After two years of strong synchronous growth the global economy is losing momentum. Almost without exception the most recent purchasing manager’s indices are signaling a significant slowing of growth, especially in the critical Chinese economy. This in turn is having a negative impact on other emerging markets. While growth in the US continues to be strong, its economy is not expanding at the same heady pace as it was in the middle of 2018. Weaker demand is depressing commodity prices and most notably oil has retreated from its peak in early October 2018. A combination of rising supply and a slower demand growth has caused a fall in the benchmark Brent price from US$86 per barrel to below US$60. In an effort to stabilise prices, at its December meeting OPEC announced it will cut production by 1.2 million barrels a day – equivalent to a 1.2% reduction in global supply.
The US Federal Reserve again increased interest rates by 0.25% at its December meeting and indicated that members of its rate-setting committee expect further increases in 2019. However, with slower growth, inflationary pressures have abated and the Fed is coming under increasing pressure from financial market participants not to raise rates further. The rhetoric emanating from the Fed has recently taken on a more dovish tone and the US yield curve is now discounting no further hikes.
The South African economy is expanding again after contracting in the first half of 2018. However a global slowdown will have an adverse impact on any recovery. In November 2018 CPI inflation was 5.2%. On 23 November the SARB Monetary Policy Committee increased the base lending rate by 0.25% to 6.75% citing concerns about the inflationary outlook. There was no broad consensus that this was the correct decision. It can be argued that, as elsewhere, inflationary pressures are abating, notably as a consequence of a lower rand oil price, and that further rate hikes will not be required for the immediate future – especially as the rand has been relatively stable since August 2018. However, the SARB is likely to respond to any significant rand weakness with further increases in interest rates.
On 24 October newly appointed Finance Minister Tito Mboweni presented the Medium-Term Budget Policy Statement to Parliament, which painted a bleak picture. As a consequence of disappointing tax collections and the inexorable rise in the compensation of government employees, the deficit for the fiscal 2018/19 will be R202 billion, equivalent to 4.0% of GDP, growing to 4.2% in 2019/2020. As a consequence of rapidly increasing public debt, interest payments constitute a growing proportion of government spending which are crowding out other expenditures. South Africa faces severe fiscal challenges which will have to be addressed soon if they are not to spiral out of control.