Markets & economy

Global growth prospects continue to deteriorate

During the past quarter inflation has remained elevated. In the US the latest print for August was 8.3%. In Europe it was 10.0% in September. Even though in coming months inflation is likely to decline due to base effects and the easing of supply chain constraints, the general environment remains inflationary. With the notable exceptions of Japan and China, central banks have increased the pace of interest rate hikes in an effort to put a brake on surging prices. The tone of their guidance regarding their future intentions has become increasingly hawkish. Bond yields have been rising accordingly, although the prices of inflation-linked bonds suggest the market remains complacent about the longer-term outlook. US linkers are currently pricing in average inflation of only 2.2% over the next 10 years. 

The prospects for global growth are deteriorating. A severe recession in Europe is probable during the next six months due to the impact of the war in Ukraine on energy supplies. China’s economy has slowed dramatically due to the bursting of its property bubble and its strategy of total lockdown when there is any outbreak of COVID-19 infections. Slowing global trade is having an adverse impact on emerging countries. 

While growth in the US is slowing, its economy remains more buoyant than those of most other countries. Accordingly, the US Federal Reserve was the early mover in hiking rates. The spread between US rates and those elsewhere has widened, which promotes capital flows into the US dollar. Accordingly, the dollar has strengthened against all other currencies, including the rand.

Despite extremely favourable export prices, South Africa remains trapped in stagnation. This is primarily due to a failure of service delivery by most institutions of government. The institutional collapses of Eskom and Transnet are proving to be severe impediments to economic growth. The fiscus has received a welcome windfall from record profits in the mining sector but faces elevated spending demands to recapitalise Eskom and meet the growing need for social grants. However, there are some positive developments. The ending of restrictions on private electricity generation will promote a large-scale investment by the private sector to meet its electricity requirements off grid which will reduce the need for loadshedding. During the recent summer in the Northern Hemisphere tourism boomed. This provides hope for South Africa’s approaching tourism season.

South Africa’s inflation rate was 7.6% in August. While this should decline due to base effects, the South African Reserve Bank (SARB) remains concerned about increasing wage pressures. It looks as if the 7% wage increase at Eskom has become the benchmark for other pay settlements. Emerging markets such as South Africa have to respond to rate hikes in the US by making similar adjustments to their own rates, otherwise they face the risk of capital flight and a declining exchange rate. The Monetary Policy Committee (MPC) of the SARB is in the process of normalising interest rates after the exceptionally low rates which prevailed during the pandemic. Members of the MPC indicate a normal repurchase rate is about 7%. 

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