How to predict an economic recovery

The return of financial stability has resuscitated global equity markets, but tentative signs of economic recovery is only expected towards the end of 2009.

South Africa lags the world where economic cycles are concerned. That's why the country ignored the first six months of America's recession, allowing buoyant commodity prices to push local shares to record highs until June 2008. As the rest of the world attempts to predict the turning point in the global economic downturn, Statistics SA just released the Q1 2009 GDP growth number and confirmed that South Africa is in a technical recession. That probably means we'll wait a few months more than the rest of the world before economic improvements filter through.

The US will lead the way

What has to happen before the recession is confined to the history books ? Analysts agree that the US is essential to any global economic recovery and the world's largest economy is not out of the woods yet. In May the US Federal Reserve conducted a ‘stress test' on the country's major banks, concluding that many of these institutions would need additional capital if the recession continued.

StanLib economist Kevin Lings confirms that "the world is not in recovery yet." However, the return of financial stability has resuscitated global equity markets. US investors ploughed their cash back into equities, sending the S&P 500 Index 30% higher since its 9 March 2009 low. Commodity prices are also on the rise as investors show a renewed appetite for riskier assets. We've witnessed this trend on local equity markets too.

Year-to-date (8 May 2009) foreigners are net purchasers of R21.985bn worth of listed shares. The

biggest winner from this inward capital flow is the rand. Our currency is the top performing emerging market currency so far this year, having appreciated from around R10.50/$ to better than R8.50/$ in record time. Compare this robust situation to 2008, when foreign investors dumped R54.439bn worth of shares, and the rand was at the bottom of the emerging market pile. Lings says strong policy action has built a platform which will form the base for a full blown recovery.

Downside risks remain

The single biggest threat to global economic recovery is unemployment. Lings says that any further weakening in US unemployment data could push the current recession into a second Great Depression. The US economy has shed 580 000 jobs each month since September 2008. Fortunately the latest unemployment payroll claims point to a reversal of this trend.

South Africa is fighting the unemployment dragon too. And most of our consumer sectors are already deep in recession, with retail sales, mining production, motor vehicle sales and housing in serious decline for months. The disappointing March 2009 manufacturing production number points to a big dip in domestic economic activity. The "slump in activity [will be] accompanied by further job losses as companies try to bring their cost base more inline with the lower level of output," says Lings. He also warns that local equities could see further downside if corporate earnings are worse than expected. Analysts expect local banks to produce 2009 earnings around 15% down on last year – and resources counters will probably disappoint to.

When will economies recover?

There's no quick fix to economic contagion. Economies around the world are going to have to deal with issues like deflation, fiscal deficits and declines in global production and trade before the world heals. StanLib only expects to see "tentative signs of economic recovery towards the end of 2009."