Markets & economy

The economic consequences of political decisions

The vote by the British electorate in support of leaving the European Union (EU) took markets by surprise. The immediate impact was a strengthening of the US dollar and yen relative to the pound and euro. The actual process of disengaging the United Kingdom from the EU will be long and complicated. In itself it should not have a significant impact on the global economy. However, it could destabilise the EU by encouraging anti-EU sentiments, which are not restricted to Britain alone.

Economic growth continues at a pedestrian pace in most countries

It is concerning that Chinese growth continues to slow despite massive injections of money into its banking system. The US Federal Reserve continues to hesitate about normalising US interest rates. Central banks in developed economies increasingly find themselves trapped in policy positions which they are reluctant to abandon because they fear possible adverse consequences.

While the South African economy contracted in the first quarter, there are signs that it is now stabilising. The devastating drought seems to have ended. The weaker rand is promoting economic adjustments, which will generate growth. The Reserve Bank is conducting monetary policy in a way which is increasingly regarded by foreign investors as extremely prudent. The process of stabilisation has been recognised by international ratings agencies which have for now chosen not to further downgrade South Africa’s credit rating.

Politics remains a serious threat to our economic stability

The process of electing who succeeds Jacob Zuma as leader of the ANC in December 2017 could negatively affect confidence. In recent years we have witnessed many examples of political instability having adverse economic consequence. The UK referendum is only the latest example.

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