With few exceptions, notably India, most countries experienced slower economic growth in the first quarter of 2018. Anecdotal evidence suggests that that the pace of growth has now accelerated again. The US economy is operating at close to full capacity. Its unemployment rate is 3.8%, the lowest it has been since 1969. Although inflationary pressures remain benign there are strong arguments in favour of the proposition that, given such buoyant business conditions, the current level of dollar short-term interest rates at 2% is too low. The market currently anticipates an increase over the next 12 months to 3%. As Europe and Japan seem committed to keeping interest rates at or close to zero for some time yet, rising US rates will favour a stronger dollar, and could cause disruptive volatility in exchange rates.
There is widespread concern that trade wars between the US and other countries could destabilise the global economy. The global supply chain has become highly integrated. Although the US only accounts for 22% of global gross national product (GNP), it can potentially cause widespread economic disruption. The victim of tariff increases will be the consumer, who will have to pay higher prices due to local shortages and the cost of supporting less efficient domestic production.
Despite an improvement in confidence since the outcome of the ANC elective conference last December, South Africa’s economy remains trapped in stagnation. The challenge involved in getting the country growing again is formidable. President Ramaphosa has correctly identified that boosting investment will be critically important in achieving a successful outcome. The political debate on issues such as land reform, the new mining charter and healthcare will have a significant impact on the attitude of potential investors.
As a consequence of global risk concerns there has been a significant sell-off of emerging market (EM) financial assets. Since February 2018 all EM currencies including the rand have weakened against the dollar. South African bonds have given up much of the gains they made immediately following the election of Cyril Ramaphosa as leader of the ANC. While a disappointing South African news flow has contributed to this price weakness, it is mainly attributable to the global EM sell off. After hitting a low of 3.8% in March 2018, South African inflation is on the increase again. In May it was 4.4%. Given the deteriorating inflation situation further rate cuts seem improbable in the near future.