On the Main Menu: GDP statistics were released yesterday and they showed an economy in deep recession. Growth contracted by 51% q/q seasonally adjusted and annualised (saar), much worse than the Bloomberg consensus expectations for a contraction of 47.2%. The South African Reserve Bank had expected 40% q/q saar contraction. The unannualised contraction is 16.4% q/q, while is we compare with the second quarter of 2019 (the y/y figure), the economy contracted by 17.2%.
All sectors except agriculture, most of whose subsectors were declared essential services and thus were not closed, recorded deep contractions. The contraction is therefore broad based and was to be expected.
Most discussions of these numbers are in percentage terms and not immediately relatable. Let me try to provide an order of magnitude of this contraction in rands and cents that can provide a scale, a way that will make the figures a bit more understandable.
In the second quarter of 2007, just before the Global Financial Crisis (GFC) set in, South Africa’s real GDP was R2.6 trillion, aided by the commodity boom of the previous seven years which added R597bn to the R2.0 trillion GDP at the end of 2001. From the second quarter of 2007, through the recession caused by the GCF, to the subsequent infrastructure investment associated with the 2010 Soccer World Cup, and the roughly R1 trillion debt accumulated during the post GFC, the economy grew by R524bn to the end of the first quarter of 2020. That is thirteen years of growth that remained some R73bn lower than the previous seven years of growth. Clearly, the post GFC period was a troubled time for the economy and lends credence to the so-called nine wasted years. But that’s not the point.
The point is that the contraction in the second quarter of 2020 takes real GDP back to R2.6 trillion, the same level it was in the second quarter of 2007. That’s thirteen years of economic growth that has been wiped in one quarter as the economy experienced its deepest contraction in history. Back then, we inherited an economy that was strong, with a fiscal surplus to whether the GFC and it still took thirteen long years. Now, we have an economy deep in debt. How long will it take to recover this lost GDP? The risk is that we never recover over the next decade.
Who I am reading:
Still with the Deficit Myth deciphering through some interesting ideas but they aren’t new and they aren’t the silver bullets the Modern Monetary Theory crowd makes them to be.
While you were sleeping:
· Bond yields are down in the major economies: German 2Y (-0.4bp), 10Y (-3.2bp); Italy 2Y(-0.8bp), 10Y (-1.8bp); UK 2Y (-4.1bp), 10Y (-6.0bp) and US 2Y(-0.7bp), 10Y(-1.0bp).
· Global equities down: MSCI ACWI (-2.0%), MSCI World (-2.2%)
· US markets are down: S&P 500 (-2.8%), NASDAQ (-4.8%)
· European markets are down: MSCI Europe (-1.1%), Euro stoxx (-1.4%), UK FTSE 100 (-0.1%), France CAC 40 (-1.0%), German DAX (-1.6%)
· Asian markets are mixed: MSCI Asia Pacific (+0.1%), China Shanghai composite (+0.7%), India Nifty (-0.3%), Japan topix (-1.3%) and Hong Kong Hang Seng (+0.1%).
· Latin America markets are mixed: Brazil (-2.4%), Mexico (-2.4%) and Chile (+1.8%).
· JSE All Share is flat at +0.1%: Top40 (0.0%), Large cap (-0.2%), mid cap (+2.0%), small cap (-0.1%), basic materials (-1.1%), mining (-1.2%), gold mining (-0.3%), platinum and precious metals (-3.0%), industrials (+0.2%), general industrials (+3.9%)
· Commodities are down: Brent crude oil (-0.2%), gold (-0.2%), copper (-0.2%)
· Sovereign risk as measured by credit default swaps spreads (CDS) was mostly flat except in Brazil where it rose +1.3bp.
· In currency markets, the US dollar index (DXY) is flat but EMs are largely down. The Brazilian real is down 1.1% while the rand is only marginally down by 0.2%.
· BER business confidence index for Q3 2020, which is expected to improve to 8 points from 5 points in the previous quarter.
· US MBA Mortgage applications
· Japan M3 money supply beat expectations, rising by 7.1% y/y in August from 6.5% in the previous month.