Anchor’s coffee table economics note by Casey Delport will be distributed intermittently and is a collection of Casey’s opinions on key economic factors and events shaping markets globally and in South Africa (SA). It is essentially Casey’s thoughts and perspectives on the multiple dynamics at play in the global and local economy.
Executive summary
In this week’s edition, we highlight the following:
- The gold price and US debt: A case of causality? Given that gold has long been considered a store of value and a hedge against economic uncertainty, market participants often argue that the gold price has been closely intertwined with concerns surrounding the growing US public debt. However, it is important to note that establishing causality is not always straightforward, particularly in complex real-world scenarios where multiple variables interact.
- The global housing market: Surprisingly resilient amid heightened interest rates. Despite a surge in interest rates and mortgage costs, housing markets across the globe remain noticeably stable, with real prices remaining 7% above pre-pandemic levels.
- It is safe to say that economic headwinds in South Africa (SA) are like a game of ‘whack-a-mole’ — just when you think you have dodged one crisis, another pops up to take a swing at your wallet. Yet a slight reprieve popped to the surface last week – the latest GDP numbers came in stronger than expected. However, this will do little to appease the average South African consumer whose wallets are increasingly feeling the strain.
- SA business confidence (or the lack thereof) and the IMF signals warnings ahead. The RMB/BER Business Confidence Index (BCI) declined significantly from 36 index points in 1Q23 to 27 index points in 2Q23, taking confidence to its lowest level since the SA economy moved out of the strictest level of lockdown during the COVID-19 pandemic. This challenging business environment is not conducive to any meaningful economic growth. Indeed, in its latest annual Article IV Assessment of the country, the International Monetary Fund (IMF) once again stressed the urgency of structural reforms beyond the energy sector and linked this as a key driver of local and international investor sentiment towards SA.
The gold price and US debt: A case of causality?
A case of causality refers to a situation in which one event or factor is considered to cause or influence another event or factor. Causality implies a cause-and-effect relationship, where a change in one variable leads to a corresponding change in another. Given that gold has long been considered a store of value and a hedge against economic uncertainty, market participants often argue that the gold price has been closely intertwined with concerns surrounding the growing US public debt. This argument has again risen to the forefront of late due to the recent, high-profile debate in Congress to increase the debt ceiling to avoid a potential default. Over the last few decades, US national debt has grown from c. US$370mn in 1970 to an all-time high of US$31.4trn in 2023.
Rising US debt often leads to concerns about inflation and a desire for gold. As gold is considered a safe-haven asset, it tends to retain or increase its value during times of economic or political uncertainty. When investors are concerned about the stability of the US economy or the global financial system, they may turn to gold as a hedge against inflation or currency devaluation. This increased demand for gold can drive up its price. In addition, the US dollar and gold generally have an inverse relationship. When the US dollar weakens, the price of gold tends to rise, and vice versa. Naturally, the US debt level can indirectly impact the value of the dollar. As such, if investors become concerned about the sustainability of US debt or the country’s ability to repay its obligations, it can weaken the dollar, making gold more attractive as an alternative investment. From a monetary policy perspective, the US Federal Reserve’s (Fed) various monetary policy decisions can indirectly affect gold prices. If the Fed implements expansionary monetary policies, such as lowering interest rates or engaging in quantitative easing (QE), it can increase the money supply and potentially lead to inflation concerns. Inflationary pressures can drive investors to buy gold as a hedge against the eroding value of fiat currencies (a government-issued currency not backed by a commodity such as gold).
The bottom line
While US debt levels can contribute to economic uncertainties, it is essential to note that many complex and interconnected factors, including supply and demand dynamics, economic conditions, geopolitical events, and investor sentiment, influence the gold price. While there is no direct tie between the price of gold and US debt, some indirect relationships can affect the gold price, as outlined above. Therefore, it is challenging to attribute any specific cause-and-effect relationship between the price of gold and US debt alone. It is important to note that establishing causality is not always straightforward, particularly in complex real-world scenarios where multiple variables interact.
The global housing market: Surprisingly resilient amid heightened interest rates.
In recent years, global housing prices have generally experienced an upward trend in many countries. Low interest rates, increased urbanisation, population growth, and limited housing supply in certain areas have contributed to rising house prices in various parts of the world. However, it is important to note that the real estate market is highly heterogeneous, and conditions can vary significantly between countries, cities, and even neighbourhoods. Regardless, on an average basis, according to data from the Bank for International Settlements (BIS), global housing prices rose an average of 6% between 4Q21 and 4Q22. In real terms, taking inflation into account, prices actually fell 2% YoY – the first decline in 12 years. Housing markets were noticeably stable despite a surge in interest rates and mortgage costs. Real prices remain 7% above pre-pandemic levels.
In Türkiye, property prices have jumped the highest globally, at nearly 168% YoY amid soaring inflation. Real estate demand increased alongside declining interest rates. Despite the heightened inflationary environment, the government drastically cut interest rates from 19% in late 2021 to 8.5% to support a weakening economy. Moving west, many European countries saw some of the highest price growth in nominal terms. A strong labour market and low interest rates have pushed up prices, even as mortgage rates broadly doubled across the continent. For real price growth, most countries were in negative territory — notably Sweden, Germany, and Denmark. In the US, nominal housing prices have grown just over 7% p.a., while real price growth halted at 0%. Prices have remained elevated, given the stubbornly low supply of inventory. In fact, residential property prices remain 45% above pre-pandemic levels.
At the end of the day, the impact of high housing prices on the global economy can vary depending on the specific circumstances and the interconnectedness of different countries and regions. Additionally, the influence of high housing prices may be more pronounced in countries or regions where real estate plays a significant role in the economy. Nonetheless, high housing prices have been a thorn in the side of most central banks in recent months. When housing prices rise rapidly, it can contribute to inflationary pressures, especially if housing costs are a significant component of inflation calculations. Central banks have been treading a fine line between carefully managing monetary policy to balance price stability and economic growth in the face of increasing housing prices. Furthermore, high housing prices can make the housing market vulnerable to shocks and market corrections. If housing prices reach unsustainable levels, a decline in prices or a housing market downturn could have ripple effects on the broader economy. This can impact construction activity, mortgage markets, financial institutions, and consumer confidence.
The bottom line
Global house prices boomed during the pandemic as central banks cut interest rates to prop up economies. However, interest rates have returned to levels last seen before the global financial crisis, as central banks worldwide struggle to get inflation under control. On average, rates have increased by four percentage points in many major economies. Roughly three-quarters of the countries in the BIS dataset witnessed negative YoY real house price growth as of 4Q22. Unsurprisingly, interest rates have a significant impact on property prices. Cross-country evidence shows that for every one percentage point increase in real interest rates, the growth rate of housing prices tends to fall by about two percentage points. As the current global interest rate hiking cycle continues to filter through the respective economies (typically taking some time), housing prices are expected to cool.
Economic headwinds in South Africa are like a game of ‘whack-a-mole’:
It is safe to say that economic headwinds in SA are like a game of whack-a-mole — just when you think you have dodged one crisis, another pops up to take a swing at your wallet. Yet a slight reprieve popped to the surface last week – the latest GDP data came in stronger than expected. Economic activity in SA grew 0.4% QoQ seasonally adjusted (sa) in 1Q23, a slight improvement after contracting by an upwardly revised 1.1% QoQ in 4Q22. On an annual basis, the economy expanded by 0.2% YoY. As a result, SA has, in fact, narrowly missed a technical recession; however, at 0.4% QoQ sa, economic growth remains weak. Expenditure on GDP growth was primarily fuelled by a rebound in government final consumption expenditure (GFCE) and partially supported by consistent fixed capital investment (GFCF) growth. However, household final expenditure (HFCE) growth slowed, and the trade deficit expanded. Looking at the production side, the economic recovery showcased a fairly widespread improvement across various sectors, with only two sectors experiencing a contraction in 1Q23 compared to the previous eight. The agriculture, forestry, and fishing sectors took the biggest hit, shrinking by 12.3% QoQ sa. The remaining sectors demonstrated growth ranging from 0.2% to 1.5%.
The economic performance in 1Q23 clearly shows that the SA economy is adjusting to the challenges posed by heavy loadshedding. However, despite the economy adapting, at the end of the day, loadshedding remains a significant obstacle to achieving substantial economic growth. Additionally, the series of interest rate hikes that began in November 2021 and intensified throughout 2022 and into 2023 are filtering through the economy and beginning to impact economic activity. Unfortunately, persistent downside risks remain, along with increased political uncertainty, which hinders the growth outlook and overall sentiment. Nonetheless, there is a growing belief that our expectation of increased private-sector electricity generation capacity will gradually mitigate the impact of loadshedding on SA’s economic growth.
Presently, however, this will do little to appease the average South African consumer whose wallets are increasingly feeling the strain. According to the latest data from BankservAfrica, average salaries continue to fall in SA (both in real and nominal terms), with actual (nominal) take-home pay recording R15,063 in April 2023, vs R15,335 in April 2021 (R15,345 in April 2022) and R15,416 in January 2021 (R15,567 in January 2022). The BankservAfrica Take-home Pay Index (BTPI) further shows real (adjusted for inflation) take-home pay slipping to R13,524 – 10.4% lower YoY (R15,097) and below the R16,021 recorded in April 2021.
In the current SA economic climate, companies remain in a form of economic ‘limbo’ – a type of survival, if you will. This environment is not conducive to suitable wage increases or, to a greater extent, general (and greatly needed) job creation. With the cost of living rising by 6.8% YoY in April, and actual salaries falling by 4.2% YoY, consumers, in turn, are becoming poorer (in real and nominal terms), severely reducing affordability and weakening the economic environment. At the end of the day, the drop in consumer affordability negatively affects household consumption expenditure (HCE), which accounts for two-thirds of GDP. Thus when HCE weakens, GDP also weakens.
The bottom line
We anticipate that the near-term prospects for growth will remain lacklustre. Moving beyond 1Q23, we foresee that SA’s growth trajectory will persistently show weakness. The ongoing issues related to electricity supply are likely to continue as a significant limiting factor on economic activity and confidence. Moreover, the impact of elevated interest rates is expected to strain household disposable incomes, thereby restricting growth in consumer spending. SA has essentially been in a stagflationary environment for a while now, with weak economic activity and a high inflationary environment. The second half of this year will likely see inflation drop below 6.0% YoY. However, salary and wage increases are not expected to occur to the extent that is sufficient to make up for the loss in spending ability in either real or nominal terms.
SA business confidence (or the lack thereof) and the IMF signals warnings ahead:
The RMB/BER BCI declined significantly from 36 index points in 1Q23 to 27 index points in 2Q23, taking confidence to its lowest level since the SA economy moved out of the strictest level of lockdown during the COVID-19 pandemic. The BCI is an economic indicator measuring the confidence and sentiment level among local businesses regarding the country’s current and future economic conditions. The index is based on a survey conducted among various businesses across different sectors and regions in SA. As such, the BCI provides insights into business expectations, investment plans, employment prospects, and overall economic outlook. It is considered a key indicator of business sentiment and is closely monitored by analysts, policymakers, and investors to assess the health and potential of the South African economy. Within the index, business confidence can vary between 0 and 100, where 0 indicates an extreme lack of confidence, 50 neutrality and 100 extreme confidence. This latest record low print suggests that the lack of optimism among businesses was widespread, except for building contractors whose confidence remained close to its typical level over the long term. Manufacturing confidence, on the other hand, remained steady but significantly lower than its usual average. Retail, wholesale, and new vehicle dealers’ confidence experienced a considerable decline, falling well below their respective long-term averages, similar to the manufacturing sector.
Overall, the ongoing problem of loadshedding continues to negatively impact confidence levels, as it raises operational costs and reduces profitability. The ability to pass on these increased costs is limited due to weak domestic and global economic activity. Furthermore, the rise in interest rates (although most responses were received before the 50-bp hike in May) is also starting to have a detrimental effect on businesses. As economic activity continues to weaken, actual business conditions have worsened. The deterioration in confidence within consumer-facing sectors has been the main driver behind the decline in the BCI in 2Q23. This outcome suggests a significant possibility of slower GDP growth in 2Q23, compared to the already feeble 0.4% QoQ sa level observed in 1Q23.
The bottom line
The current difficult and challenging business environment is not conducive to (non-energy) capex growth or any meaningful form of job creation, which naturally hurts SA’s productive capacity over the long term. Indeed, in its latest annual Article IV Assessment of the country, the IMF once again stressed the urgency of structural reforms beyond the energy sector and linked this as a key driver of local and international investor sentiment towards SA. The IMF expressed particular concern about SA’s fiscal consolidation plans as it does not see debt levels stabilising as projected by National Treasury. The Fund’s baseline forecast for real GDP growth in SA for 2023 currently sits at a measly 0.1% YoY. With regards to future growth prospects, the IMF recommends; “… easing the heavy regulatory burden on corporates, levelling the playing field, and forcefully tackling corruption and governance weaknesses would promote private sector investment, particularly in the network industries that are dominated by inefficient state-owned enterprises (SOEs). Reforms to enhance labour market flexibility are also needed to bolster job creation.” A goldilocks scenario indeed.
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