Markets stable, rand stronger, despite devastating economic recession

The news that the South African economy recorded a dismal -51 percent (quarter-on-quarter) economic growth during the second quarter of 2020 was a surprise for most economist and analysts. Photo: Chris Ratcliffe/Bloomberg

The news that the South African economy recorded a dismal -51 percent (quarter-on-quarter) economic growth during the second quarter of 2020 was a surprise for most economist and analysts. Photo: Chris Ratcliffe/Bloomberg

Published Sep 14, 2020

Share

By Chris Harmse

PRETORIA – The news that the South African economy recorded a dismal -51 percent (quarter-on-quarter) economic growth during the second quarter of 2020 was a surprise for most economist and analysts.

It is the third consecutive quarter of negative growth as the country's economy tumbled into its deepest recession ever. The economy recorded a 1.4 and -1.8 percent negative economic growth rate during the fourth quarter of 2019 and quarter one of 2020.

The year-on-year number for second quarter 2020 was -176 percent.

Over the first six months the economy had contracted by -9.2 percent.

The Reserve Bank expected a contraction of -33 percent for the second quarter, whilst the consensus market expectation was -40 percent. This dismal performance was mostly due to the level 5 and level 4 lockdown phases, as well as a sharp decrease in exports as the global economic was shut down.

The scandal around the employment of an official plane by members of the ANC for a visit to Zimbabwe sparked yet again another setback for President Cyril Ramaphosa.

Financial markets, however, tend to react more positivly on other indicators, suggesting that the economy is likely to turn around quickly during the third quarter.

The South African Chamber of Commerce and Industry (Sacci) announced that the Sacci business confidence index rose to 82.8 points in July of 2020 from 81.4 points in June and recovering further from a 35-year low in May.

Although manufacturing production decreased by 10.6 percent in July against July 2019, seasonally adjusted manufacturing production increased by 7.6 percent in July 2020 compared with June 2020, showing a turnaround.

The same trend appeared in the mining production and sales industry, where mining production decreased by 9.1 percent year-on-year, but seasonally adjusted mining production increased by 20.2 percent in July 2020 compared with June 2020.

The Reserve Bank also announced last Thursday in its report on the current account of the balance of payments for the second quarter that the balance on the current account had switched from a surplus of R63.4bn (1.2 percent of gross domestic product) (GDP) in the first quarter to a deficit of R103.6bn (-2.4 percent of GDP) during the second quarter.

The deficit, however, was lower than expected.

The rand exchange rate as well as the government bond yields had a stable and recovering week based on the above improved data.

The rand traded within a narrow range and ended Friday on R16.72 to the dollar against R16.62 the previous Friday.

Against the pound the currency appreciated stronger trading at R21.38 against R21.93 the previous week.

The R187 Government Bond traded 7 basis points lower as the yield improved by 1 percent.

Despite a sharp decline in the oil price ($39.86 per barrel), the gold price traded $25 higher over the week on $1 949, while the platinum price had shot up from $897 the previous week to $941 on Friday.

On the JSE share prices recovered most of their losses of the previous week and traded again positive for the month to date.

All share index had increased by 2 208 points or 4.1 percent closing Friday on 56 087 points.

Industrials were up by 3.5 percent, and Financials continued their recovery as the index improved by 7.7 percent, wiping out the big loss of the previous week.

Given the higher prices for metals and other resources, the Resource 10 index gained 3.7 percent. US equity markets stay under pressure last week recording a second consecutive week decline a mist one of the most volatile periods since the Covid-19 lock down in March.

“You see this kind of volatility when there is a vacuum of information for investors, and we don’t have good data,” said Erika Karp, the founder and chief executive of Cornerstone Capital Group.

“Markets can adapt when there is certainty, but when there is extreme uncertainty and when we're in a period of transition, you’re going to get volatility.”

This coming week investors will await the announcement of South Africa’s retail figures for July on Wednesday.

It is expected that retail sales improved by 8 percent for the month, but still will be down by -3.8 percent on last year.

The Monetary Policy Committee (MPC) of the Reserve Bank will start their bi-monthly meeting tomorrow and will announce its interest rate decision on Thursday.

It is expected that the MPC will keep the repo rate on 3.5 percent.

Globally, the UK will release its unemployment data for July tomorrow and its latest inflation rate on Wednesday. The US will publish its manufacturing and industrial production numbers for July on Wednesday, retail sales on Thursday and the Fed will announce its latest interest rate decision, also on Thursday.

Dr Chris Harmse: economist at CH Economics.

BUSINESS REPORT