The synchronous global slowdown, which commenced in the last quarter of 2018, continues to take its toll. While Europe is not in recession, it has returned to the state of stagnation which prevailed prior to 2016. Officially, the Chinese economy is still growing at a rate of about 6%, but business conditions in its private sector have been weak. Although the US economy is doing better than most, the Federal Reserve has responded to these developments by abandoning its plans to increase interest rates. Market opinion has shifted to the view that within the leading economies, the current low levels of interest will prevail for some time. Reflecting this new paradigm, long-term rates in the US have declined significantly. The prospect of continuing benign monetary policy has buoyed equity prices.
While a slowing global economy reduces the demand for raw materials, commodity prices have been sustained by supply disruptions and an erosion of inventories. Notably, the prices of iron ore and palladium, which are significant South African exports, have benefited from supply constraints.
The South African economy remains trapped in stagnation. The National Budget, tabled in February, confirmed the bleak predictions of the October 2018 Medium-Term Budget Policy Statement. The financial and operational implosion of Eskom is proving to be a major threat to economic stability. South Africa is very dependent on continuing capital flows from abroad. Rating agency Moody’s decision at the end of March to leave its sovereign rating unchanged is supportive of such inflows because, for now, South African government debt continues to be included in the benchmark World Government Bond Index.
Inflationary pressures both globally and domestically remain benign. Accordingly, the South African Reserve Bank is under no market pressure to increase interest rates, and left them unchanged at its last Monetary Policy Committee meeting.