SA firmly on Recession Glidepath

2014-07-22 13:31

In our last post, we examined the performance of the last six SA presidents in and around recessions, observing that none of them have ever skirted a recession. This month we focus on another possible SA recession which could give the new Zuma administration a run for their money.

The latest South African Leading Economic data is available from the South African Reserve Bank (SARB) and the Organization for Economic Cooperation and Development (OECD). Both sets  represent data as at end of May 2014. When one analyses the growth of the respective leading economic indexes (LEI's), it is clear that the leading data is predicting slower growth ahead:

We have found it useful to examine the average of the SARB and OECD LEI's growth rates for assessing recession risk, as shown by the black line above. Typically negative future growth is indicated by the growth of the leading indexes (blue and orange lines) falling below zero. Whilst the SARB LEI growth seems to be attempting a recovery below zero, the OECD LEI has its nose firmly planted downwards, and is accelerating.

It is sobering to examine the track of the last 16 months of the black average line above with its historical glidepath into the last 5 SA recessions since 1981:

It is clear that the black line with yellow dots, representing the average growth of the SARB and OECD LEI's has a correlation fit of 0.95 (1=perfect) with its average 16-month recession glidepath. You can see that the average glidepath gives us about 6 months warning of recession. Given that the black line is not prone to jumping about in a rapid fashion, the odds are stacked in favour of SA already being in or just about to enter economic recession.

In the past, this would be your signal of an average 20% JSE correction but with such a large portion of the JSE's earnings now coming from offshore (estimated 60%) and the unstoppable structural decline in the Rand due to our failure to rope in the twin deficits or deliver a competitive economy, it is likely that the JSE will continue to find a floor under it if offshore economic conditions continue to improve. However correct choice of local shares and an understanding of economic growth outside our borders is now more important than ever against a backdrop of a stuttering local economy.

Also, it would be prudent to hang onto your job for all its worth and keep your spending to the essentials until things improve.

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