Various international economic data and policy statements show a stronger possibility that the world may move into a recession this year, mostly due to the Russia-Ukraine conflict, and causing oil, gas, and food prices to skyrocket across the globe.
A repeat of the 2009 sub-prime crisis is becoming more of a reality.
The UK and European economic growth are on the brink of negative expansion, namely 0.3 percent and 0.8 percent respectively, during Q1 of 2022. The US economy already recorded negative numbers of 1.5 percent growth for Q1.
The US inflation rate had increased to 8.6 percent from 8.3 percent in April, 2022. The annual inflation rate in the euro area also increased strongly last month to 8.1 percent, up from 7.4 percent the previous month. This is a new record high level.
These inflation fears across the US and Europe caused expectations of sharp increases in interest rates across the world, pushing the world economy into recession.
The European Central Bank’s Christine Lagarde announced on Thursday that the ECB would increase interest rates for the first time in 11 years in July, as inflation has become a major challenge.
It is expected that another sharp increase of 0.5 percent in the Federal Reserve rate by the US Central Bank is on the cards on Wednesday. This will increase the bank rate from 1 percent to 1.5 percent.
In reaction to these inflationary pressures and interest rate increase prospects, the sell-off on equity markets across the globe continues.
On Wall Street, all three main stock indices reached their lowest level for the year and are falling at the same rate as during the 2029 sub-prime crisis. The Jones Industrial Index over the past week lost 4.6 percent and is now down by 13.6 percent for the year. The S&P500 Index lost 5.1 percent and is down by 18.1 percent year-to-date. The main loser on the board remains struggling tech stock, as the Nasdaq is down 5.6 percent for the week and 26 percent lower for the year.
Despite the better-than-expected economic growth rate of 1.9 percent recorded in South Africa during the first quarter of the year, expectations of a sharp decline in economic activity during the rest of the year have led to negative perceptions of risky assets (equities and bonds) on the JSE.
The shocking news from Statistics SA that mining production slumped by 14.9 percent and manufacturing production by 7.8 percent in April, indicates that due to the floods in KwaZulu-Natal, the economy had already started to shrink.
On the JSE, equities were sold as risk investors stayed out of the market. The ALSI had its second-worst week this year, contracting by 4.4 percent, and is now 8.8 percent lower for the year. The Industrial 25 index lost 2.8 percent, while the financial shares had been hit the most as the FIN15 Index was down by nearly 7 percent.
The news on the negative trend of production in the country, and expectations of sharp increases in interest rates in Europe and the US weighted strongly on the rand/dollar exchange rate.
The currency lost more than 60 cents during the week from a strong R15.26 to the dollar to R15.87 at the close on Friday.
The weaker rand and continuing increase in the oil price (Brent oil closed Friday at $123 per barrel) already indicates that South Africans are due to pay more than R2.08 per litre more for petrol and R1.10 more for diesel at the beginning of July. The 75c a litre subsidy from the government will help only partially.
This week investors and analysts are set to turn their attention to the publishing of South Africa’s retail sales figures for April 2022. It is expected that sales to the public had increased by 1.5 percent in April, against 1.3 percent year-on-year the previous month.
On global markets, attention will shift towards the interest rate decision by the Federal Reserve (FOMC) of the US on Wednesday. The FOMC will also publish its economic projections on Wednesday. The release of the US retail sales for May will also be important, as it is expected that it had increased only marginally by 0.2 percent (year-on-year). The Bank of England (BoE) is to announce its interest rate decision on Thursday.
Author: Chris Harmse is an economist at CH Economics and lecturer at the School of Commerce at Stadio University.