August 2022 Economic Review
Global economic news
Although the war in Ukraine continues to impact the global economy via higher commodity prices, supply-chain disruptions and worsening sentiment, markets looked positive at the start of the month, but then developed market equities resumed their declines as it became clear that further substantial interest rate rises may be needed to tame inflation. Fears surrounding the impact of tighter US monetary policy proved to be the main driver of the sharp reversal of investor sentiment – with many Fed members delivering hawkish-skewed messages.
The majority of economic data that came out during the month, such as the global composite Purchasing Managers’ Index (PMI), which dropped to a 22-month low of 50.8 in July, continued to demonstrate the slowdown of the global economy. Surprisingly, economic data was generally a bit better than anticipated, as shown by economic surprise indices, while global inflation pressures started to ease on the back of lower commodity prices.
In the US, there were red flags in economic data published, with inflation holding at a 40-year peak and consumer sentiment declining. US GDP growth could slow sharply in 2022-2024 as the post-pandemic rebound starts to wear off and rising inflation and interest rates start to bite. The baseline outlook remains that the US economy will circumvent an outright recession, but risks to this view have increased.
This heightened sense of uncertainty is most pronounced in Europe, as it is likely that the energy crisis will deepen, with no end in sight for the now 6-month war in the Ukraine. Russia has continued to limit its gas exports to Europe. This, in addition to the unscheduled maintenance of the Nord Stream 1 pipeline, has pushed energy prices to all-time highs. Below shows the monthly rate of inflation in terms of electricity, gas, liquid fuels and energy as a whole in the EU. Some respite came in the form of the reopening of Ukraine grain exports, which ease the global food pressures.
Graph 1: Energy prices keep climbing in the EU
Emerging markets held up relatively well during August, as economic momentum in many markets balanced the difficulties encountered by China. While Chinese monetary and fiscal policies announced during the month were supportive, a resurgence in Covid-19 infections provoked additional lockdowns, and macroeconomic data continued to point to slow domestic demand.
For the most part the level of uncertainty about the outlook for the global economy remains high. The Fed’s hawkish message amid ongoing risks to the growth outlook hurt both equity and bond markets. Concerns about the impact of the energy crisis in Europe also weighed on markets.
Local economic news
The South African economy has finally returned to pre-pandemic levels, as June GDP numbers indicated. According to data from the IMF, South Africa’s recovery has been relatively sluggish when compared to other countries, taking seven quarters to return to the same level of economic activity pre-lockdown.
Monthly indicators for August were as follows:
According to the Bureau of Economic Research (BER) in Stellenbosch, the seasonally adjusted Absa Purchasing Manager’s Index (PMI) dropped into contraction territory in July as rotational power cuts and weak demand hurt output. This was the first reading below the 50-point neutral level since the looting unrest in Natal and Gauteng in July 2021.
At the start of August, global markets were quite positive on the back of an optimistic investor outlook. Unfortunately, sentiment turned negative towards the end of August, with markets drawing back sharply to end the month lower. The MSCI World was down 4.33% in USD and down 2.12% in ZAR for the month. European and UK markets bore the impact of the sell-off as their economies seem most vulnerable to the squeeze from higher energy prices. The Euro Stoxx 50 fell 5.1% in August, while the DAX was down 4.81%.
Emerging markets (EMs) held up better in August in rand terms, posting gains of 2.35% in rand terms but ending flat in USD. The Brazilian stock market was the standout EM performer in August, closing the month up in excess of 6.2%, as it benefitted from its significant exposure to energy shares.
South African markets echoed their global counterparts, advancing on the back of strong investor sentiment to rally 5% into mid-August, before being sharply impacted by the hawkish Fed statements. The FTSE/JSE All Share was down 1.84% for the month, mainly driven by resources, which was down 4.13%. Financials and Industrials were also down for the month, coming in at -2.34% and -0.60% respectively. The listed property sector was down 5.41% for the month. South African 10-year government bond yields ended August marginally higher (10.9%), having come into the month already elevated (10.8%). The All Bond Index delivered a flat 0.31% for the month while cash did marginally better, returning 0.45%. The local currency struggled against a strong US dollar, ending the month 2.3% weaker and featuring amongst the worst-performing currencies in August.