In recent News Flash editions, we have written about the “K-shaped” economic recovery, while today we focus on the sustainability thereof, as well as how governments intend using taxes as an instrument to plug their deficits.
New research from Stanlib highlights just how badly the pandemic battered the world economy in 2020, while offering hope that a recovery is well underway. The research shows that, in the first five months of 2020, the volume of world exports declined by an incredible 17.5%, surpassing the fall-off in global trade that occurred during the global financial market crisis in 2008-2009. There was also a noticeable fall-off in global shipping activity and a recession in global industrial production.
According to Stanlib, the subsequent recovery in the first half of this year has been equally dramatic. It cites monthly data from the Netherlands Bureau for Economic Policy Analysis (CPB) showing that global trade and industrial production have recovered sharply, reaching a record high, in volume terms, during January 2021.
Countries where vaccine rollouts are further down the road are leading the recovery. The US, UK and Europe are said to be on the cusp of a sustained recovery as key sectors of their economies reopen. Revised data from the EU’s statistics office, Eurostat, showed gross domestic product (GDP) in the Eurozone contracted 0.3% quarter-on-quarter, compared with the last forecast of a 0.6% contraction. As such, the contraction rate is slowing, which is seen as a precursor to growth.
In South Africa, the tide also seems to be turning, as a pickup in household spending and robust activity in mining and finance industries helped GDP grow 4.6% in the first three months of 2021—the third-consecutive quarter of recovery. This was better than the 3.2% expansion predicted in the median estimate of 16 economists surveyed by Bloomberg.
“A continued post-lockdown bounce in the economy is no guarantee of robust future growth. In as much as the GDP release points to some good news for now, (sustained good performance from metals mining and a deeply negative base aside), the release tells us almost nothing about the economy’s ability to keep on growing after the initial post-lockdown bounce.”
– Razia Khan, Chief Africa Economist at Standard Chartered Bank in London
“But the point will come where the spending taps will need to be switched off [and] the economy [will need to] stand on its own two feet again. When this is remains to be seen, but for now the sun is shining and the roof is being fixed.”
– Hinesh Patel, portfolio manager at Quilter Investors
- According to the OECD, the Group of 20 economies saw GDP return to pre-pandemic levels – GDP growth for the G20 rebounded to 3.4% in the first quarter of 2021 versus the first quarter of 2020. This follows a contraction of 0.7% in the previous quarter.
- The UK economy also showed signs of improvement with GDP rising by 2.3% in April. Rishi Sunak, Chancellor of the Exchequer, said the figures are a promising sign that the UK economy is beginning to recover.
- On the inflation side, US consumer prices increased by the most in nearly 13 years in May, year-on-year, as rising demand, supply chain bottlenecks, and the ‘base effect’ from last year’s lockdown push up inflation. Energy, used cars, flights and clothes all pushed CPI up to 5.0%, higher than expected. Core inflation also surged, hitting 3.8% for the first time since 1992. But Wall Street rallied, and bond yields remained calm, as investors showed confidence that the surge would be temporary.
- Finance ministers from the Group of Seven (G7) rich nations reached a landmark deal, backing the creation of a global minimum corporate tax rate of at least 15% to close cross-border tax loopholes used by some corporations. Major economies are aiming to discourage multinationals from shifting profits – and tax revenues – to low-tax countries regardless of where their sales are made.
- According to the Financial Times, US President Joe Biden’s plan to overhaul the international tax system, following the G7 vote, will face a difficult passage through the US Congress as Republicans threaten to vote down a prospective deal in a Senate where a two-thirds majority is necessary for approval.
- This comes as a report from ProPublica (which is based on leaked taxpayer information) illustrated how wealthy people in the US are able to avoid income taxes by keeping the bulk of their wealth in investments that attract little or no taxes. According to the report, the US’ 25 most wealthy people legally managed to avoid paying taxes.
- Meanwhile, Wall Street Journal’s take on the matter is that leaking taxpayer information is a crime, as, under federal law, tax returns are confidential. Although the source of the leak, be it another jurisdiction or a person, has not been revealed, it points out that the story landed amid the Biden Administration’s effort to pass the largest tax increase as a share of the economy since 1968.
- Meanwhile, the meteoric rally in meme stocks such as AMC Entertainment Holdings and GameStop has unleashed a burst of options trading, upending traditional dynamics in the market for stock bets. The complicated contracts can be risky to use but have mushroomed into a feature of the meme mania this year.
- Bill Gates and Warren Buffett are set to build a $1 billion next-generation nuclear reactor in Wyoming. Gates’ company TerraPower and Buffett’s PacifiCorp, expect the nuclear reactor to be able to produce 500 megawatts of power during peak demand, which would be enough energy to power about 400,000 homes.
- The entertainment industry continues to tick along strongly as billionaire investor Bill Ackman’s blank-check company Pershing Square Tontine Holdings has confirmed it is in talks to buy 10% of Universal Music Group for around $4 billion. The deal values Universal Music at 35 billion euros (around $42.4 billion). Universal Music will go ahead with a planned listing on Euronext Amsterdam in the third quarter of 2021.
- The New York Times has published a piece speculating that Tencent’s popularity may help it avoid trouble with Beijing. In 2010, the Chinese technology industry considered Tencent to be public enemy number one as it had no qualms about copying somebody else’s idea and driving that upstart out of business. More than a decade later, the Chinese government is finally reining in the country’s most powerful technology companies, but not Tencent.
- Hong Kong has started a project to explore issuing a digital currency. This research study, which is expected to last 12 months, will look at consumer needs, data privacy, anti-money laundering requirements, and other legal and policy considerations.
- In other crypto currency news, El Salvador will be the first country to accept bitcoin as legal tender. According to WSJ “the government hopes that adoption of the cryptocurrency can help drive financial inclusion in a country where most people don’t have access to traditional banking.”
- Business confidence climbed to its highest level in three years, data from the South African Chamber of Commerce and Industry (Sacci) showed. Sacci has released its Business Confidence Index for May, which ticked up to 97 points from 94.7 previously. This is the highest level recorded since March 2018, when the Business Confidence Index recorded 97.6 points.
- Meanwhile, Business Day reported that SA posted its second-largest current-account surplus in history in the first quarter of 2021, as the value of exports surged on the back of a global economic recovery and a stronger rand curbed the price of steadily rising imports. Economists, however, said risks to the surplus remain as long as load-shedding continues.
- Even though President Ramaphosa made a very positive announcement this week to lift the threshold for companies to produce their own electricity without a licence to 100MW, it is unlikely to alleviate Eskom’s power-generating woes for at least the rest of this year.
- This morning the South African government announced that it intends selling a 51% stake in SAA to Takatso consortium. According to News24, Gidon Novick, CEO of the consortium, said that it is a privilege to be involved in a project of such magnitude and importance to the country. Novick is a former co-CEO of Comair and recently launched Global’s airline LIFT in South Africa. For more on this announcement, click here.
- Moneyweb reported this morning that in an unprecedented move, 36 asset managers have sent a strongly worded letter to the boards of Naspers and Prosus highlighting their concerns about the proposed share exchange between the two companies and the long-standing misalignment of the executive compensation system. The asset managers find several aspects of the proposed transaction problematic. “We are of the view that it introduces elements which serve to increase complexity in the overall company structures, thereby reducing the likelihood of further value unlock, whether immediate or longer-term.”
- South African Breweries, part of Anheuser-Busch InBev, has reinstated its investment programme that was cancelled last year, allocating R2 billion for its home operations. Investments were cancelled last year when the lockdown, at its most restrictive, banned alcohol sales.
- South Africa’s Business Unity South Africa is the latest entity to warn that the Competition Commission’s decision to block the sale of Burger King by Grand Parade Investments makes it harder for black companies to sell assets and places them at a disadvantage compared with their white counterparts.
- South Africa is the world’s 12th-biggest producer of greenhouse gases but should improve on its target to cut its projected greenhouse gas emissions by 28% by 2030, according to members of the Presidential Climate Change Commission.
- The Congress of South African Trade Unions wants the South African Reserve Bank to further lower the repo rate by 50 basis points when its monetary policy committee next meets, and for commercial banks to “come to the party” in helping make credit affordable.
- For more than a year, the Department of Public Service and Administration as well as National Treasury have been trying to settle a major wage impasse with large public sector unions. Major trade unions have rejected government’s salary freeze proposal and want a salary increase of consumer price inflation plus 4% in 2021 – effectively 8.2%.
- In the rapidly moving matter of Health Minister Dr Zweli Mkhize and his alleged ties to a company that was illicitly awarded a communications deal by the Department, the Minister has been placed on special leave, and his position filled in an acting capacity by Tourism Minister Mmamoloko Kubayi-Ngubane. An article by Dynasty’s primary consulting political analyst, Dr Ivor Sarakinsky, explains the difficulty faced by the President should he have wished to summarily dismiss the Minister.
Sources: Dynasty, Bloomberg, New York Times, , Market Watch, Daily Maverick, Moneyweb, MyBroadband, BusinessTech, EWN, Business Insider, BusinessLIVE, Reuters, BBC, etc.