The Coffee Table Economics (CTE) with Anchor note by Casey Sprake is distributed intermittently. It is a collection of Casey’s thoughts and perspectives on key economic factors, socio-political events, and the multiple dynamics shaping markets globally and in South Africa (SA).
Executive summary
In this week’s edition, we highlight the following:
- Jittery vibes: Recession fears ripple through markets. At the beginning of the week, fears of a US recession sent shockwaves through global markets, causing steep losses in high-beta emerging market (EM) currencies and equity markets. Whilst the significant moves in financial markets over the past few days appear somewhat exaggerated, they nonetheless underscore the extreme sensitivity of financial markets to any unfavourable economic data.
- Lifelines across borders: The vital role of personal remittances in the global economy. Over the past few decades, the global flow of personal remittances has emerged as a critical component of the global economy, playing a pivotal role in enhancing the economic stability and development of many nations, particularly those in the developing world.
- Local household incomes beginning to paint a rosier picture, albeit a mixed one. While there are positive signs, such as rising take-home pay and improving consumer confidence, significant challenges remain. High living costs and interest rates continue to strain consumers, but the anticipated decline in inflation and forthcoming interest rate cuts provide a cautiously optimistic outlook for the remainder of 2024. The nuanced interplay of these factors will be crucial in shaping the economic trajectory in the coming months.
Jittery vibes: Recession fears ripple through markets
On Monday (5 August), fears of a US recession sent shockwaves through global markets, causing steep losses in high-beta EM currencies and equity markets. Japan’s Nikkei 225 index plunged 12.4% on the day (its biggest single-day decline since 1987) as investors reacted to rising US unemployment and slower job creation data reported on Friday (2 August). This news suggested an impending economic slowdown in the US, which could spell trouble for Japanese companies. The pessimistic outlook was compounded by a stronger yen, which added to the challenges faced by Japanese exporters. On Wall Street, the sell-off began as soon as the US market opened. The S&P 500 dropped 4% before recovering some ground, ultimately ending the day c. 2.7% down – its worst performance since 2022. The tech-heavy Nasdaq Composite fared even worse, plummeting by 6% at one point on Monday (it ended the day down c. 3.4%) as high-profile big-tech counters (including Apple, Amazon, Meta, Alphabet, Microsoft) and high-profile AI investments (Nvidia) that were the stars of the US equity market in 1H24 came under pressure on the back of sluggish returns and news that Warren Buffett’s Berkshire Hathaway had sold nearly half its Apple stock in 2Q24. The CBOE Volatility Index or VIX, known as Wall Street’s fear gauge, briefly soared to its highest level since the early days of the COVID-19 pandemic.
The Bank of Japan’s (BoJ) decision last week to hike interest rates, which caused the yen to spike in value, contributed to the turmoil. This move disrupted the long-standing “carry trade” investment strategy, where international investors borrowed yen at low interest rates to buy riskier, higher-yield assets abroad, such as US stocks. As the yen appreciated against the US dollar, many investors were forced to sell assets to cover their loans.
Looking ahead, we advise caution before making drastic decisions with your investment portfolio. It is important to highlight the continued resilience of the US economy, which still boasts relatively low unemployment and better-than-expected GDP growth in 2Q24 (up 2.8% annualised vs expectations of a 2.1% print), as indicators that the market turbulence might be temporary. There are signs of recovery: Japan’s stocks have rebounded (the Nikkei 225 ended c. 10% higher on 6 August), and a semblance of calm returned to markets on Tuesday (6 August). Equity markets staged a partial rebound following the sharp declines seen at the end of last week and on 5 August. For example, the FTSE 100 rose by 0.2%, and the S&P 500 closed the day 1% higher. The VIX, although still elevated at 27, dropped sharply from its intraday high of 60 reached on Monday, the highest level since the onset of COVID-19 in 2020. On Wednesday morning (7 August), market movements also indicated a potential rebound. While the initial reaction to recession fears caused significant market disruptions, underlying economic strengths and early signs of recovery suggest that the situation may stabilise in the near future. Investors are encouraged to remain cautious, but not panic as global financial markets navigate these turbulent times.
The bottom line
Overall, the significant moves in financial markets over the past few days, driven by fears of a US recession, appear somewhat exaggerated. Nonetheless, they underscore the extreme sensitivity of financial markets to any unfavourable economic data. The debate over whether the US economy will experience a ‘hard landing’ after 525 bps of policy tightening remains ongoing. The fact that this has been avoided so far has been a key driver of the impressive equity rally this year. Despite the recent selloff, the S&P 500 is still 8.7% higher YTD. It seems that markets are on high alert for any signs of economic trouble, fearing that, eventually, it will come to fruition. This recent bout of volatility may not be the last in store for investors.
Lifelines across borders: The vital role of personal remittances in the global economy
Over the past few decades, the global flow of personal remittances has emerged as a critical component of the global economy, playing a pivotal role in enhancing the economic stability and development of many nations, particularly those in the developing world. Personal remittances refer to the money sent by individuals working abroad to their families or communities in their home countries. This financial activity supports millions of households worldwide and influences economic growth, poverty reduction, and social development on a larger scale. One of the primary reasons for the significance of personal remittances in the global economy is their sheer volume. According to the latest estimates from KNOMAD, remittance flows to low- and middle-income countries (LMICs) increased by an estimated 3.8% YoY to reach US$669bn in 2023. Total global remittance flows are estimated at US$860bn for 2023. To put it into perspective, The UN states that funds from abroad support at least one in every nine people globally, and half of the amount ends up in rural areas, where some of the world’s poorest people live. This also makes remittances three times more important than international aid. On a global scale, personal inbound remittances have risen seven times between 2000 and 2023. Notably, the Indian diaspora (measuring nearly 18mn people) collectively sent more than US$125bn back to the country in 2023. Subsequently, India became the first country to ever receive more than US$100bn in personal remittances in 2022. To put this in context, India’s remittances received add to more than the next two countries, Mexico (US$67bn) and China (US$50bn) combined.
This substantial influx of funds provides a stable source of income for many families, often covering essential needs such as food, healthcare, education, and housing. The impact of remittances on poverty alleviation cannot be overstated. For many households in developing countries, remittances form an essential lifeline that helps them escape the vicious cycle of poverty. These funds provide immediate financial relief, allowing families to invest in better living conditions and opportunities. Studies have shown that countries with higher remittance inflows tend to experience lower poverty rates and improved health and educational outcomes. Moreover, personal remittances contribute significantly to the economic stability of recipient countries. They act as a buffer against economic shocks and financial crises. For example, during periods of economic downturn or natural disasters, remittances often remain resilient, providing a crucial financial safety net. This stability is essential for countries with volatile economies or limited access to international capital markets.
Remittances also play a vital role in fostering financial inclusion. In many developing regions, access to formal banking services is limited. The flow of remittances encourages the use of financial institutions and services, as recipients are more likely to open bank accounts, save, and invest their funds. This increased financial inclusion can stimulate local economies by promoting savings and investments, thus fostering economic growth and development. Furthermore, remittances have a multiplier effect on the local economy. The money received is often spent on goods and services within the recipient’s community, boosting local businesses and generating employment opportunities. This circulation of funds stimulates economic activity and can lead to the development of infrastructure and public services, ultimately contributing to the region’s overall economic growth.
The bottom line
It is essential, however, to acknowledge the challenges associated with remittance flows. High transaction costs and fees imposed by money transfer operators can significantly reduce the amount of money that reaches recipients. Additionally, there are concerns about the dependence of some economies on remittances, which can create vulnerabilities if these flows were to decline. Nonetheless, the global flow of personal remittances remains a crucial element of the global economy, particularly for developing nations. These funds provide essential financial support to millions of households, contributing to poverty alleviation, economic stability, and social development. While challenges exist, the positive impact of remittances on economic growth and financial inclusion underscores their importance in fostering a more equitable and resilient global economy.
Local household incomes beginning to paint a rosier picture, albeit a mixed one
For the SA consumer, household incomes are finally beginning to paint a rosier picture. According to recent BankservAfrica data, in June, the average take-home pay experienced a modest increase of 0.7% YoY in real terms (i.e., adjusted for inflation) and a more substantial 6.0% YoY rise in nominal terms. Real incomes climbed 1.8% YoY for 2Q24 yet saw a decline of 2.9% QoQ. These data reflect SA’s nuanced economic landscape, whereby gains in earnings remain tempered by broader economic pressures. Nonetheless, consumer confidence also showed signs of improvement in 2Q24. The FNB/BER Consumer Confidence Index (CCI) rose from -15 in 1Q24 to -12 in 2Q24, marking a recovery from the severely depressed reading of -25 in 2Q23. This rebound in confidence occurred in the aftermath of the May National and Provincial Elections (NPEs) between 3 and 14 June. Despite this improvement, the CCI remained in negative territory, indicating ongoing consumer concerns. Nonetheless, it is worth noting that while consumer sentiment in 2Q24 was still decidedly negative, it was at its highest point in 18 months (since 4Q22) when the CCI reached -8. The economic outlook brightened in 2Q24, particularly in the category assessing the appropriateness of the present time to buy durable goods such as vehicles, furniture, household appliances, and electronic goods. However, household finances did not show further improvement in 2Q24, although they had been in positive territory after climbing over the past three quarters from a depressed state in 2Q23.
The increase in consumer confidence was primarily driven by middle- and low-income households. For middle-income households earning between R5,000 and R20,000/month, confidence levels rose from -17 index points to -10. Low-income households, also earning between R5,000 and R20,000/month, saw their confidence move from -16 to -10. This shift indicates a less depressed sentiment among these groups despite ongoing economic challenges. The absence of loadshedding in 2Q24 contributed to less negative consumer sentiment. However, elevated living costs continued to strain households. The consumer price inflation rate averaged 5.2% YoY in 2Q24, exceeding the 4.5% YoY midpoint of the inflation target range. High interest rates also added to the financial burden on consumers. Nevertheless, inflation is expected to fall further over the remainder of 2024, potentially dropping below 4.5% YoY by 4Q24. This anticipated decline in inflation, along with expected interest rate cuts starting towards the end of the year, is likely to boost consumer sentiment further. Naturally, the timing and extent of these anticipated rate cuts depend on the inflation outlook (locally and abroad) and global interest rate developments as we progress into 2H24. At this stage, we expect an initial rate cut of 25 bps in September, followed by a further 50- to 75-bp worth of cuts in 2025 and leading into 2026. Whilst the initial 25-bp cut may not significantly impact consumer spending, it is anticipated to boost confidence slightly. The repo rate, which had dropped from 6.5% (prime lending rate at 10.0%) to 3.5% (prime lending rate at 7.0%) in 2020, rose to 8.25% (prime 11.50%) by 2024.
Significant fuel price cuts have primarily influenced the decline in inflation outcomes over June and July, positively impacting consumer spending in other areas. Petrol prices fell by R2.23/litre over these two months, easing some financial pressure on consumers. The recent election results, showing over two-thirds of the vote for more moderate political parties, also contributed to a mild lift in the CCI. The successful formation of a government of national unity (GNU) is expected to further boost sentiment in the 3Q24 FNB/BER CCI reading, though a substantial increase is not yet anticipated. By the 3Q24 CCI reading, little is expected to have changed regarding interest rates, though financial markets are pricing in another potential cut in November. The BER notes that if the GNU remains stable and recent gains on the Johannesburg Stock Exchange (JSE) and the rand exchange rate are maintained, there could be an improvement in high-income consumer confidence during 3Q24. However, consumer spending in 3Q24 is projected to be modest. Based on incoming monthly data, the quarterly growth rate will likely be below 0.5% QoQ seasonally adjusted (qqsa), possibly closer to 0.2% qqsa.
The bottom line
As such, 2H24 continues to hold the potential for an uptick in the local economy. As interest rates ease and inflation slows, there is the possibility of a boost in consumer spending. Positive developments include progress in energy and rail sector reforms, alongside efforts to address grey-listing concerns. However, inconsistent international relations, infrastructure bottlenecks, and residual policy uncertainty remain constraints to SA’s growth. While there are positive signs, such as rising take-home pay and improving consumer confidence, significant challenges remain. High living costs and interest rates continue to strain consumers, but the anticipated decline in inflation and forthcoming interest rate cuts provide a cautiously optimistic outlook for the remainder of 2024. The nuanced interplay of these factors will be crucial in shaping the country’s economic trajectory in the coming months.
