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A recession … not yet, but definitely a fast downturn


Although warning signs are emerging, the US is not in an economic recession. Fast rising interest rates coupled with no or little bond purchases by central banks are however causing distress in some markets. And while recessionary indicators do not indicate an imminent recession, the outlook is for fast sliding economic growth in the US. Due to the inter-connectedness of the world economy, it will negatively affect growth rates across the world, including South Africa, who is dealing with its unique challenges.

An example of how quickly events can change the economic outlook in the US can be found in the Federal Reserve Board’s economic growth projections. Economic growth of 3.3% for 2022 was projected in June 2021 (a year ago). In March 2022, this was scaled back to 2.8% and in June 2022 it was lowered further to 1.7%. However, the US is not in a recession (yet). The Sahm-rule dictates a recession starts when the “three-month moving average unemployment rate” is more than 50 basis points above its “low in the preceding 12 months”. So, the unemployment rate must jump from 3.6% in May to 5.1% in June for the US to be in a recession. Another indicator of a recession is if the two-year government bond exceeds the ten-year yield, which has not happened. Yet, some stresses are building in the housing market, which normally is a sign of a weakening economy. Housing starts fell sharply in May in reaction to rising CPI and interest rates. Furthermore, CPI rose 8.6% in May compared to average hourly earnings of 5.2%, signaling declining purchasing power of consumers. In an attempt to bring CPI down to 2% the Fed hiked the benchmark rate by 75 basis points in June and another 75 basis points in July is likely. The Fed’s dot plot suggests most members expect the rate to peak in 2023 around 3.5% to 4%.

As is the case in the US, both the manufacturing and services PMI fell sharply in the Eurozone, though it remained above the 50-mark, signaling expansion. However, the PMI showed inventories are increasing, suggesting a future cut in production. In addition, the rising cost of energy and continued supply chains disruptions were blamed for weakening demand. Natural gas prices quadrupled in Europe (tripled in Asia and doubled in the US), contributing to high inflation. The European Central Bank (ECB) has so far avoided a rapid tightening of monetary policy, but a 25-basis point hike in July is almost a done deal, while markets are pricing in increases of 165 basis points up to the end of the year. In addition, with the ECB announcing an imminent end to bond purchases, a negative consequence emerged as market jitters surfaced on the sustainability / affordability of debt in Italy and Spain with yields surging way above the German yield.

China’s economy will continue to face headwinds, even as COVID-19 restrictions were eased. The country is still struggling with trade conflicts, the effects of the Russian-Ukraine war, the negative production effect of higher international inflation and interest rates, and declining demand from the US which will have a strong impact on Chinese production – as US retail purchases account for almost 50% of the merchandise exports from China to the US.

South Africa’s economic growth rate should also have slown in the second quarter of 2022 following flooding in Kwazulu-Natal, increased bouts of loadshedding and rising interest rates. In addition, CPI increased to 6.5% in May - driven by fuel and food prices. The petrol price may hit R30/l in August, if the government does not continue its subsidization thereof, while steep municipal rate increases may fuel CPI towards 7% in July/August. The South African Reserve Bank increased the repo rate by 50 basis points in May and is expected to repeat the feat in at least July, whereafter increases of 25 basis points each may occur in September and November.


Multivest Economic Division

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