Insights category - Markets economy
Markets & economy

Global business conditions deteriorate

Negative news about the global economy persists. Purchasing manager indices continue to signal a widespread deterioration in business conditions. Even in the US, where the economy remains buoyant, the momentum of growth has slowed. China has had to resort to increasing monetary stimulus in an attempt to meet its 6% annual growth target. American tariffs are having an increasingly damaging impact on Chinese exports. While China and the US have agreed to resume trade negotiations, the outcome of these talks is uncertain. Business investment has slowed because it is difficult to make long-term commitments when there is so much uncertainty about the longer-term impact of the trade war on global supply chains. Reduced business investment will exacerbate an already-deteriorating global outlook.

Financial markets seem to be surprisingly unconcerned about deteriorating global business conditions because it is widely expected that central banks will respond to any adverse economic developments with aggressive monetary easing, which will somehow keep the show on the road. Almost everywhere, inflationary pressures are benign, which makes it easier for central banks to contemplate such a response. The experience of the past decade suggests that while aggressive monetary easing does little for the real economy, it does wonders for asset prices.

South Africa remains trapped in stagnation, from which the deteriorating international outlook will make it difficult to escape. Year-on-year growth in the first quarter of 2019 was 0.1%. It is particularly concerning that private consumption grew only 0.7%, with weakness manifest in all sectors of expenditure. There was also a widespread contraction in fixed investment, which in aggregate was down 2.9% year on year. President Cyril Ramaphosa’s plan to promote investment to kick-start the economy has yet to gain traction.

As a consequence of weak domestic demand, the trade account is now in balance. This, together with capital inflows seeking to take advantage of South Africa’s high interest rates, has stabilised the rand. Annual consumer price inflation in May was 4.5%. With a very weak economy and a benign inflation outlook there are strong arguments for a significant cut in interest rates.

Select a site

The financial services, products or investments referred to on this website are not available to persons resident in jurisdictions where their availability or distribution would contravene local laws or regulations and the information on this website is not intended for use by these persons. This website is for information only and does not in any way constitute a solicitation or offer by Allan Gray Proprietary Limited or any of its associates or subsidiaries (collectively “Allan Gray”) to buy or sell any financial instruments or to provide any investment advice or service.

By selecting one of the countries below I confirm that I have read and understood the above and that:

(a) I am not a South African citizen; or 
(b) I do not reside in the Republic of South Africa; or 
(c) I am not otherwise a person to whom the communication of the information contained in this website is prohibited by the laws of my home jurisdiction; and 
(d) I am not acting for the benefit of any such persons mentioned in (a),(b) and (c) and 
(e) I confirm that any investment with Allan Gray is based on my own initiative and not due to any offer or solicitation by Allan Gray.