Insights category - Markets economy
Markets & economy

Business confidence improves in South Africa

After 18 months of accelerating growth, the momentum of the expansion of the global economy slowed in the first quarter of 2018.  It is noteworthy that an unusual period of synchronous growth has been followed by a widespread slowdown affecting most regions.

This slowdown does not necessarily presage recession. Most business cycles feature a period of strong growth followed by a slowdown before a final growth surge. However, the slowdown exacerbates the fears of market participants, nervous because it coincides with rising interest rates in the United States and President Donald Trump’s declaration of a trade war against China.  The latter is particularly concerning because its outcome is so uncertain. Markets hate obvious uncertainties.  The US economy is running at full employment and there is a risk that increased tariffs will trigger an inflationary spiral, which will force the Federal Reserve to increase interest rates much more that is currently expected, with adverse consequences for asset prices.

In South Africa, the election of Cyril Ramaphosa as president has dramatically improved business confidence. Growth in our gross national product accelerated from 2.3% in the third quarter of 2017 to 3.1% in the fourth quarter. Improved confidence should sustain this upturn.  A 1% increase in the VAT rate has stabilised government finances and strong inward foreign investment flows have strengthened the rand. Financial stability promotes price stability. CPI inflation for the year to February was 4.0%, the lowest it has been since March 2011. 

As a consequence of the improved fiscal and inflation outlook the South African Reserve Bank reduced its repo rate by 0.25% to 6.5% on 30 March 2018.The sudden change for the better in South Africa has been noted by the international ratings agencies. Moody’s has maintained its investment grade rating and changed its outlook from negative to stable.

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