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:
- Global wealth concentration: Regional powerhouses and shifting dynamics in a divided world. Whilst global wealth remains highly concentrated in a few dominant regions and countries, the landscape is evolving, with emerging markets (EMs) increasingly driving economic growth and wealth creation. Regions like Latin America, the Middle East, and parts of Asia-Pacific are set to experience significant gains, altering the balance of wealth distribution in the coming years. However, wealth disparities (both within and between countries) remain stark, emphasising the multifaceted nature of global inequality.
- The Sahm Rule: A timely indicator of recessions or a lagging signal? The Sahm Rule or Sahm Rule Recession Indicator is a real-time economic indicator designed to identify signals related to the onset of a US recession. Developed by economist Claudia Sahm in 2019, the rule specifically tracks changes in the US unemployment rate to signal when the economy might be entering a recession. The Sahm Rule Recession Indicator flashed red at the start of August amid the release of a weaker July US jobs report that, on its own merit, saw investor concerns ripple across global financial markets.
- The local economy rebounds as loadshedding takes a backseat. SA’s economy notably started the year on a low note, posting a revised 0.0% QoQ growth rate in 1Q24. The 1Q24 GDP growth data highlighted the enduring economic vulnerabilities that almost tipped the country into recession in 2023. However, in 2Q24, SA’s economy strengthened by 0.4% QoQ
Global wealth concentration: Regional powerhouses and shifting dynamics in a divided world
It is no surprise to hear that global wealth is highly concentrated, with roughly 90% held by just three regions – North America, Asia-Pacific, and Western Europe. This concentration of wealth reflects the diversified economies, advanced financial systems, and high levels of industrialisation present in these regions. According to the Boston Consulting Group’s (BCG) 2024 Global Wealth Report, in 2023, these regions accounted for most of the world’s net wealth, with North America alone creating over 50% of all new financial wealth, largely thanks to strong stock markets and the growth of financial assets. Notably, BCG defines financial wealth as cash and deposits, bonds, public and private equities, investment funds, life insurance and pensions, and cross-border wealth. BCG predicts that wealth growth will shift, with regions like Latin America and the Middle East & Africa expected to grow the fastest, each at an 8% compound annual growth rate (CAGR). Meanwhile, European regions are projected to experience the slowest growth. This shift highlights how EMs, particularly in Asia-Pacific, are becoming significant drivers of global wealth. India, for example, created US$588bn in new financial wealth in 2023, marking the most significant wealth increase in that country’s history.
Wealth disparities are also visible nationally, where growth trends vary widely. Countries like Kazakhstan and China have seen rapid increases in wealth due to factors such as natural resource production, urbanisation, and the rising value of real estate. Conversely, European countries like Spain, Italy, and Greece experienced negative wealth growth, primarily due to the eurozone debt crisis, which undermined wealth accumulation in the early 2010s. One useful measure of wealth concentration in this regard is average wealth per person. Average wealth is a country’s total wealth divided by the adult population. However, it is worth noting that these figures can be skewed by extremely high or low values, such as wealth held by billionaires. Regardless, according to the 2024 UBS Global Wealth Report, in 2023, Switzerland ranked first, with an average wealth per adult of US$709,612. Other small countries with thriving financial sectors, like Luxembourg and Singapore, also rank highly. These countries benefit from pro-business policies and significant foreign direct investment.
However, average wealth can be skewed by extremely high individual fortunes. A more representative measure, median wealth, often shows a lower value, revealing the gaps in wealth distribution. For example, in Switzerland and the US, median wealth is four to five times lower than the average, pointing to significant inequality within these countries. Despite these wealth disparities, countries like Luxembourg, Australia, and Belgium have smaller gaps between average and median wealth, partly due to widespread homeownership and fewer extremes in wealth concentration. Luxembourg, with a high density of millionaires but no billionaires, exemplifies a country with a more balanced wealth distribution, reflecting how wealth can be more equitably shared within smaller, economically thriving nations.
The bottom line
Whilst global wealth remains highly concentrated in a few dominant regions and countries, the landscape is evolving, with EMs increasingly driving economic growth and wealth creation. Regions like Latin America, the Middle East, and parts of Asia-Pacific are set to experience significant gains, altering the balance of wealth distribution in the coming years. This shift highlights the growing influence of developing economies, particularly as they diversify their industries, invest in infrastructure, and expand access to financial markets. However, wealth disparities (both within and between countries) remain stark, emphasising the multifaceted nature of global inequality. Global trends, such as urbanisation, technological advancement, and shifting trade patterns, further complicate wealth distribution. Emerging economies, like India and China, are increasingly benefiting from these trends, capitalising on urban growth, real estate appreciation, and expanding financial services.
Meanwhile, older economies, particularly in parts of Europe and Japan, face challenges in maintaining their wealth growth due to ageing populations, stagnating economic systems, and the lingering effects of past financial crises. Ultimately, addressing these wealth disparities requires a coordinated effort across developed and developing nations. Policies that promote inclusive growth, equitable access to resources, and long-term sustainability will be crucial in narrowing the wealth gap. At the same time, understanding the global dynamics of wealth distribution and the forces that drive it is essential to creating a more balanced and fair economic future for all.
The Sahm Rule: A timely indicator of recessions or a lagging signal?
The Sahm Rule or Sahm Rule Recession Indicator, which has signalled every US recession since 1949, flashed red at the start of August amid the weaker July US jobs report that, on its own merit, saw investor concerns ripple across global financial markets. The Sahm Rule Recession Indicator is a real-time economic indicator designed to identify the onset of recessions in the US. Developed by economist Claudia Sahm in 2019, the indicator specifically tracks changes in the US unemployment rate to signal when the economy might enter a recession. It does so by comparing the three-month moving average of the US national unemployment rate to its lowest point in the previous 12 months. According to the Sahm Rule, if the unemployment rate increases by 0.50 ppts or more above this low, it suggests the US economy is likely in the early stages of a recession. This simple, data-driven approach makes the Sahm Rule a potentially valuable tool for policymakers, economists, and financial market participants who need to assess economic conditions in real-time. However, the question remains: is the Sahm Rule a useful indicator?
One of the major strengths of the Sahm Rule is its timeliness. Many economic indicators, such as GDP or income data, are reported quarterly and often revised after their initial release. In contrast, the US unemployment rate is published monthly, making the Sahm Rule a more responsive tool. It can flag a potential recession as soon as the labour market starts to weaken, offering an early warning to policymakers and the public. Historically, the Sahm Rule has been a reliable indicator. In past recessions, it has consistently identified the onset of economic downturns, giving it credibility as a valuable tool for monitoring business cycles. For example, it successfully flagged the 2008 global financial crisis (GFC) and the COVID-19-induced recession in early 2020, highlighting its accuracy in identifying major economic contractions. The rule’s straightforward approach allows for quick and easy interpretation. Focusing solely on the US unemployment rate avoids the need for complicated econometric models or multiple data inputs, making it accessible to a wide range of users, from professional economists to the general public.
The Sahm Rule does, however, have notable limitations. Unfortunately, it is better at identifying a recession once it has started rather than predicting one in advance. When US unemployment has risen by 0.50 ppts, a recession may already be underway, meaning the rule is more of a “now-cast” than a forecast. For policymakers hoping to implement measures to avoid a recession, this might provide insufficient lead time. While unemployment is a critical economic indicator, it is not always the first metric to deteriorate in a recession. Other factors, such as declining industrial production or a sharp drop in consumer spending, sometimes signal economic trouble before unemployment rises. In this sense, the Sahm Rule could lag other early-warning signals. Like any rule based on historical data, the Sahm Rule may not perform as well in unusual economic conditions. For example, during periods of rapid technological change or labour market disruptions that do not follow typical patterns, the unemployment rate might not increase as quickly, even if the economy weakens. Similarly, temporary shocks to employment (such as a major natural disaster or a short-term economic event) might trigger the Sahm Rule prematurely. Hence, this signal may be overstated due to the unique labour market dynamics that are currently present.
The bottom line
The Sahm Rule or Sahm Rule Recession Indicator is undeniably useful for identifying recessions, particularly in terms of timeliness and simplicity. Its historical track record makes it a credible and reliable indicator for detecting economic downturns. In the hands of policymakers, such as those responsible for fiscal or monetary interventions, the Sahm Rule Recession Indicator can provide a crucial early signal to initiate stimulus measures, such as unemployment benefits or interest rate cuts. However, its limitations also need to be acknowledged. It does not predict recessions far in advance or account for more complex economic dynamics that could influence the broader business cycle. The Sahm Rule should be used alongside other indicators such as the yield curve, consumer confidence measures, and leading economic indicators like housing starts or industrial production for a more comprehensive view of the economy. Moreover, as labour markets evolve (particularly with the rise of automation, gig work, and changing labour force participation rates), the behaviour of unemployment in recessions could shift, potentially weakening the effectiveness of the Sahm Rule Recession Indicator in the future. It is also worth noting that other economies may not follow the same patterns as the US economy, meaning the rule is not universally applicable outside the context in which it was developed.
The local economy rebounds as loadshedding takes a backseat
The SA economy notably started the year on a low note, posting a revised 0.0% QoQ growth rate in 1Q24. The 1Q24 GDP growth data highlighted the enduring economic vulnerabilities that almost tipped the country into recession in 2023. Entering 1Q24, the erosion of business and consumer confidence, driven by political uncertainty ahead of the 2024 National and Provincial Elections (NPEs) and the ruling ANC’s waning popularity, further dampened the country’s economic prospects. However, in 2Q24, SA’s economy strengthened by 0.4% QoQ. The finance, manufacturing, trade, and electricity, gas & water supply industries drove most of the economy’s production or (supply) side momentum. On the expenditure (demand) side, household consumption, government consumption, and a build-up in inventories contributed favourably to growth. Uncertainty around 2Q24’s print was particularly high, given the projected El Niño damage to summer crops (potentially leading to the agriculture sector’s growth outlook being more volatile than usual and generating a downside surprise). Similarly, large parts of services, including financing, business and personal services, also have no reliable intra-quarter activity data.
Rising consumer confidence saw household consumption expenditure (HCE) strengthen by 1.4% QoQ – a significant development given household consumption constitutes around 67% of GDP. Unsurprisingly, as a result, household consumption was the largest positive contributor to overall growth on the expenditure side of the economy. Notably, consumers increased their spending across most product categories. The miscellaneous goods & services product group was the largest positive contributor, driven primarily by increased spending on insurance. Given the elevated cost of debt servicing and eroding purchasing power, the anticipated relief stemming from the upcoming interest rate-cutting cycle should boost consumer spending further in the coming months. However, gross fixed capital formation ([GFCF] covering investments in infrastructure and other fixed assets) disappointed for a fourth straight quarter, declining by 1.4% QoQ.
Despite the fleeting optimism of ‘Ramaphoria’ in late 2017, a term used to describe the euphoria which greeted Cyril Ramaphosa’s appointment as ANC president in December 2017 and then country president in February 2018, SA’s investment climate has largely stagnated over the years. Business confidence plunged from 44 to a bleak 30 index points in 1Q24, reflecting policy uncertainty, sluggish growth, and a perceived lack of political will to create a business-friendly environment. Whilst there was a slight improvement to 35 in the 2Q24, business confidence remains far too low to spark a meaningful resurgence in investment activity. Last year, however, investment saw a sudden spike, but this was mainly driven by energy-related machinery purchases spurred by tax incentives and the urgent need to counter the debilitating effects of loadshedding. This reactive investment was aimed at business survival rather than expansion. While there is cautious optimism about the new Government of National Unity (GNU) and the potential for faster reform implementation, significant challenges persist. High capital costs and the slow recovery of business confidence continue to pose obstacles. Nevertheless, looking ahead, there is hope for a more favourable business environment that could stimulate investment across various asset classes.
Looking ahead, we track in line with the SA Reserve Bank’s (SARB) GDP growth forecast for 2024 and 2025 at 1.1% and 1.5% YoY, respectively. It is important to remember that the government has made significant strides in several reform initiatives. The elimination of energy generation license thresholds has sparked private investment in large-scale energy projects, and the long-anticipated auction of the high-demand telecommunications spectrum has paved the way for the rollout of 5G networks. Furthermore, the Transnet Recovery Plan has led to marked improvements in rail and port efficiency, while the processing times for water-use licenses have been significantly reduced. The recent changes to immigration regulations also promise to simplify access to scarce international skills. These reforms collectively create a more favourable business environment and have the potential to drive economic growth. If economic reforms are implemented faster and private sector engagement increases, our baseline scenario could be upwardly revised. Business and consumer confidence metrics will be key to watch in this regard.
The bottom line
Nonetheless, regardless of the uptick in growth, the average SA consumer is becoming poorer – the latest data from the International Monetary Fund (IMF) indicates that SA’s GDP per capita is now below the average for emerging economies – and at about the same level as in 2005. According to IMF data, SA’s GDP per capita dropped from US$6,680 in 2022 to US$6,190 in 2023 – far below the record-high of US$8,800 recorded in 2012. Additionally, the 2023 domestic GDP per capita is below the US$6,450 average for emerging and developing markets. Notably, this is the same level of GDP per capita as in 2005. Simply put, SA’s expanding population growth, the weakness of the rand and the minimal economic growth means that the country’s population has been getting poorer in real terms. Moreover, in the domestic economy, material job creation has only occurred when GDP growth approaches 3% p.a. Thus, the economy is simply not growing at an adequate rate to sustainably boost long-term employment prospects for South Africans.
