Powered by consumers with extra savings, businesses eager to hire and enormous policy support, the United States’ current economic recovery is billed as being “unlike any in recent history”. According to the Wall Street Journal, businesses and workers are expected to emerge from the downturn with far less permanent damage than occurred after recent recessions, particularly the 2007 to 2009 downturn.
Economists and policy makers “now expect the economy’s size to surpass pre-pandemic levels this quarter. Analysts project that by the end of this year gross domestic product will reach the path it was projected to follow had the pandemic never happened, and then exceed it, at least temporarily.”
“New businesses are popping up at the fastest pace on record. The rate at which workers quit their jobs—a proxy for confidence in the labour market—matches the highest going back at least to 2000.” Household debt burdens, and the cost of servicing them, when viewed as a share of after-tax income, are creeping in on their lowest levels since 1980, when records began.
Federal Reserve Chairman Jerome Powell has said that job growth should pick up, while the United Nations expects its extraordinary recovery to make the country the world’s top destination for overseas investment this year and next.
Locally, growth is also starting to pick up, as is inflation, which has climbed above the 4.5% midpoint of the South African Reserve Bank’s monetary policy target range. However, while indicators such as consumer and manufacturing confidence are pointing in the right direction, the economy is not out of the woods yet. Meaningful structural reform remains an imperative, and in particular, the third wave which is currently devastating South Africa, especially Gauteng, could have potentially disastrous consequences on the economy.
We have previously commented on the correlation of vaccine rollouts and economic recovery and how slow rollout programmes could severely impact the pace at which poorer countries are able to recover. This reaffirms our stance to not focus on “SA Inc” stocks and those domestic asset classes which are particularly vulnerable to more onerous lockdown measures.
Consequently, we continue to prefer developed markets, where vaccines are being rolled out more effectively and where we are seeing signs of sustainable growth going forward. This comes with a caveat though, as much of this growth has already been priced into global equity markets which may also experience some volatility due to inflation considerations and a tempered earnings growth rate for 2022.
“We’ve never had anything like it—a collapse and then a boom-like pickup. It is without historical parallel.”
“The incoming data are very consistent with the view that these are factors that will wane over time, and inflation will then move down toward our goals, and we’ll be monitoring that carefully.”
- The extraordinary recovery of the US economy is likely to make the country the world’s top destination for overseas investment this year and next, according to new United Nations projections. Foreign businesses are drawn by the prospect of a rapid and sustained rebound in consumer spending and the Biden administration’s infrastructure plans (for which a deal was struck on Thursday to provide about $579 billion in new investments in roads, broadband internet, electric utilities, and other projects).
- Federal Reserve Chairman Jerome Powell said that job growth should pick up in coming months and temporary inflation pressures should ease as the economy continues to recover. He expects inflation to move back toward the US central bank’s two percent target once supply imbalances pass.
- Powell has also reaffirmed the US central bank’s intent to encourage a “broad and inclusive” recovery of the job market, and not to raise interest rates quickly based only on the fear of a possible onset of inflation. Recent price increases “don’t speak to a broadly tight economy” that would require higher interest rates, Powell said, but come from categories “directly affected by [the] reopening” of the economy.
- US home prices in May experienced their biggest annual increase in more than two decades, as a shortage of properties and low borrowing rates fuelled demand. Sales prices have been climbing sharply since last summer, as lockdowns eased across the country and many people rushed to find more space and bigger homes. Others working remotely seized the opportunity to move to less expensive suburbs or cities.
- International markets have seen a sharp shift from last year, when so-called FAANG stocks took a commanding role in a market driven by the coronavirus pandemic. After the swift downturn of early 2020, shares of Facebook, Apple, Amazon.com, Netflix. and Google parent Alphabet recovered more quickly than the broad stock market. Then surged ever-higher, ultimately powering the S&P 500 to a 16% gain for 2020. This year, as the economy strengthens and vaccinations diminish the pandemic in the US, that synchronised march has broken down. The Wall Street Journal reports that “investors have broadened their sights beyond the familiar names whose technology businesses thrived as many Americans switched to working, shopping and socializing at home.”
- Meanwhile, a chip shortage has wreaked havoc on global supply chains over the past year, adding to inflation pressures and spurring governments across major economies to rethink their reliance on imports of the tiny slithers of silicon that power the new economy. But playing catch up won’t be cheap. Japan is vulnerable because, after decades of under-investment, its manufacturers have to import about two-thirds of their chips. It isn’t alone. President Joe Biden has laid out a $52 billion plan to bolster domestic chip manufacturing, responding in part to China’s accelerating blueprint to place semiconductors at the heart of its development.
- Amazon.com could be forced to sell its valuable logistics services division – the network of warehouses and delivery hubs around the country that powers quick delivery of online orders – under antitrust legislation proposed by a congresswoman from Amazon’s hometown of Seattle. Washington Democrat Pramila Jayapal has proposed a bill with bipartisan support that would prevent Amazon from luring sellers to use its logistics services in exchange for preferential treatment on its busy web store. Nearly 85% of Amazon’s biggest sellers use its Fulfilment by Amazon service, paying the online retailer fees for warehouse storage, packing and shipping of their products.
- On the digital currency front, Bitcoin has fallen below US$30 000 for the first time since January, adding to losses sparked earlier this week when China’s central bank deepened a crackdown on cryptocurrencies. The sell-off was sparked by the People’s Bank of China (PBOC) urging China’s largest banks and payment firms to crack down harder on cryptocurrency trading. Crypto exchanges were effectively pushed out of China by a 2017 rule change, but over-the-counter platforms based overseas have sprung up to receive payment from people based in China and buying cryptocurrencies on their behalf.
- This comes as cryptocurrencies’ potential threat to China’s fiat currency, the yuan, has spurred the PBOC to launch its own digital currency.
- With rich countries vaccinating growing proportions of their populations, the link between infection numbers and deaths appears to be diminishing. Now, in some places the focus is on learning to live with the virus — and on the data that matters most to avoid fresh lockdowns. Scientists and government officials are keen to see whether the widening scope of vaccinations will finally break that cycle. Events in Britain are providing the most compelling test case to date. Read more here.
- Although the latest economic statistics paint a picture of an economy well on its way to recovery, spiralling Covid-19 infections in Gauteng and signs of the same in the Western Cape and North West are cause for concern. Notwithstanding, Daily Maverick reports indicators that are showing healthy advances include business confidence; building plans approved; manufacturing orders; job advertisements; as well as the business cycle indicators in South Africa’s major trading partner companies, domestic new vehicle sales, and the commodity price index for South Africa’s main export commodities.
- Statistics South Africa has published its latest consumer price index, showing that annual headline inflation has climbed above the 4.5% midpoint of the South African Reserve Bank’s monetary policy target range, accelerating to 5.2% in May from 4.4% in April. The sharp increase in inflation puts pressure on the Reserve Bank, which has cut interest rates by three percentage points in the past year to support the economy in the wake of the Covid-19 crisis.
- Residential vacancy levels in Cape Town increased to 28.8% in the second quarter, new data from TPN shows. This means that between one in three and one in four rental units in this city are standing empty. Nationally average vacancy rates have stabilised at 13.15%. The Western Cape’s vacancy rate, however, tops this at 14.4%.
- Business Day columnist Carol Paton opined that, like many others, she will be happy when SAA flies as far away from the South African fiscus as possible. The financial cost has been heavy. She unpacked the fact that, between 2003 and 2019, cash bailouts to SAA amounted to R31.2 billion and debt, which the government must still repay, to R16.4 billion. Adding to this the cost of the business rescue of R16 billion so far with another R3.5 billion requested, financial stimulus totals R67.1 billion over the past 20 years.
- South Africa’s National Ports Authority will operate as a standalone business under the aegis of state-owned freight logistics group Transnet, President Cyril Ramaphosa said, as the country tries to overhaul some of the world’s worst-performing ports. According to Reuters, a report last month by the World Bank and IHS Markit, saw South Africa’s major ports at the bottom of its list, with Durban faring the worst among local peers and coming in at 349 out of a total of 351 ports assessed globally.
- Eskom unions, the National Union of Mineworkers and National Union of Metal Workers of South Africa, are calling on government to intervene urgently, to prevent Eskom from falling into business rescue. Secretaries-General of the two unions have written a letter to Deputy President David Mabuza, requesting a meeting to discuss the financial crisis facing the power utility, as the unions say they fear for the jobs of their members as Eskom seems headed in the same direction as SAA went a few years ago.
- In company news, Prosus, the international investment arm of South Africa’s Naspers, reported a better-than-expected net profit of $7.45 billion for the year that ended March 2021, driven by strong returns from its big stake in Chinese software giant Tencent. However, the company reported an operating loss of $1.04 billion as a result of the companies it owns around the globe in online marketplaces, food delivery and educational software.
- This week the Auditor-General revealed R26 billion in irregular expenditure at municipalities. Cash-strapped councils across the country spent more than R1 billion on consultants to prepare their annual reports and financial statements.
- Interestingly, Bruce Whitfield recently wrote a column on “why companies are ditching useless municipalities”. He wrote that the decision by Israeli-controlled, JSE-listed Clover to shut SA’s biggest cheese factory in Lichtenburg, and spend R1.5bn relocating to Queensburgh near Durban, has shades of the long-running battle between Astral Foods and the Lekwa municipality around Standerton. “Both are symptomatic of a broader collapse of smaller municipalities, destroyed by a mix of incompetent political deployees in jobs they are not trained or suited for, rising corruption and factional ANC battles.” Read more here.
- In local crypto news, $3.6 billion (roughly R54 billion) was taken out of multiple wallets controlled by directors of Africrypt. It was hacked on or about April 13. Moneyweb reports that the ‘hack’ is deemed extremely suspicious by investigators, not least because the two founders – South African brothers Raees and Ameer Cajee – reportedly disappeared to the UK within days of this happening. Though the investigation is still ongoing with multiple regulatory authorities now looking into it, this may turn out to be one of the biggest financial scandals in SA’s history.
- Due to the rapid increase in new Covid-19 cases, we are seeing growing calls for a tougher lockdown, especially in the country’s economic hub, Gauteng. However, Gauteng Premier David Makhura has ruled out the possibility of implementing a Level 5 lockdown in the province.
Sources: Dynasty, BusinessLIVE, Fin24, Business Report, Moneyweb, Personal Finance, Channel Africa, Daily Maverick, Wall Street Journal, BizNews, TechCentral, Financial Mail, Bloomberg