December 2021 economic review
Despite increased restrictions worldwide caused by the Omicron variant and ongoing inflation concerns, most major global indices ended the month higher, including South Africa. Early data suggests the Omicron variant is not as harmful as expected, with data indicating a lower risk of severe disease compared to previous variants. Economic data has also begun to show a slight return to normality. Both were enough to see a reversal from losses recorded in November.
US inflation in the headlines once again
Inflation in the US increased yet again in November with the Consumer Price Index (CPI) coming in at 6.8% year-on-year (y/y). The rise in prices marks the ninth consecutive month above the Federal Reserve (Fed)’s 2% target as well as its highest reading since June 1982. Core CPI, excluding food and energy prices, rose 4.9% y/y in November, the sharpest rise since mid-1991.
At its December meeting, the Fed announced plans to double the pace at which it withdraws its COVID-19 induced US$120 billion per month bond-buying programme, thus bond tapering at US$30 billion per month. At this rate the Fed would have concluded tapering by March 2022 and it has therefore raised expectations for rate hikes to follow, with the median member now forecasting three hikes in 2022.
On a positive note, the US economy grew 2.3% quarter-on-quarter (q/q) in 3Q21, slightly higher than 2.1% q/q estimates.
UK economy grows while inflation persists
The UK economy grew at a slower pace than initially expected in 3Q21, with revised data from the Office of National Statistics (ONS) showing a quarterly (before Omicron took hold) increase of 1.1% compared to estimates of 1.3%. The ONS said weaker consumer spending and the impact of energy firms going out of business contributed to the lower GDP print, and the economy remains 1.5% smaller than pre-pandemic levels.
Prices also seem to be running hot in the UK, with the CPI inflation rate coming in at 5.1% y/y for November. This result marks the third consecutive rise as well as the highest reading since September 2011. Thus, it was no surprise when the Bank of England (BOE) decided to increase interest rates during its December meeting, becoming the first G7 country to hike. The committee stated although risks remain within the economy, the tightening was needed in order to meet its 2% inflation target.
China’s policymakers head in opposite direction from rest of the world
In early December, after the People’s Bank of China (POBC) decided to cut the reserve requirement ratio (RRR) by 50 basis points (bps), the POBC lowered the re-lending rate by 25 bps to support agricultural and small enterprises. The easing bias of the POBC reflects the growing concerns of Chinese policymakers about downside risks to the economy.
South African GDP negative in Q3 2021
In local economic data, November annual headline inflation measured by the consumer price index (CPI) accelerated to its highest level since March 2017 coming in at 5.5% y/y, compared to 5% in October. According to Statistics SA, the transport category continued to play a significant role in the increase, recording an annual hike of 15% in November.
After recording four consecutive quarters of growth, SA real gross domestic product (GDP) contracted 1.5% q/q in 3Q21, giving back some of the economic gains made since the severe impact of COVID-19 in 2Q20. Statistics SA mentioned the twin pressures of tighter COVID-19 lockdown restrictions and civil unrest last seen since the apartheid era dealt blows to the economy. This was further aggravated by renewed loadshedding and the Transnet cyberattack that disrupted operations at key SA ports during the quarter, leaving the SA economy on par with the first quarter of 2016.
Six of the ten industries recorded a decline in production in Q3 2021, with agriculture, trade and manufacturing the hardest hit. The agriculture industry recorded its biggest decline in production since 2016 (contracting 13.6%). The industry in KwaZulu-Natal was dealt a major blow by the civil unrest and maize, citrus and sugarcane farms recorded losses from fires started during the upheaval.
Adding to the negative woes was the release of SA’s unemployment rate which rose to 34.9% in 3Q21, up from 34.4% in the previous quarter. This result brands SA as the country with the highest official unemployment rate in the world and serves a reminder of the structural challenges we continue to face. Furthermore, the youth unemployment rate, measuring job-seekers between 15 and 24 years old, hit a new record high of 66.5% in 3Q21.
On the pandemic front, the country appeared to have passed the peak of the fourth wave (Omicron) of infections during the month. As at 31 December 2021, the Department of Health data showed that 27.95 million vaccines have been administered compared to 25.6 million at the end of November. Furthermore, the curfew that was in place from 12 midnight to 4 AM was lifted with immediate effect resulting in no remaining restrictions on people’s hours of movements. Finally, the tourism industry received some positive news as the UK removed South Africa from its “red list” of travel restrictions.
Global equity markets managed to finish the year strongly, bouncing back for a weak November as it became apparent the latest COVID-19 variant (Omicron) was significantly less deadly than previous strains. Developed equity markets finished the month in positive territory as the MSCI World Index closed 4.19% month-on-month (m/m) in USD and 3.77% in ZAR. US stocks proved resilient as the S&P 500 (US$) closed the month 4.47% up, its best December in over 10 years. The US 10-year government bonds closed marginally higher in December, following the Fed’s announcement to accelerate the pace of quantitative easing. Furthermore, European equites also got back to winning ways, with the Euro Stoxx 50 (€) up 5.81% m/m.
Emerging market equities lagged developed market peers but did finish the month with slight gains. The MSCI Emerging Market Index returned 1.62% m/m in USD and 1.21% in ZAR. China and Russia once again contributed significantly to the latest drag on performance, the former negatively affected by US-listed Chinese stocks performance and the latter still caught up in geopolitical tensions related to the build-up of troops on its border with Ukraine.
The South African equity market produced another month in the “green”, as the FTSE/JSE All Share index closed the month at 4.80% and 29.23% for the year, resulting in the strongest year for the local bourse since 2012. Gains occurred across the board in December, and gold miners (the star performers of November) were really the only drag on performance.
All major sectors were in positive territory for December. Resources led the pack at 5.53% m/m, Financials closed at 4.42% m/m higher and industrials lagged slightly at a 2.76% m/m return. Bonds recorded another positive return, as the All Bond Index (ALBI) closed 2.69% higher m/m . SA listed property delivered a strong return as it closed 7.88% higher m/m in its second consecutive month up. Cash (STeFI) delivered a moderate return of 0.34% m/m. South African value managers (6.48% m/m) outperformed growth managers (4.12% m/m) while globally the opposite occurred.
The ZAR experienced mixed results against most major currencies, due to the uncertainty around the Omicron variant. The ZAR was up 1.42% and 0.40% against the Japanese yen and USD, but lost ground against the sterling and euro, which finished the month 1.93% and 0.62% stronger against the ZAR respectively.