Volume 18 Issue 6– July 2020
COMMENT AND OUTLOOK – A Different World
The reopening of societies and economies around the world is being hampered by a resurgence of the Coronavirus in some countries. Perhaps this is an indicator that a return to normal, whatever that is, will take longer than was initially anticipated. The question that needs to asked is whether economic activity will quickly reach the levels it was at, prior to the onset of the pandemic. The behaviour of consumers around the world is going to be critical in determining the pace at which economic activity recovers. One thing that is quite certain is that the patterns of consumer behaviour are going to change. This will create a different normal going forward. The impact of job losses and reduced earnings will affect spending patterns, as will a greater propensity to save. The whole world of retail may well change significantly as ecommerce and online retail play a bigger role in consumer activity going forward. Shopping malls around the world may no longer be the social hubs they once were, until such time as the Coronavirus is eliminated. Theatres, cinemas, and restaurants have been particularly badly hit and many of these may not reopen. Travel and tourism which is a significant economic activity in many countries will also remain muted until the virus is ended.
Given the extent of the economic slowdown that has been caused by global lockdowns, there will initially be some positive data as employment numbers rise through job creation and economic activity resumes. Initial estimates by major global banks and many economic commentators were that by the fourth quarter of 2020, economic activity would be heading back to pre-pandemic levels. In the USA, this was based on it being an election year and that the Trump administration would do everything it could to get the economy growing again. There should be a much-improved economy in the USA by the November election time, but it is not likely to be as buoyant as expected. This may well be a factor in the election outcome. It is also interesting to note that many governments around the world are looking at infrastructure projects to kick start better economic prospects, rather than consumption. Global markets have taken faith in the prospects of a V shaped recovery from the effects of the pandemic. Most stock markets continued their positive trend in June but at a more muted pace. The exception was the heavily technology weighted US Nasdaq index that reached an all-time high during June. The anticipation by the markets that a strong economic recovery is in place must be watched. It potentially means that there is little margin for error in central bank and government policy steps or in disappointing economic growth outcomes. Second quarter economic data and company results will give better guidance on the strength of the recovery underway.
Quite interestingly there is a view that the European Union could be a stronger force going forward than it was prior to the crisis. The fact that the European Central Bank has for the first time issued Euro bonds, with the collective backing of member states, signifies the prospect of a more united, stronger EU. If that does materialise then growth prospects for the region will increase significantly. The EU is an important trading partner for South Africa so better prospects in that region could have some spinoff locally. China is also recovering and the shift in economic power to the East will continue which does change the global dynamic. Politically the USA is in a mess and that is not helping it is cause as the largest economy in the world. The upheaval caused by the protests following the brutal killing of a black man by police, is having a profound impact on the nation. It is a country that has always prided itself on its history and how it overcame significant challenges to evolve as the strongest nation in the world. Whatever its’ context, some of the heritage relating to that history is now being discarded. It remains to be seen how the USA will reach a balance between the redressing injustices of the past and maintaining pride in its history and role in the world.
South Africa continued its re-opening as the Coronavirus surge increased, as was expected. Many restrictions remain in place and a peak in infections is not expected before September. Like many other parts of the world a shift in work and consumer patterns will be seen. The JSE remained steady after its recovery and the Rand has recovered from the lows it reached during the crisis. Interest rates were cut again in June and are now at the lowest levels in a long time. The damage caused to the SA economy and government finances is going to take some time to overcome. Finance Minister Tito Mboweni delivered what was termed as an emergency budget on 24 June. What became apparent from the outlook given, is that it is an emergency that the country is facing with its finances. Tax revenue is going to fall well short of the projections made the February 2020 budget. Government spending is being reprioritised to make up
for the additional pandemic related spending that has taken place since the start of the crisis. Government debt as measured by the debt to GDP ratio is anticipated to rise to 87% in the next 2 years. Government spending, particularly on wages must be reduced. That is not easy in the SA political context. Economic growth and increased tax collection will also help but that will follow a recovery. Let the smokers contribute to the fiscus rather than to the crooks. That will be a start.
Twinoaks Investment Management (Pty) Ltd (Twinoaks) is an FSB approved Discretionary Financial Service Provider – No 849. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Twinoaks has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. For any further information concerning this publication, please contact Twinoaks