Markets & economy

Global growth accelerates but emerging markets under pressure

Following a slower first quarter, the rate of global economic growth accelerated during the Northern Hemisphere summer, with Europe being the only notable laggard. Consumption has been supported by growing personal incomes. Business conditions in the United States are particularly buoyant, which justifies the market expectation that during the next 12 months the Federal Reserve will increase short-term interest rates to more than 3%. Inflationary pressures are mounting. The combination of the implosion of the Venezuelan oil industry, sanctions on Iran and infrastructural constraints in the US is putting upward pressure on oil prices.

The growing trade confrontation between the US and China remains a major market concern, especially as its outcome is so difficult to predict. China has responded to this threat with measures aimed at promoting domestic investment, including reducing interest rates and condoning a depreciation of the renminbi. The very publicly aggressive statements and actions of US President Donald Trump are making it increasingly difficult for the Chinese political leadership to concede to American demands.

Following a second quarter 0.7% contraction in GDP, South Africa is technically in recession. While the specific culprit was a 0.9% decline in the volatile agricultural sector, our economy remains trapped in stagnation. President Cyril Ramaphosa has had some success in procuring expressions of financial support from countries in the Middle East and China, but private sector investors remain extremely concerned about issues such as the proposed change to the constitution to enable land expropriation without compensation. Proposals to use large-scale Chinese loans to kick start the economy bring with them the risk that foreign borrowings will be used to promote economically questionable projects, further exacerbating our fiscal crisis.

Following a financial meltdown in Turkey and Argentina, emerging market currencies have been under pressure. Accordingly it is not surprising that the rand has also been very weak, which has put upward pressure on consumer prices. The prospect that the petrol price may further increase significantly is very worrying. In August 2018 consumer price inflation was 4.9% per annum. However, the parlous state of the South African economy makes it difficult for the SA Reserve Bank (SARB) to respond to rising inflationary risks by increasing interest rates. At its September meeting, the Monetary Policy Committee resolved to keep rates unchanged. The subsequent decision by the International Monetary Fund to grant Argentina a US$57 billion rescue package has helped to stabilise emerging market currencies, which is supportive of the SARB’s decision.

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