Global economic conditions continue to deteriorate but so far, no major economy has entered a recession. Business conditions in Europe and Japan are best described as stagnant, rather than contractionary. The trade war between the United States and China continues to exact its toll. The International Monetary Fund estimates that, so far, its cost has been 0.8% of global GDP. There is little growth in international trade and investment decisions are being postponed due to the uncertainty as to how supply chains must be reconfigured to meet American demands. As a result of supply constraints, commodity prices have held up well, but are vulnerable should growth slow further. Inflationary pressures continue to be benign and the bias among central banks is towards monetary easing. However, in developed economies, interest rates are so low that there is little they can do that would have a counter-cyclical impact.
South Africa’s economy continues to stagnate. In the second quarter of 2019, real GDP was only 0.9% greater than in the same quarter of 2018. Business confidence is extremely poor. There is a pervading sense that the Ramaphosa administration is finding it difficult to implement policies required to end our economic woes. The most important immediate issue is Eskom, which requires new management and a funding plan, without which it will not be possible to formulate a medium-term government budget. Rating agency Moody’s has indicated that an imminent downgrade of South African government debt to junk is unlikely, but this forbearance will not last if the government cannot come up with a credible plan to create financial stability.
Over the past 12 months, the rand exchange rate has been volatile within a stable trading range. It continues to be significantly influenced by the ebb and flow of international capital. The combination of a stable currency and a weak economy promotes price stability. In August, consumer price inflation was 4.3%. Given the weak economy, there are strong arguments for lower interest rates, but the South African Reserve Bank is unlikely to reduce rates until there is greater clarity regarding the fiscal situation.