Recession Crises Loom in South Africa

Weekly Market Snapshot

• No end in sight to South Africa’s economic downturn as the business cycle indicator continues a downward spiral.

Behind the Headlines: What happened?

South Africa’s Composite Leading Business Cycle indicator continued its negative trend, declining to -1.7% in May from -1% in April, according to statistics released by the South African Reserve Bank on July 25th. The Composite leading business cycle indicator is designed to predict future economic activity and identify turning points in an economy. However, South Africa has been facing adversity to stimulate its economy for growth and development and has had four consecutive months of decline in the business indicator.

The monthly leading business cycle indicator comprises ten components that contribute to its monthly releases. However, among these ten components, six decreased, including the export commodity price index and approved residential building plans. This continuous decline in the business indicator raises concerns about weakened economic growth and the possibility of a recession in South Africa.

South Africa’s Monthly Leading Business Cycle Indicator.

Connecting the Dots:

The negative trend in South Africa’s leading business cycle reflects the performance of fundamental economic activities, such as the unemployment rate, stock prices, and average workweek. In January, the leading month-on-month (MoM) indicator showed a positive percentage change of 0.0%, but it sharply declined to -2.2% in March before gradually recovering in the following months until May. Would this lead us to a recession?. Safe to say as the monthly index has been volatile which in the near time may pedal South Africa to recession.

Coincidentally, the South African economy had a weakened economic growth of 0.3% quarter-on-quarter in Q1, 2023, and a minimal possibility of positive economic growth in 2023 as elevated inflation, a debt-to-GDP ratio greater than 70%, and a 33% unemployment rate weigh on the economy. As these increase, economic conditions worsen.

The Bottom Line:

The underlying movement in the composite business cycle is important as it provides a glimpse of future market conditions. However, dark days might still be up of the business cycle index, as ongoing pressure on the economic outlook worsens.

Will interest rates also respond to the economic outlook? As the indicator falters, the Apex Bank may lower interest rates to enhance the supply of money in the economy. Hence, it is important to stay diversified. Options during times like these could be defensive stocks that can withstand negative economic growth and bear fruits.

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