News in South Africa 8th September:

1. Global economy worsening:

The global economic outlook is getting cloudier, not clearer.

While market volatility is expected, investment strategies should ideally reflect one’s personal circumstances – not current market conditions.

Global economy worsening
Image taken by: Nicola Barts

The last week or so saw a broad sell-off across global bonds, credit, equities, and property. Commodity prices are also lower across a broad front, but natural gas and coal prices remain very high. The main reason for this is renewed signs of slowdown in China and Europe, even as central bankers continue to pile on the pressure.

As always, it is the intentions of the US Federal Reserve that matter most.

While US inflation has probably peaked and is starting to trend lower, largely due to average gasoline (petrol) prices falling about 20% from the June record of $5 per gallon to $3.80, services inflation remains elevated. Therefore, the road back to meeting the Fed’s 2% average inflation target is likely long and uncertain.

No Powell pivot

In a short but sharp speech at the recent annual Jackson Hole central banking symposium, Fed chair Jerome Powell reiterated that his institution remains committed to getting inflation under control, that it will not declare victory prematurely, that rates would continue rising (though probably at a slower pace) and that the economy will have to slow to bring demand and supply back into balance.

Since the US economy, particularly the labour market, remains relatively strong, this could require a long period of elevated interest rates.

Energy crunch

Across the Atlantic however, the inflation situation has deteriorated due to sky high natural gas prices. Russia has drastically cut gas flows to Europe, while drought and heatwave conditions have impeded the production of hydroelectricity and nuclear power.

The surge in energy costs will not only severely constrain household budgets, but electricity rationing is possible as the northern winter approaches. Eurozone inflation hit 9% in August and is likely to keep rising.

Consumer price inflation

China is also facing electricity rationing as a two-month long heatwave has drastically reduced the production of hydroelectricity. This compounds the negative economic impact of Covid crackdowns and the sharp slowdown in the key property sector.

The Caixin China Manufacturing Purchasing Managers’ Index unexpectedly fell below the 50 neutral level in August, as the electricity shortages and Covid-lockdowns bit.

Dominant dollar

The dollar itself has hit fresh 20-year highs on a trade-weighted basis over the past few days. So much for the dollar’s oft-predicted demise. The euro sank to a corresponding 20-year low of $0.99, while the Japanese yen has declined to ¥140 per dollar, a level last seen during the Asian financial crisis of 1998. The tightly controlled Chinese yuan is also weaker since the start of the year.

This is rarely a good sign. While the dollar does benefit from higher short-term interest rates (2.75% in the US against 0% in Europe and -0.1% in Japan) it is also a symptom of global risk aversion. In stormy seas, investors seek safety in the dollar. That the US is self-sufficient in energy and far away from geopolitical hotspots, gives additional impetus to the dollar.

Unstable and uncertain

So where to from here? Clearly the global macro environment is unstable and uncertain, and investors should expect market volatility.

There are a lot of moving parts, but the key thing to keep an eye on is whether inflation, particularly in the US, is convincingly on its way down.

This will allow the Fed to ease up on tightening and give greater consideration to growth and employment. That in turn will probably signal the end of the dollar’s upward surge.

2. Relief grant controversy:

In a discussion, documents which have not been widely circulated, the Presidency and the National Treasury have suggested options for new grants to replace the Social Relief of Distress (SRD) grant. The Institute for Economic Justice has slammed these proposals which it says are designed to exclude as many people as possible.

The proposals, dated July 2022 by the Presidency and August 2022 by the National Treasury, include replacing the SRD grant with a job-seeker grant and a caregiver grant.

The SRD grant of R350 a month was introduced by the government as a response to the impact of Covid and the lockdowns. Anyone whose income falls below a threshold can receive the grant. 

The Presidency document, entitled “Putting South Africa to work”, says the core focus of policy must be on creating jobs, and an expansion of social grants must be accompanied by plans to boost growth. It considers four options: continuing the SRD grant, replacing it with a job seekers grant of similar value, adding a caregiver’s grant, and implementing a minimum income guarantee at the same level.

The National Treasury suggests a combination of an SRD-job-seeker grant and an SRD-caregiver grant (for those who cannot work).

In a response on Wednesday, the IEJ said the proposals were “regressive and unworkable”. The plans, they said, “seek to exclude many, if not the majority”, of the current recipients of the SRD grant.

“The proposals are underpinned by a logic of narrowing the grant beneficiaries as much as possible – that is excluding as many people as possible,” said the IEJ.

The IEJ also said the Treasury had not given proper consideration to other proposals, like the Universal Basic Income Guarantee.

The Presidency’s proposal was more realistic, said the IEJ, but “the upshot of these proposals, if adopted, would be that millions of poor people, those who should be the primary target of cash transfer programmes like this, will be excluded from receiving support, either because they do not qualify or because the complexities of the system being imposed make it entirely inaccessible to them.”

3. Tax hike coming:

National Treasury acting director-general Ismail Momoniat says that South Africans can expect the carbon tax and sin taxes to continue to escalate as local and global challenges continue to put pressure on the economy.

Speaking at the South African Institute of Taxation’s (SAIT’s) Tax Indaba on Wednesday (7 September), Momoniat said that the biggest issues facing the country in the short term are economic growth and making an impact on unemployment, while also dealing with poverty and inequality.

These are not new challenges but ongoing challenges, he said, which have been compounded by global issues – including the fallout of Covid-19, Russia’s invasion and the ongoing war in Ukraine, chip shortages, and ‘zero-Covid’ policies in foreign markets like China, which cause frequent economic shutdowns.

“We are living in a world that’s become very uncertain – more uncertain than many of us are used to. They impose new challenges on us in the short term,” Momoniat said.

The acting DG said that these short-term challenges are detracting from long-term ones – specifically climate change.

“When there’s a long-term challenge like climate change, we need to do better than how we are dealing with short-term challenges,” he said, adding that the global environment in tackling such issues has become incredibly toxic, and policymakers are divided. Some people lean into irrationality, he said, not following the science.

Amid this “great uncertainty”, Momoniat said that the world is falling behind established targets around carbon emissions, which will have a greater impact on the local economy going forward.

“The world hasn’t reduced emissions. That’s just a fact,” he said. As a result, instruments like carbon taxes are going to escalate, with the government likely to lean into policy and regulation to deal with the growing crisis.

Momoniat said that core taxes in South Africa – personal income tax, corporate tax and VAT – also face new challenges, whether it’s a shrinking tax base, or digitalisation, etc.

He said that funding the basic income grant (BIG) would require a tax hike.

“Don’t fool yourself by thinking you can have a step change in expenditure and not raise one of the two big taxes, and that does have an impact on growth. You need to understand the trade-offs.”

When it comes to long-term issues, he said Treasury is using the tax system to deal with them. This includes challenges like climate change and health. With the former, carbon tax is the key tool, with the latter, its sugar tax and sin taxes. He indicated that sin taxes and sugar taxes would also go up.

“They do make some difference,” he said.

4. European farmers winding down:

Some farmers in Europe are winding down production this winter due to high energy prices, further threatening the global food supply that is already in a crisis.

Europe faces a potential energy shortage this winter as countries in the region are highly dependent on Russia for natural gas. However, Russia has shut down a significant pipeline to Europe, citing technical issues due to sanctions over the invasion of Ukraine, and the EU is planning a full Russian oil ban this winter. This has caused a massive surge in natural-gas prices that were already on the rise even before the war due to rebounding demand as pandemic restrictions eased.

As energy is required throughout the food production process, farmers and food producers are feeling the pinch from red-hot prices with some halting or slowing output in the colder months ahead.

Nordic Greens Trelleborg, a top Swedish tomato producer, said it will not be planting a winter crop this year because it would be running at a loss given current electricity prices, Swedish newspaper Afton Bladet reported on Sunday. That’s because Nordic Greens had already locked in tomato prices earlier in the year when electricity prices were lower, explained the company’s site manager Mindaugas Krasauskas. It’s the first time the company is suspending production.

EU farmer union Copa-Cogeca told the Financial Times that the dairy and bakery sectors are the most impacted by the surge in fuel prices because processes for pasteurization and milk powder production consume a lot of energy. This, in turn, has pushed up butter and milk powder prices, which were up 80% and 55% respectively at the end of August from a year ago, according to the European Commission.

Meanwhile, some greenhouses — which regulate temperatures for off-season growing — in the Netherlands are switching off or reducing production areas this winter due to expensive fuel prices, Reuters reported on Wednesday. The Netherlands is the world’s second-largest agricultural exporter after the US, so a reduction in farm output would hit shipments of fruits, vegetables, and flowers.

5. Eskom faces violent threats:

Eskom is hesitant to re-enter areas where it has disconnected residents due to threats of violence against its teams.

In some areas, gangsters have attempted to launch protection rackets against the power utility – demanding as much as R20,000 a month in ‘protection fees’.

These protection rackets go further than the power utility, with similar attempts being made against other state companies like Prasa.

All information sourced from articles posted by: Moneyweb, GroundUp, BusinessTech, Business Insider, and TimesLive.

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