Mixed signals in the domestic economy
A range of mixed data reports released over the past month highlights the fact that the general recovery in the domestic economy remains subject to considerable risks. And in the shadow of the continuing Euro debt crisis, local equity markets remain under pressure.
This is the view of Daryll Owen, Chief Investment Officer at BoE Private Clients. While noting the surprisingly strong GDP data released recently by StatsSA, which suggested that the SA economy grew production at a rate of 4,6% quarter on quarter, he says that the growth is not necessarily a function of increased private sector investment spending.
“Ideally, the strong recovery is not just the result of government consumption and the inventory rebuild. Signs of some recovery in household consumption and private sector investment spending would be very welcome. But, following a 0.7% year on year contraction in private sector credit extension in April, May’s number again disappointed with a fall of 0.9% y/y. The weakness in credit growth remains indicative of weakness in private domestic demand”, he says.
Similarly, he notes that while manufacturing production rose by 2.6% month on month, a lower PMI (Purchasing Managers Index) reading of 51.1 in May (from 55.2 in April and 60.4 in February) was recorded.
The latest Sake24 and BoE Private Clients' provincial barometers (for April) also suggest that while the local economy is generally on the road to recovery, a number of divergent trends point to a possible ‘breather’ in economic growth over the next few months.
The barometers are compiled by Economists.co.za economist Mike Schüssler from various time series data used to measure economic activity in the four provinces: Gauteng, Western Cape, Eastern Cape and Free State.
According to Schüssler, the sectors which are recovering relatively quickly are the broad trade sectors (retail, wholesale and leisure) and the broad financial, property and business services sector. The manufacturing sector is also slowly lifting its head while the construction industry, especially in Gauteng and the Western Cape, is seeing significant declines in activity.
Schüssler’s says that, while the 2010 FIFA World Cup will continue to have a positive impact on various industries over the next two months, the biggest change in economic circumstances is currently taking place in the construction industry, where productivity levels are likely to decline in the months ahead. The property sector, too, is continuing to experience significant difficulty, impacting on prospects for faster economic recovery.
Looking at broader domestic markets, Owen says that on a year to date basis, the bond index has outperformed the equity market by 6,2% and that cash has outperformed both bonds and equities. In his view, the equity market is likely to remain under pressure in the months ahead.
“Given the risks to the global recovery and considerable uncertainty emanating from Europe and its policy makers, we remain neutral on equities,” he concludes.
