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Wednesday, August 17, 2022

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Worldwide recession: Well and alive? Prospects for markets

Dr Chris Harmse

Dr Chris Harmse

Published Aug 1, 2022


As reported last week, the continuous increases in interest rates across the world, as well as the supply shortages of gas, oil and agricultural produce, pushed most economies into a spiral of stagflation, with rising inflation together with deteriorating demand pushing more countries into recession territory.

The US reported last Thursday that their gross domestic product growth rate had decreased by 0.9 percent during quarter two (Q2), following a negative expansion of 1.6 percent in economic activity in Q2. This had put the US economy officially in a recession as they experienced two quarters of negative economic growth.

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Although the Eurozone had grown by 0.7 percent in the second quarter, beating expectations of a 0.2 percent growth rate, a growing number of economists are expecting that the Eurozone will slide into a recession from the last quarter of 2022.

Despite these negative economic prospects, share and bond rates across the globe started to improve over the last eight trading days. In the US, equity prices recovered strongly over the past two weeks. The Dow Jones Industrial index was up by 3 percent last week, the S&P500 gained 4.2 percent and the Nasdaq was 4.9 percent higher.

Markets already discounted the 75 points increase in the US Fed rate, and now start to believe that given the weak US economic growth rate, the Fed may be less aggressive in meetings to come. The yield on the US 10-year bond remains above 2.5 percent on news that consumer spending and personal income in June were higher than expected. Although bond yields are still almost 7 percent negative in real terms, it is still expected that the US recession will not hold for long and that inflation will start to move downwards strongly again.

Oil prices, however, started to surge upwards at the end of last week as Brent Crude traded at $110 (R1 811) per barrel on Friday, gaining $6 over the week.

European gas prices had shot up by 30% last week after Russia deepened its gas supply cut to European countries. Gas prices are now more than ten times more than the average between 2010 and 2020.

Inflation expectations for Europe, as well as recession possibilities may affect equity and bond prices in Europe and the UK in months to come.

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Domestically, the rand exchange rate initially improved strongly on Thursday, after the news of the US economy moving into a recession. Against the US dollar the rand at one stage traded at R16.40, or 43 cents, stronger than its opening level of R16.83 last Monday.

The higher oil price, recovering in the dollar and expected lower growth in the South Africa, pushed the rand to weaker levels on Friday, and the currency ended on R16.85 to the dollar, weaker than the previous Friday close.

On the JSE, share prices continue to recover, mostly to a stronger rand (than the previous weeks) and a steady increase in precious metal prices such as gold and platinum. The gold price increased by $38 per ounce last week and the price of platinum was higher by $27.

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This contributed to a 5.5 percent increase in the Resources 10 index over the week, while the all share index improved by 1.2 percent. Industrials remain volatile and traded down by 1.1 percent last week, after gaining more than 15 percent in the previous two weeks. Financial and property shares are improving steadily given the relative stronger rand. Bond yields also improved last week

This coming week, the release of South Africa’s total new vehicle sales for July and Absa’s Manufacturing Purchasers Managers Index (PMI) for July will be released. On Wednesday, South Africa’s Global PMI for July will be announced, and on Friday the Reserve Bank will publish the latest level of South Africa’s gold and foreign reserves.

On global markets, investors await the US non-farm payroll for July to be released on Friday as it will show the effect of the recession on unemployment and jobless claims, if any. The Bank of England will release its interest decision on Wednesday, and it is expected that it will increase rates by 50 basis points. Most other developed economies will announce various PMI’s and Balance of Trade numbers during the week.

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Chris Harmse is an economist at CH Economics and lecturer at the School of Commerce at Stadio University.

Dr Chris Harmse