contributed by Carel la Cock
Japan is drawing up plans to boost the economy by taking advantage of historic low interest rates. Prime minister Shinzo Abe, concerned about the negative effects of a slowing global economy and the recent increase in consumption tax, has ordered government officials to prepare a fiscal stimulus package. Although the scale of the stimulus has not been announced, spending will include repairs to infrastructure after typhoon Hagibis, but also expanding on severe weather defences. Furthermore, investment in projects to improve productivity in small and medium enterprises and the agriculture sector will also be prioritised. With interest rates currently at -0.1%, a 50-year bond has been touted to lock in low interest rates. The longest dated bond in issuance currently runs for 40 years. There is a global trend for governments of developed market to loosen fiscal policy and take advantage of low interest rates in order to better position for future growth.
Contributed by Carel la Cock
German exports for September grew by an unexpected 4.6% year on year and by 1.5% month on month. Exports of €114.2bn outstripped imports of €93bn to widen the current account to €190.7bn for the year until September. Imports were higher by 2.3% year on year and 1.3% compared to the previous month. Exports to other European Union countries were higher by 5.6% on the year and increased by 6.9% to the US, which more than offset the 3.3% decline in shipments to China. For the first nine months of the year, exports were up 0.9% compared to the same period in 2018. It is hoped that the positive trade data might help Germany avoid a technical recession in the third quarter after posting a 0.1% contraction in quarter two. GDP figures will be released later in the week amid fears that Europe’s largest economy might have stalled.
Contributed by Carel la Cock
Whilst the UK avoided a technical recession, classified as two consecutive quarters of economic contraction, it reported the worst two-quarter economic growth figures since the global financial crisis. Third quarter GDP growth of 0.3% quarter on quarter or 1% compared to the third quarter in 2018, marked a rebound from the 0.2% contraction in quarter two, but still suffered from Brexit uncertainty and the general lack of business investment. This year’s quarterly growth figures have been distorted by stockpiling ahead of the original Brexit deadline and the subsequent unwinding of inventory. Quarter three was largely free from these Brexit distortions and showed positive signs from the service and construction sectors, while growth from the production sector remained flat. Private consumption (0.26), government consumption (0.06) and net trade (1.22) all contributed positively to growth, in contrast to fixed capital formation which detracted 1.24 percentage points from GDP and remained weak due to ongoing Brexit uncertainty. Should prime minister Boris Johnson’s Conservative Party win the general elections on the 12th December, it could boost the UK economy given Mr Johnson’s promise to complete Brexit. Wins by opposing parties could further delay Brexit or scrap it all together. UK businesses need certainty to start investing again and kickstart the UK economy.
FAR EAST AND EMERGING MARKETS
Contributed by Carel la Cock
Gavyn Davies, chairman of Fulcrum Asset Management and former economic advisor to the UK prime minister, explores the possibility of another surge in global equities in an opinion piece for the Financial Times. He points out that since the global financial crisis there have been several periods of relative weakness followed by “extremely powerful surges in risk assets”. Those included the periods following the eurozone debt crisis from 2011 to 2014 and following China’s currency devaluation from 2016 to 2018. During the last surge the FTSE Global All Cap Total Return Index rose by 60% from February 2016 to January 2018. Mr Davies argues that there are similarities between the conditions prior to the previous two booms and current conditions that have caused markets to be subdued. Brexit and the US-China trade war, although still unresolved, have both moved in the right direction recently. Central banks have become more dovish on monetary policy with the Federal Reserve easing on monetary tightening and Europe and Japan both have rates in negative territory. However, there are certain key elements from the previous two bull markets missing. Mr Davies lists the key differences as the US economy being much closer to full capacity now “which implies that future growth is more likely to be constrained by supply shortages than during the previous upswing”, while “the last recovery benefited from the fiscal stimulus introduced by the Trump administration” and above average growth in the eurozone, which are unlikely to be repeated. He concludes that any rebound in equity markets will be much lower than those seen in the last major upswing, remarking that the rallies “may be adequate, but not great”. An increase in risk appetite stemming from the potential upswing in global equity markets will be especially positive for emerging market equities.
KEY MARKET INDICATORS
JSE All Share
JSE Fini 15
JSE Indi 25
JSE Resi 20
Contributed by Gielie Fourie
After the tough Mini Budget by Min Tito Mboweni, followed by Moody’s downgrade of our economic outlook from stable to negative, we needed good news. After the Springboks’ victory in the RWC, Springbok Ramaphoria hit SA. It was followed by Pres Ramaphosa’s second Investment Conference in Sandton. We have a look at some of the discussions.
Business Climate: Ramaphosa addressed local investors and investors from 22 countries at the second SA Investment Conference. He outlined the steady but sure progress being made to make SA a more competitive investment destination. He said government was in the process of implementing several reforms to improve the business climate and attract further job-creating investments. He made specific reference to the liberalisation of our tourist and business visa systems, cited as major constraints to tourism growth and on foreign companies’ ability to bring in international managers and executives. The business-registration process, which currently takes more than a month, is being overhauled. Ramaphosa promised to reduce the process to hours rather than the day outlined in the pilot project. In addition, securing a water-use licence should take three months in future, rather than three years.
Investment Fund: Progress is being made in setting up an Investment Fund, which will draw on both public and private finance to help close ongoing economic and social infrastructure backlogs. Ramaphosa said the fund would seek to draw on the success of the Renewable Energy Independent Power Producer Procurement Programme, which had facilitated hundreds of billions of rands of investment into mostly wind and solar projects since 2011.
Energy Security: Energy security is being prioritised, with investment in new generation technology to be guided by the recently approved Integrated Resource Plan (IRP) and supported by the restructuring and modernisation of Eskom. Ramaphosa said a new Eskom CEO will be appointed within days. Government is also working on a plan to extend debt relief to Eskom, whose debt burden had risen above R450-billion and beyond a point where Eskom could repay the debt without government support. Anglo American CEO Mark Cutifani said Eskom was a risk to investments. However, Cutifani said there is a clear view within the government of what has to be done at Eskom, with SA forging ahead with the split of the power utility into three independent units of generation, distribution, and transmission.
Broadband Spectrum: The process of releasing high-demand broadband spectrum has been initiated, seen as critical to both creating capacity for growth in the information communication and technology sector, as well as lowering the cost of communications and digital services.
Levelling the Playing Field: Ramaphosa concluded: “We are on a path of removing impediments and constraints to inclusive growth. We have embarked on a path that is illuminated by policy consistency and regulatory certainty, fiscal responsibility, and decisive interventions to stimulate economic activity. The Target: The initial target was to raise R1.2tn within five years. We have raised R663 billion in 2018 and 2019. Ramaphosa made a bold announcement that SA plans to feature in the top 50 countries in the World Bank’s annual ease of doing business report in the next three years. Currently SA is in 84th position out of 190 countries.
2018: At last year’s Investment Conference R300bn was promised – 80% (R238bn) of these promises have already been allocated to 31 projects, ranging from adding production lines at manufacturing plants to exploring new mining operations. Eight projects have been completed, while 17 projects are in the implementation phase. The remaining projects are still in the planning phase. R60bn is going through regulatory clearances. It normally takes many years, and not one year, to go from planning to opening a manufacturing factory or new mining operation. There are critics who says that the numbers are vastly overstated. They may be correct. The bottom-line is that we now have a written and measurable program. And if you can measure it, you can manage it.
Ramaphosa’s Little Helpers: Ramaphosa has gathered a strong team around him. He has appointed an 18-member Presidential Economic Advisory Council (a brains trust) with effect from 1 October 2019. The Council constitutes expertise in international economics; macroeconomics (including fiscal policy and monetary economics); labour economics; economics of education and the economics of poverty and inequality and urban development. Ramaphosa’s economic advisor is businesswoman Trudi Makhaya. Makhaya holds a number of degrees in business and economics, including from Oxford University and the University of the Witwatersrand. Raised in Hammanskraal and schooled at St. Barnabas College in Bosmont, Johannesburg, Makhaya went on to study at Oxford where she read a Masters and an MBA. She added a second MSc. Ramaphosa has also established an investment and infrastructure office, to be headed by former Gauteng MEC for Economic Development, Kgosientso Ramokgopa. He has appointed four Investment Envoys: former minister of finance Trevor Manuel, former deputy minister of finance Mcebisi Jonas, executive chair of the Afropulse Group Phumzile Langeni, and chair of the Liberty Group and former Standard Bank head Jacko Maree. There is also the Public Private Growth Initiative of Roelf Meyer, Johan van Zyl and Nick Binedell. A strong team indeed. Compare this with Zuma’s team of three brothers from India. It will be hard work. Nobody has ever changed the world by working from 9:00 to 5:00.
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