How Newton’s law holds true in the economy

From Gareth Stokes, MoneyWeek editor, SA

Dear MoneyMorning reader

“To every action there is always an equal and opposite reaction: or the forces of two bodies on each other are always equal and are directed in opposite directions.” – Sir Isaac Newton

Sir Isaac Newton was an English physicist. Along with Albert Einstein, he made the biggest impact on modern science. His work on gravity and his “laws of motion” became the cornerstone of classical mechanics. And although you probably associate Newton with the “discovery” of gravity, you’ll often run into his name when anyone mentions his third law of motion, quoted above. A couple of days ago, we concluded Newton’s third law of motion applied as easily to economics as to the world of objects! What set us on this path, you wonder?

Well – earlier this week the International Monetary Fund (IMF) published a report titled Selected Issues for the South African Economy. In this report, the IMF assessed government’s monetary and fiscal policy decisions (the actions) with the economic consequences (reactions) through the financial crisis. Each time the Reserve Bank alters its interest rates stance or government throws a few billion rand at a public sector infrastructure project, the macroeconomic environment changes. So if policymakers want a certain reaction, they must consider the possible outcomes of each decision. Before fiddling with one variable, they must determine how it’ll impact on other broad measures of the economy, such as inflation, production, trade deficits and employment!

Standard Bank Economics says the IMF used its data projections to create a table of the expected path of South Africa’s economic reaction to external shocks. Of the dozen indicators on the list, all but three have already come to pass…

What can you expect over the next 18 months? The 10th reaction will be an improvement in private sector investment in response to lower real interest rates and the ongoing recovery in South Africa’s trade counterparts. Following this, look for a recovery in domestic output, followed by an improvement in the trade balance! The July 2009 manufacturing production numbers suggest this checkbox could be filled soon. StanLib economist Kevin Lings notes that “manufacturing activity appears to be moving past the worst of the recession”. He predicts further improvements in the PMI over the next half year.

If South Africa Inc keeps improving at current rates, you should see a return to economic growth by next year. The IMF predicts a contraction in GDP of 2.1% for full year 2009 before a return to positive growth of around 1.9% per annum in 2010.

Whatever happens in South Africa, it’s clear the US and other Western economies are already on the front foot. With low interest rates and rather lacklustre returns on bonds, the majority of private investors in these economies are pouring into equities. But there’s another asset class that’s worth a
look… property.

In MoneyWeek's feature article US-based investment guru Dr Steve Sjuggerud argues the case for US residential property. He believes US real estate is ripe for the picking and urges readers to consider a property or two. If residential property isn’t your cup of tea, read James Fergusson’s counter. Fergusson, a regular MoneyWeek UK contributor, warns that early bird investors could still get burned in property!

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Turning to the markets...

The JSE all share index grew 0.5% on Friday. The gold mining index lost 2.12%. Resources fell 1.5%. Banks slumped 0.12% while financials traded flat with a 0.04% gain. Industrials jumped 0.36% and the platinum mining index slid 2.36%.

London's FTSE100 collected 0.17%. The Dow Jones added 0.37% and the Nasdaq increased 0.29%.

Tokyo's Nikkei lost 0.7%. Hong Kong's Hang Seng rose 0.21%.

Brent crude is currently trading at $70.80 per barrel.

Spot gold's trading at $1,000.75 and platinum was last quoted at $1,324.50.

And here's how the rand is performing against the major currencies:
R/$7.51
R/₤12.14
R/€11.01