Investment Insight: SA economy turns the corner for the better
CAPE TOWN – The South African economy has turned the corner for the better as social distancing is losing momentum.
The Federal Reserve Bank of Dallas has developed a social distancing index (SDI) that summarises information in seven variables based on geolocation data collected from a large sample of mobile devices.
Studies by the bank have confirmed the massive impact of the level of social distancing on economic activity.
Although similar SDIs are not available for other countries, the Dallas SDI is highly correlated with the Google Covid-19 Mobility data for the US. For comparative purposes I use the Google Covid-19 Community Mobility Reports.
Google Covid-19 Community Mobility data is available for most countries and their counties or provinces.
The data shows the changes of how visitors to (or time spent in) places such as retail and recreation, groceries and pharmacies, parks, transit stations, workplaces, and residential compared to Google’s baseline days, where a baseline day is the median value from the first five weeks of this year.
I calculated a Business Mobility Index (BMI) for South Africa by using the weekly averages of Google’s data for the following categories: retail and recreation, groceries and pharmacies, transit stations and workplaces. Parks and residential were excluded.
I calculated the same for the US, UK, Germany and Japan – yes, arguably the major economies. It is evident that BMI in the aforementioned major economies hit a low of 54.5 points in the second week of April and has since risen to 68.3 points, or more than 13 basis points higher than the low.
South Africa’s BMI also hit a low of 29 points in April and hit a level of 50 points last week – an improvement of more than 21 basis points – much in line with the United Kingdom. What it points to is that the lockdowns in South Africa and the UK were up to 27 percent more severe than in the US, Germany and Japan.
But how does it impact on business?
Using the same time series as the Dallas Fed of small business activity from the scheduling software firm Homebase, where small businesses open are compared to the median number of businesses open on same weekdays in January this year, it is evident that the BMI for the US has a stunningly direct bearing on the percentage of small companies open.
I will not be surprised if there is a similar relationship between the percentage of small businesses open in South Africa and the BMI for South Africa.
It indicates that at the time of the hard lockdown only about 30 percent or even fewer of small businesses were open. The move to level 4 could mean that 40 to 50 percent of small businesses are open for business. This indicates an increase of nearly 80 to 100 percent on level 4.
The impact on small businesses in South Africa and the UK were, therefore, massive compared to the US economy, where the economy bottomed at a level of 50 percent of small businesses open. Germany probably shared the US’ experience as the former’s BMI closely tracked that of the latter.
The declining social distancing (higher BMI) in the US has profound impacts on the US economy. The employment situation in the US as measured by continued unemployment claims improved barely two weeks after the US BMI bottomed and the number of small businesses open, increased.
The HIS Markit Composite purchasing managers’ index registered a jump of 9 points in May’s Flash reading from April’s, meaning that the depth of the contraction of the US economy has eased considerably. I expect South Africa’s BMI to ratchet up to 60 to 65 percent as the country moves to level 3 today.
Using the results in the US as a base, I expect small businesses open for business to increase to 60 percent or more from about 40 to 50 percent under level 4.
I am, therefore, of the opinion that South Africa’s economy has seen the worst during the current Covid-19 crisis and looks on the up. That said, although the number of unemployed people will be contained or even decline somewhat, the number will remain unacceptably high.
South Africa remains behind the curve compared to the US and Germany though. It is evident that South Africa must move to level 2 as soon as possible to get in line with the major economies in regard to social distancing as the latter is a major determining factor in economic stabilisation and growth.
The move towards level 1 should also be brought forward, especially in light of the increased pace of opening up of the US and German economies.
South Africa missed out on the global recovery last time around due to mismanagement and apparent wrongdoings. Let that not happen again.
Ryk de Klerk is analyst-at-large. Contact [email protected] His views expressed above are his own. You should consult your broker and/or investment adviser for advice.