The world is changing fast and to keep up you need local knowledge with global context.
It would seem that things are not as bad as they seem. The doomsday collective came out in full force in August but when Cees Bruggemans reflects on all that happened globally, his conclusion is that it might all be a ‘little inflated’. He says what follows isn’t necessarily collapse but it’s a shift to a slower pace. The problem however arises when you hone in on what a slowdown globally means for South Africa. It all points to a weaker Rand, which means industries will need to recalibrate, and we may have all seen the last of petrol price relief. A time to be cautious. – Stuart Lowman
by Cees Bruggemans *
We can be forgiven to think that the surge of anxiety that showed itself globally in the course of August may have done permanent deeper damage.
Yet that may be an overinflated reading of what happened. China may be slowing (nobody knows precisely by how much), key commodity producers such as Brazil, Canada and Russia may be in recession (and Australasia struggling at +2% yoy growth, better than our own +1.6% in 1H15), much of the rest of Asia may have ground to a standstill, but that was all in train well before August unleashed its financial cannonades.
Indeed, America regained growth momentum in 2Q15 to a handsome 3.7% (making up for much disappointment elsewhere, not least Trump for President, the biggest bully since Teddy Roosevelt hit the presidential stumps over a century ago) and may not have given up hope of more to come.
Europe looked a little weaker, probably for domestic reasons, as weak Euro and lower priced oil and gas helped her. Japan struggles, as expected, to escape her deflation trap, falling back on zero inflation last week, despite Abe’s trillions of intervention and 60% Yen depreciation since 2013 (from near 75:$ then to 120:$ today).
What global financial markets registered in August was the sudden onset of fear, as deeper questions came to be asked about China, investors extrapolating this through to exposed global companies, and ultimately worried stiff about how it might affect western economies (and a gaggle of commodity producers and EMs).
The Vix index spiked steeply higher by mid-month, reminiscent of old recession shock situations, only to fall sharply back again. After a week of agony, indeed sheer hell, Wall Street seemed ready to move on (even as a second bout of volatility was unleashed this week). Not unrealistically. Only 0.7% of US exports go to China so does it matter that it’s growth isn’t 7% but 6%, 5% or 4%? It doesn’t seem to register in real life.
Things are a little different for commodity exporters shipping most of their exports as commodities, and then mostly nowadays to China. Their volume hit can be material, their biggest hit is on Dollar prices earned. But that was baked into the cake before August’s moment of fear hit hard.
The deeper question, oh my gosh, is whether over leveraged, debt burdened, property top-heavy China is making a deeper knee-fall than imagined, that it no longer has the will or firepower to support its markets and economy after outflows of $400bn, that far more sizeable adjustments may follow.
Of course, those Chinese stock markets remain rudimentary gambling dens still mainly disconnected from their real economy, so whatever their price gyrations these should not register noticeably in their larger economy.
Certainly Chinese policymakers are struggling with a speculatively overstretched economy and discovering they don’t really know how to gently let air out of their tyres even as its infrastructure-cum-export investment strategy has reached its natural limitations and is now on the rebound. This denies them the traditional scope to boost their economy even as they cut interest rates and also are resorting to Yuan depreciation. Chinese consumers are still buying strongly, but don’t necessarily have the scope to do more either.
What follows isn’t necessarily collapse, but it is certainly a shift to a slower pace, already advanced but further to run?
That global audiences had a vertigo lapse in August must be understood as an information moment, where deeper appreciation finally suddenly dawned that “this was it” (whatever it was), instantly translated into fear (and the flashing message “flee”). Yet a few days of reflection (and falling prices) were enough to restore the sangfroid (and sense of value?), shifting the focus back to the Fed.
Meanwhile global markets had shifted currencies and equity markets lower, thus assisting the recalibration process around the world. Those badly in recession, hammered by terms-of-trade impoverishment (export prices falling faster than import prices), needed shielding for their export industries and boosts for their import displacement.
All these duly delivered by heavy currency falls, perhaps somewhat overzealous, by August’s witless moments as realisation of mortality hit wide.
SA was also so favoured, with the Rand reaching handsomely above 13:$, 20:£ & 15:€, thereby probably doing more for our many prostate steel producers than the heavily conditioned 10% steel import surcharges slapped on eight product categories (with the government message that “thee will not increases domestic prices (good) and will commit to promised plant investments (meddling?)”).
Meanwhile, because global fear had sunk Brent oil even faster than the Rand in August, our slate over-recovery gave us handsome petrol and diesel price falls this week of 69c/l & 55c/l respectively. That eased somewhat the steep price paid of cancelled overseas holiday intentions by sections of the SA middle class.
These will probably be the last such pump price reductions for a while, if Brent oil may not have that much further downside potential for now (though much volatility) even if the Rand has.
So we are back to living by our wits in a recalibrating world getting used to Chinese slowness (after three decades of breakneck speed), probably implying more Chinese rate easing and Yuan mini-depreciations to come, and a re-assertive Fed (it though promising to be very, very careful).
Meanwhile, Europe and Japan may not be finished easing either. It makes for a very diverse global line-up, many cross-currents, and more opportunity for the Rand to weaken and our industries to recalibrate. Perhaps our spreading agricultural droughts at home should be of greater concern to us?
A time to be cautious?
*Cees Bruggemans is consulting economist at Bruggemans & Associates
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