Podcast : No Ordinary Wednesday ep29

Instead of hiking interest rates so aggressively, central banks should ride out the inflation storm that is forecast to subside by next year, say experts on the latest episode of No Ordinary Wednesday.

We’re flying through severe turbulence, battered by an unrelentingly aggressive US Fed, soaring inflation figures and negative sentiment. In this volatile economic landscape, answers are few and far between. When we’re not sitting in the dark squinting at our loadshedding schedules, we’re wincing at the petrol pump. But where is this turmoil cascading in from? And what does this mean for our own economic prospects? This was all ventilated in a recent edition of Investec’s No Ordinary Wednesday bi-monthly podcast.


With interest

First, a look at interest rates – and a gloomy one at that. Investec economist Lara Hodes weighs in on a weighty load. “The negative effect on investor sentiment from the Feds, coupled with global growth concerns – exacerbated, obviously, by the persisting war in Ukraine – is weighing heavily on risk assets,” explains Hodes. “For example: out of a basket of 24 emerging-market currencies monitored by Bloomberg, all 24 have depreciated when measured on a month-to-date basis. The Fed is expected to hike rates by a further 75 basis points at its July meeting, which will put even more pressure on emerging market currencies.

In these uncertain times, emerging currencies feel the heat – with more than the dollar strength being dished out. Says Hodes: “The Rand, which is a key commodity currency, has also weakened as metal prices have lost ground. The risk-adverse environment in global financial markets has, of course, adversely impacted metal prices, with the World Bank's metals and minerals index actually down over 18% since March.”

We’re also up against a barrage of domestic challenges and pitfalls, such as loadshedding and the all-too-slow implementation of key reforms, causing concern around our growth prospects. This is weighing on the Rand and wrinkling expert and investor brows.

Where to from here? Any light at the end of this tunnel? (Resist the urge to check your loadshedding schedule.) Brian Kantor, a key member of Investec’s Global Investment Strategy Group and Head of the Research Institute, Investec Wealth & Investment, believes a turning point is within reach – with a fine balance in play.

“I would say we're close to the peak,” says Kantor. “So we'll see the headline inflation rate in the US declining by year-end towards 6% or so. The trend will reverse partly because some of the supply-side forces that have acted on inflation are reversing.”

“Perhaps more fundamental is the demand side of the equation – and surprisingly equalised demand and supply. The demand side is weak, so there's no doubt that demand-side pressures on inflation everywhere – including South Africa – are very subdued and are likely to get even more subdued. To get inflation continuing at these rates, you need continuous stimulus to the demand side of the economy and that is not happening.”


Pointed tips and tipping points

As we soldier on, keep a question burning at the back of your mind: is a global recession on the cards? Says Kantor: “There are models of recession that suggest that the probability of a recession in the US is not more than 50% – it's somewhere between a 30% and a 40% chance.

“The Fed found itself in a hard place and could easily make mistakes and intensify recessionary pressures. But so far, it's not certain that we will get a recession. It does, I think, depend on how aggressive the Fed wants to be.”

“I'm fairly optimistic that the Fed won't make such a cardinal and obvious error as to lead the US economy into a significant recession. It's too obvious what they need not do – and if they are at all data dependent as the phrase goes, they will stop raising interest rates within six months and then the market will start looking towards declining interest rates across the board.”

While some batten down the hatches, key players look to the resulting impact on world trade and export conditions in light of stretched supply chains, low business confidence and domestic obstacles. Explains Hodes: “The IMF is looking to downgrade its global growth forecast for the third time [this year] and this is obviously a key risk for international trade. International trade flows are continuing to decline. This decrease in demand will definitely weigh on SA's export potential.”

Perhaps there is some hope when it comes to certain exports. Says Kantor: “The key player in determining the prices of industrial metals and precious metals is China. There's strong credit creation and money growth in China at the moment – and that may well help the commodity prices.”

“I think one can be fairly optimistic about the longer-term outlook for the metals that South Africa produces, which are so important to our economy and to the direction the South African economy takes.”


The path ahead

With uncertainties to wrangle and plenty of export-quality food for thought, what are our experts’ forecasts for our nation in light of these global shifts and trembles.

Says Hodes: “South Africa is unlikely to see a GDP growth above 2% for this year, following a robust first quarter outcome, which was ahead of consensus expectations. The second quarter of this year is likely to record a contraction, largely on the back of the effects of the flood damage in KwaZulu Natal and the significant ramp in loadshedding, along with a weakening in global demand and very low confidence levels. At this stage, our forecast is for around 1.9% for this year.”

The sad fact remains: Eskom is still fighting an uphill battle, hampering economic progress and pushing us backwards. “The electricity grid, as we all know, has been under severe strain,” says Hodes. “The economy cannot function to its full potential.”

Investor confidence is one thing, but there’s no denying we’re all taking strain. Turns out, consumer confidence doesn’t glow in the dark... “Consumer confidence actually fell markedly in the second quarter, with households anticipating a deterioration in their household finances,” says Hodes.

Yet Kantor is quick to remind us: “The South African economy has not fared as poorly as many of the other emerging market economies, partly because we have very little dollar-denominated debt.” Kantor remains cautiously optimistic. “The opportunity is there. But it takes a change in mindset and change in attitude towards the role of the private sector.”

“We have a crisis with the failure of Eskom to deliver and there's lots generating capacity there – they just can't seem to keep it running. You’ve got to change the incentive structure. And when we can introduce attention to the bottom line in South Africa's public sector, we will have a much stronger economy – but you've got to be able to convince the ideologues accordingly.”

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