Insights category - Markets economy
Markets & economy

Global growth slows

Over the past year, global economic growth has slowed. International trade volumes have contracted. This slowdown has many causes but has been significantly aggravated by the disruption created by trade wars initiated by US President Donald Trump. Uncertainty as to how global supply chains are to be reordered has had a seriously adverse impact on investment. Emerging markets, which are very dependent on exports, have been notable casualties. Provided President Trump does not embark on some new disruptive rampage, the December trade agreement between the United States and China offers the prospect that the adverse economic trends of 2019 will be reversed. However, risks remain. China continues to face formidable challenges as it struggles to manage its transition away from excessive dependence on investment as its principle source of economic growth.

During 2019, economic conditions in South Africa were dire. The economy stalled. A combination of collapsing tax collections and the financial implosion of Eskom and certain other parastatals has increased the fiscal deficit to about 6.5% of GDP. Government debt is growing unsustainably. The focus of investors and the international ratings agencies will be on the February budget, which hopefully will present a credible plan to bring the exploding deficit under control. There is a significant risk that the budget will disappoint, which may have adverse consequences in financial markets. However, it is important to recognise that the news flow is not all bad. Of particular significance is the dramatic change of fortune of the platinum industry due to higher palladium and rhodium prices. A global economic recovery would have a positive impact on South African exports.

Inflation has been surprising on the downside. In November 2019, it was 3.6%. Accordingly, there is considerable pressure on the South African Reserve Bank to further cut interest rates. It has been keeping rates unchanged probably because it wishes to await the outcome of the February budget before making any decision. The annual current account deficit is running at about R170bn and the capital inflow required to finance this is an important source of funding for the growing fiscal deficit. Over the past 18 months the rand has been volatile but within a stable trading range. Continued financial stability is dependent on retaining the confidence of foreign investors. 

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