Mid-June economic review

The rand has been the star performer, hitting a 28-month high against the US dollar.

May was turbulent for most markets as investors weighed up the improvement in the global economic recovery against the backdrop of inflation worries and tapering of accommodative monetary policy.

The MSCI All Country World index yielded 1.6% for the month, however, developing markets performed better than developed markets with the MSCI Emerging Markets Index yielding 2.3% against 1.5% from the MSCI World Index.

The US economy is showing strong signs of recovery on the back of ultra-loose monetary policy, reopenings in the economy and a well-executed inoculation programme. The US recorded an annual inflation increase of 4.2% (y/y) in April, making it the highest reading since September 2008. The Federal Reserve however reiterated that these readings are transitory and will likely dissipate throughout the year. All eyes will be on the release of the May jobs report to get a clearer picture of the strength of the labour market recovery.

The UK economy also continues its path of recovery with GDP up 2.1% (m/m) and manufacturing PMI surging to 66.1 in May, making it the largest growth in factory activity recorded. The Bank of England also kept its monetary policy unchanged however announced that it would start tapering the purchase of government bonds from £4.4 billion per week to £3.4 billion.

Locally, economic indicators for May have pointed to a moderate expansion of the South African economy in the first quarter of 2021. GDP grew 1% in the first quarter translating into an annualised growth rate of 4.6%, whilst promising, the economy still has a long way to go to recover to levels seen pre-pandemic. Productivity levels, as measured by the Absa manufacturing PMI, also picked up in May as it continues to print above the expansionary 50 level. It rose to 57.8 compared with April’s 56.2.

Sentiment surrounding the economy is optimistic with business confidence improving yet again in May and sitting above pre-pandemic levels. However, the rise in unemployment is of concern with Stats SA showing unemployment increased to 32.60% in Q1, the highest level seen since 2008. This is a reminder of the many structural challenges facing South Africa despite the modest uptick in economic activity.

Locally, inflation also ticked up to 4.4% (y/y) in April thus nearing the midpoint of the central bank’s target. This is somewhat expected given that we are coming off a very low base from 2020 as well as the surge in global oil prices. Thus, it is no surprise that the South African Reserve Bank (Sarb) unanimously left interest rates unchanged at their May meeting. The MPC also reiterated its belief that inflation is contained, and that the economy could use the continued support.

In other news, our national budget deficit came in at only 11.2% of GDP, beating Finance Minister Tito Mboweni’s initial forecast of 12.3%. Eskom has also reported a reduction in its debt by just shy of a fifth by taking advantage of a stronger rand and paying off matured loans.

In currencies, the South African rand has been the star performer, hitting a 28-month high against the USD, continuing to benefit from the low interest rates in the US, elevated commodity prices, and a risk-on environment.

The South African stock market continues to perform with the FTSE/JSE ALSI returning 1.53% in May. Financials delivered 9.04%, Industrials 0.89%, Listed Property -3.50% and Resources -1.39%. South African Bonds (FTSE/JSE All Bond Index) were also positive ending 3.70% up.

Source: Tradingview (data 31 May 2021)

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Mauro Forlin

Global & Local Asset Management


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