August 2021 economic review
The global reopening continued in August, with a number of developed markets further lifting restrictions. For example, the UK finally lifted its last domestic COVID-19 restrictions. Economic data remained strong, although the developed world appears to be at or just past the peak rate of growth. Despite ongoing concerns of the Delta variant and monetary policy tightening, most nations ended the month on a positive note, excluding South Africa.
Economic news (first half of 2021)
Global vaccination rollouts and effectiveness (second half of 2021)
On the COVID-19 front, the Delta variant continued to spread and daily cases picked up across the globe in August. In Europe and the UK, the efficiency of vaccination programmes has meant hospitalisations have not risen anywhere near as quickly as during the previous wave. In the US, hospitalisations have increased more sharply, raising some concerns that the link between infections and hospitalisations has not been effectively broken there due to lower vaccination take-up by the US population.
There has been a great deal of interest in data coming out of Israel regarding possible rapidly waning immunity of the Pfizer COVID-19 vaccine, as Israel delivered the world’s fastest vaccine rollout. Data out of Israel suggests that antibody protection from the vaccine wanes after six months, although protection against severe disease and hospitalisation remains high. In response, several countries have announced booster programmes to deliver third doses to their populations.
Israel has been experiencing a high number of infections in August, with the Delta variant accounting for nearly all infections in Israel. Thus, it came as no surprise when Israel was the first country to offer a third shot of the Pfizer vaccine in a nationwide booster campaign, an attempt to significantly increase protection against the COVID-19 virus.
The Fed signals a change amid decelerating inflation
Jerome Powell, the chairman of the Federal Reserve (Fed), took a cautious stance in his latest speech, which was well received by global markets. The Fed stated it remains content with the progress made on inflation, which it still believes is transitory, and expects the labour market to reach appropriate levels for tapering shortly. Since the pandemic began, the Fed has predominantly used two policy levers to support the economy. These are short-term interest rates and large asset purchases. There is no expectation that interest rates will be changed any time soon. But there has been much speculation regarding when the Fed will taper its programme of monthly asset purchases.
Powell further stressed that there was no rush to increase interest rates, but the timeline for tapering is separate to that of interest rates, thus all eyes will be on the September meeting held by the Federal Open Market Committee for more news on tapering.
Job creation in the US over the month of August was a huge disappointment, with the economy only adding 235 000 jobs compared to the Dow Jones estimate of 720 000 new jobs. This comes with heightened fears of the pandemic and the impact of rising COVID-19 cases in the US. The weaker than expected report could cloud policy for the Federal Reserve, which is weighing whether to begin tapering on some of the massive stimulus it has been adding since the COVID-19 outbreak in early 2020.
In other interesting news, the US Food and Drug Administration (FDA) government agency has given the Pfizer vaccination full approval. Prior to this the US only authorised the vaccine for emergency use.
China to stimulate economic activity via credit market activity
In the midst of a slowdown in economic activity, China’s central bank is taking steps to boost credit market activity. During August the central bank cut the required reserve ratio (RRR) for commercial banks. Later it provided direct low interest loans to banks to encourage them to increase lending. During the month the Governor of the People’s Bank of China (PBOC) encouraged banks to provide more credit to micro, small and medium sized businesses.
The Governor also urged banks to lend more for the opportunities that will lead to scientific and technological innovation, as this tends to bolster economic growth. The Chinese economy faces serious obstacles from COVID-19, supply chain disruption and shortages, tense trading relations with the United States, and the lagged effect of the preceding tightening of credit market conditions.
Taliban takes control of Kabul
The Taliban effectively replaced the Afghanistan government during the month of August. This comes after the United States and its allies withdrew their soldiers from the Middle Eastern country for the first time in a decade. Millions are looking to flee the country due to uncertainties of Taliban leadership, implying virtually all aspects of the economy are not working. Such undoubtedly tragic consequences for many have had a minimal impact on global financial markets. It will be interesting to see the effect on local and foreign investment in Afghanistan and if there will be a global financial impact in the near future.
Purchasing Manager Indices (PMIs) yield mixed global economic growth stats
PMIs are forward-looking indicators meant to signal the direction of activity in the broad manufacturing and services sectors. A reading above 50 indicates growing activity; the higher the number, the faster the growth—and vice versa.
The manufacturing PMI for the United States fell from 63.4 in July to 61.2 in August, the lowest in four months. Still, this is a number indicating that the US economy is still growing at a healthy pace, albeit decelerating for the month. The services PMI for the United States fell from 59.9 in July to 55.2 in August, an eight-month low. It is a number indicating a moderately strong rate of growth. Overall, the latest PMIs for the United States suggest economic strength but significant challenges, especially those that influence inflation.
In Europe, the economy of the 19-member eurozone continued to grow at a very strong pace in August, according to the latest PMIs. However, there was a slight deceleration, largely due to supply chain obstacles.
The PMIs for the United Kingdom suggest a significant deceleration of the British economy in August. Although the manufacturing PMI was largely steady (falling from 60.4 in July to 60.1 in August), the services PMI fell sharply from 59.6 in July to 55.5 in August, a six-month low. The sub-indices for output were down for both manufacturing and services.
The manufacturing PMI for Japan fell slightly from 51.8 in July to 51.0 in August, a level indicating very modest growth in activity. The services PMI, however, fell from 47.4 in July to 43.5 in August. Overall business sentiment weakened, mainly due to concerns about the possible impact of the Delta variant. That said, sentiment remained positive on balance because of a high and growing rate of vaccination.
Naspers and Prosus share swap shut down JSE
On the 18th of August the Johannesburg Stock Exchange (JSE) was down for five and a half hours. This was due to significantly higher trading volumes the day before involving large deals between Naspers and Prosus, after they announced a share swap agreement of approximately R145 billion, a trading record. Naspers and Prosus’ performance weighed on the JSE once again and resulted in the South African equity market ending the month in negative territory.
The employment data for the second quarter of 2021 was also released during the month and was worse than expected, setting yet another record high of 34.4%.
Overall global equity markets had a bumper month in August, as developed equity markets delivered yet another positive return for the seventh consecutive month. The MSCI World Index closed 2.35% month-on-month (m/m) in USD and 1.20% in ZAR. US equities led from the front once again, with the S&P 500 (US$) up 3.04% month-on-month and 21.57% year to date. Furthermore, European equities also closed the month on a positive note, with the Euro Stoxx 50 (€) up 2.63%.
Emerging equity markets managed to bounce back from last month’s results, recording a positive return of 2.42% m/m in USD and 1.27% in ZAR, slightly edging developed equity markets for the month. Indian equities produced a stellar performance in August, buoyed by strong retail investor demand following economic data showing the Indian economy was significantly less impacted by the severity of the most recent COVID-19 wave than expected. The former, as well as a strong performance from Russian equities, contributed to emerging equity markets’ recovery. Meanwhile, the rollout of regulations in China continued to weigh on Chinese stocks, with uncertainty around the impact of the shifting Chinese regulatory landscape abounding.
The South African equity market ended the month in the negative for August, as the FTSE/JSE All Share Index closed at -1.74%, with the best performers of the month coming in the form of local banking companies.
All major indices were in negative territory for August, with Financials leading the pack at -0.97% m/m, while resources and industrials lagged somewhat, closing at -4.88% and -5.17% m/m. Industrials were once again negatively affected by Naspers and Prosus’ performance. SA listed property closed the month 7.46% up, with cash (STeFI) delivering a moderate return of 0.32% m/m. South African value managers (2.52% m/m) outperformed growth managers (-6.16% m/m), while globally, the opposite occurred.
Our currency experienced its lowest level in five months against the USD during the month of August, but managed to close the month 1.13% up, in another rollercoaster month. Furthermore, the ZAR gained as much as 2.17%, 1.59% and 0.10% against the sterling, euro and Japanese yen respectively.