A crude awakening for inflation?

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00:00 – Introduction 

 Neo: Just as the world economy was beginning to find its footing, it's been struck by a shock we know all too well. Oil prices are soaring again, and inflation risks have reappeared on the horizon. The much-anticipated interest rate cutting cycle now seems firmly off the table with markets pricing hikes and central bankers openly discussing the possibility amid looming inflationary pressures

From Washington to Pretoria, policy makers face the urgent task of recalibrating their strategies. The question isn't if the shock will slow the global economy but rather how far reaching the impact will be and how long it'll last.

This is No Ordinary Wednesday, Investec’s flagship podcast where we unpack the forces shaping markets, economies and your financial world. I'm Neo Ralefeta, Treasury Risk Solution Consultant, standing in for your regular host Jeremy Maggs.

This week we're stepping back from the noise, much of it overwhelming, to take a clearer big picture look at the global economy. This isn't just any quarter, it could well be a turning point.

To help us cut through the complexity and shed light on what's ahead, I'm joined by two of Investec’s top minds, our chief economists Annabel Bishop in South Africa and Phil Shaw in the United Kingdom. Together they'll unpack the economic shocks, discuss what it means for central banks and markets and share insights on how these shifts might impact your financial world.

Our recording date and time is 11:00am South African time on the 31st of March 2026 and the situation remains extremely fluid.

Annabel and Phil, welcome to No Ordinary Wednesday.

01:42 – How has the Middle East conflict changed the global macroeconomic landscape?

Neo: Phil, just a few weeks ago markets were pricing in a rather benign outlook of slowing but stable growth, falling inflation and rate cuts on the horizon. Now the narrative has shifted dramatically. How has the conflict in the Middle East changed the global macroeconomic landscape?

Phil: That’s suddenly the direction of travel. The S&P500 was close to all-time highs just prior to the attacks and since then it's shed about 7%. Investors have been repricing what now looks like a slower growth outlook and a risk of a hard landing for the global economy together with higher interest rates. If central banks decide that the medium-term outlook for inflation has turned for the worst. Now in terms of the outlook, much depends on the intensity and the duration of the energy shock.

We're not just talking about oil but gas in particular as well. The Gulf flows of 20% of the world's LNG, so that's important to base cases that the conflict lasts weeks rather than months. So, in this case you could argue that the worst of the shock is temporary. The damage, however, to various energy facilities will reduce capacity for a while longer. So even in a benign case, oil and gas supply will be tied to the usual and therefore price is higher for a while.

With regard to the comparison with previous energy shocks. We've had quite a large number of oil and gas shocks previously and they varied in terms of their effects. I think a rule of thumb is that for each shock of equal intensity and duration, the impact on the global economy is smaller as time goes on, as the world's energy intensity has fallen, and as other fuels, such as renewables, have become available. But a lasting conflict over Iran could still inflict significant damage to global GDP.

03:28 – What’s the difference between the 2022 oil price shock and now?

Neo: The general question we hear is that after the start of the Russia/Ukraine conflict, the oil price surged quite significantly but we are not seeing that much of a shock right now. Is there anything that explains the “muted” shock from this conflict that seems rather important than what we saw in 2022?

Phil: It's important to remember oil prices in dollar terms remain over US$100barrel. I think the key difference really was gas and everyone focuses on LNG liquified natural gas in this conflict. But LNG, while it's important, it makes up something like only 15% of the global gas market. The overwhelming supply of gas is the dry gas market, which gets pumped.

In 2022 Russia turned its gas taps off through its pipelines. In particular, the whole of the European continent was short of gas. Taken from a UK context, the gas price four years ago surged up to 600. That had a massive effect on inflation, and the central bank had to react to that.

04:36 – Other commodities that should concern the global economy?

Neo: Now that you've mentioned the gas price, there are other commodities that we should be concerned about that come out of The Strait. I'm talking about aluminium, sulphur, urea and helium. What impact would these have on manufacturing across the globe and what should we be looking out for when we consider all these other commodities?

Phil: It's correct to look at everything that comes out of The Gulf. The attack on aluminium plants means that aluminium prices rose earlier in the week. Another concern is that The Gulf is an important channel for global fertiliser and if that channel's blocked then agricultural yields will be reduced and therefore the risks are that food prices rise.

It's at times like this, that one realises just how interconnected the global economy is. If you shut one part off it, then it could have severe consequences for a wide range of goods and services. Thank you for setting that global scene for us.

05:27 - What is the immediate impact of the conflict on SA’s economy?

Neo: Annabel, South Africa is a net oil importer, and the country feels these shocks quite keenly more through price than supply constraints. What is the immediate impact of the Middle East conflict on South Africa's economy right now?

Annabel: To unpack it for our audience, South Africa only changes the price of its petrol, diesel and obviously illuminating paraffin once a month. That’s the first Wednesday of the month. It’s calculated back on the previous month’s rand cost of petroleum products. So really the 1st of April is going to reflect the impact of the war and the higher oil price in terms of our fuel increases.  

From an immediate impact, South Africa is an energy intensive economy as economies around the world are. Our supply chain is diesel reliant and diesel intensive. Some of the good news is that when we start to plant in South Africa and when we start to use a lot of fertilisers that will be towards October this year. But of course, these price increases are already affecting fertiliser, agricultural chemicals, industrial solvents, industrial products and feedstock from oil.

There's almost a price push coming down the line, which is quite lagged. Some people might feel that we could see data much sooner. You are already seeing some data in Europe, with the German inflation data. But for the April inflation data, which catches this price increase, we only see it published in May.

So, for South Africa, this is quite a long wait. I think the real direct impact has been on sentiment, seeing the negative impact on the rand and our bond market. But really from the exchange rate, it's not just rand weakness because of US dollar strength, it's more of the rand weaknesses due to this global financial risk off environment that we're experiencing.

07:21 – What happens if the war ends today?

Neo: What happens if the war ends today? How long does it take for all of this to wash out of the system and for us to get some sort of sense of normality back to this positive momentum that we saw before a month ago?

Annabel: I think that's a very good illustrative point for listeners to understand how quickly all this unwinds and unfolds. For South Africa unfortunately, we'd still see a petrol price increase in April because we've already paid the price for fuel, the higher cost over the month of March, for example, the rising petroleum cost in March.

If the war were to summarily end today, and financial markets were to believe it, you'd expect your oil price to drop from perhaps $US115 a barrel for Brent, right back down about $US65 a barrel. A return to where we were before the crisis, if you are hoping to scupper out all of the impact.

Now, of course there's still a lot of lags in supply ships who couldn't get through. Even for South Africa, we buy our petroleum products because we don't produce our own oil and we don't produce enough of refined products of oil to meet all our diesel, petrol, jet fuel and other needs as well. So, we import petrol and diesel etc. That obviously will come through on our supply ships that we wait for every six weeks. We do have some reserves but o it's going take a while for a lot of that flow to come through.

South Africa gets a lot of its oil and petroleum products from India, Nigeria and other African countries. Only a portion comes from Saudi Arabia, but nevertheless, that's still significant. We also produce quite a bit from coal and artificial synthetic fuel coming from our Sasol refinery, and that's probably about 30% of our needs.

We also can refine oil into petroleum products, not as much as we need but we have to import the oil to do. A very sudden unwind in the oil price would mean quite a drop for the month of April in terms of the calculation of the under recovery. And it would be a much lower fuel price for May. The question would be whether the Reserve Bank will look through the shock from an interest rate perspective. We obviously expected it would have already done that at the March MPC meeting and perhaps we would evade any interest rate hikes this year. Inflation then would be a very temporary shock as we said. But there would be a bit of a lag coming through in those later months. But those lagged effects are much less than you would expect from a longer war here.

09:51 – What if the war doesn’t last a few weeks?

Neo: Phil the comments out of Washington have been confusing. We all expect this conflict to last another few weeks and the question is what if it doesn't? What if it's a few months? What does the long-term forecast on oil and global interest rates look like?

Phil: A longer conflict would probably imply a more intense conflict and in that case what you would see is worse inflation numbers. You get a greater slowdown in global growth and central banks really don't want to be caught out with permanently higher inflation as they were arguably in 2021/2022. So, what you will begin to see is central banks actively beginning to raise interest rates to contain the inflation threat.

What then happens there is that you get a further break on economic activity and if we were looking at that scenario, which I must add is not our base case, it is, if you like, the most severe scenario, you see quite a slowdown in global activity. It's not impossible to see global growth falling below 2%, which some organisations such as the IMF (International Monetary Fund) would actually say constitutes a global recession. We all hope it doesn't come to that. And as I said, our base case is that this lasts weeks rather than months.

11:19 - How do central bankers respond to stagflation environment?

Neo: There’s talk about the world finding itself or heading into some sort of stagnation environment. How do central bankers respond to such an environment?

Phil: At the moment, at least the majority of central banks are just talking about possible responses and not responding. The first impact that you see, you're already beginning to see it in the inflation numbers. Earlier this week we had the Eurozone inflation numbers for March, which showed an increase to 2.5% from 1.9% and that was very much an energy-based effect. After that, you begin to get some secondary effects, which is where goods and services producers begin to pass on their high energy costs to consumers.

What would concern us most and certainly concern central banks is if you begin to see the labour market responding in terms of higher pay growth to catch up with higher inflation. Now those pay increases increase company costs and they would be fed through into higher prices into what we call second round effects, and they would tend to result in inflation remaining higher for a prolonged or persistent period. That would be something which central banks are already on the lookout for just to make sure they don't get caught out by higher inflation as they did a few years ago.

12:36 – Could there be divergent responses from central banks?

Neo: Phil, could we see divergent responses by central banks and what do you think happens now to this political pressure that's been put on the Fed to cut rates? How do you think the Fed responds to this environment and against that pressure?

Phil: What we're looking at is central banks at least giving us some slightly different rhetoric from place to place. So, for example, the European Central Bank is warning of hikes soon, and the Fed is keen to wait on how the situation develops. There are a couple of reasons for those divergences. One is concerned with the level of rates. By contrast, the Fed's policy rate, the Fed funds target range between three and a half to three and three quarters of the percent, is arguably slightly restrictive.

You could argue that stance is already pushing hard or moderately hard against inflation. So, there's less of a need to raise rates from that perspective. The second important reason regards the mandates of each central bank, again I'll use the ECB and the Fed, as an example. The ECB has a 2% inflation target meanwhile; the Fed has a dual 2% inflation and full employment objective. Given what's happening with energy prices, those targets are in conflict with each other and that argues for less policy restraint.

All economies face different circumstances. They have their own nuances. So, it's not all together surprising to hear some differences in the messaging from different central banks and also different responses by forward interest rate markets in various jurisdictions as well. Now with regards to the Fed, it looks unlikely that the FOMC is likely to capitulate to political pressure to lower rates anytime soon. Much of the outlook for rates, specifically whether the FOMC eases policy this year, really depends on the duration of this conflict. It's not impossible that if things are resolved quickly, then later in the year you are likely to have a new Fed chair, if he is appointed formally, that's Kevin Walsh, the former Fed governor. He may well try and put pressure on the committee to lower rates gradually, but it's very dependent on the situation in the Gulf and what happens to energy prices and the resulting inflation pressures. But our base case is that the FOMC does nothing this year. By contrast, we're expecting two 25 basis points increases in the rates from the European Central Bank.

15:24 – SA focus on consumers, business and government

Neo: Annabel, I just want to bring you back home to South Africa. I want to look at three key lenses here from a consumer perspective, from a business perspective, and from a government perspective. From a household perspective, consumer confidence was also on demand earlier this year - should we expect that positive trend to stall or even reverse?

Annabel:  Now we're talking specifically on households, they account for two thirds of GDP. This really talks to consumer confidence, what's really going to happen going forward. We did see a little bit of an improvement in recent data. There has been a trend of modest improvement and that was really part and parcel of the overall growing improvement that we saw in South Africa.

Sentiment was picking up in terms of the economic outlook, household finances, and consumers were starting to think that will obviously have a positive impact on employment and earnings. Now with fuel price increases, it still drains consumer household finances.

This is the real worry whether those costs come through into other consumer items as well. I think there will be a bit of negative impact but I think that once this crisis is over, consumer confidence will actually recover in South Africa. It will be part of that return to the trend that we are seeing in our country, which is one of an upliftment in the investor climate and in sentiment across the board. You also see that in the business sentiment readings.

For businesses, these rising costs are really key. It's a situation in South Africa where our producer price inflation really runs ahead of consumer price inflation of about a month or two. For us, we said that a lot of the agricultural costs will tend to come through later in the year from fertiliser, but there's still the pesticides - other factors. Why do we focus so much on agriculture? Last year we saw the economy grow at about 1.1%. Without the agricultural sector, we had 0.7%. So, it's a big sector. It's important but also feeds through to the consumer. For businesses, the bottom line really is what is going to be the demand globally and domestically, and this is a shock that impacts global and domestic demand.

For government itself now, I think they would probably see this as a temporary interruption to that trend as well. Cutting back on the taxes would obviously provide some relief but not full relief by any means for this fuel price jump. But also the finance minister did say it's a temporary reprieve. It's not something that would be persistent. So, it's unfortunate that it's happened, but I think all economies around the world are going to see the impact on their government finances. Many countries will obviously try and assist where they can from a financial perspective but really everyone's been very stretched from a debt perspective because of the COVID impact. We haven't seen economies return to extremely strong economic growth globally. Obviously there have been some uneven conditions but for South Africa we are expected to be on an upward trend for economic growth for the next five years.

I don't think that changes and I don't think the long-term story changes for our government finances either. South Africa really needs to see an economic growth rate running at three to 5% to drop unemployment.  In the 2000s that's what we had. We had economic growth even exceeding 5% for a number of years, and unemployment dropped from over 30%, which is what we have now to closer to about 22%.

For economic growth in South Africa, our infrastructure area remains key. We have the infrastructure conference in South Africa at the moment, and it comes off the back of Operation Vulindlela - where we have seen enormous progress in ending the electricity crisis in South Africa, ending loadshedding, getting off the Greylist and fighting crime and corruption. But focusing heavily on Transnet and getting the goods through our ports and improving exports. And that's really the outlook for economic growth, that strong continued improving infrastructure.

There's no doubt there's going to be a short-term growth impact. It just depends on how long the war lasts for and how much government really can manage to absorb on the fuel price. We know getting a sense really today I think of what they're going to absorb for April. How much longer does this persist in terms of starting to see the impact feed down the line into producer price inflation. So that really the growth story for South Africa.

20:25 – What is the single biggest risk to the global economic outlook?

Neo: Phil, what would you say is the single biggest risk looming over your global economic outlook?

Phil: We're always looking at potential risks to the global economy and there are always a variety of risks. One is perhaps related to AI and private credit, and that hasn't disappeared, but it's obviously been dwarfed by what's going on in the Gulf. That really is the epicentre of what we're looking at right now.

As I've mentioned earlier, it's really related to a protracted conflict. We know what the dynamics would be there with energy prices - they go up and they remain at elevated levels for a protracted period. So that really is the greatest risk. It is a risk at the moment, but it's not impossible. It's not a base case.

21:10 - What can consumers and businesses look forward to in the future?

Neo: I would like to finish off positively here. Looking forward, what positivity can we extract from your forecast and what can consumers and businesses alike look forward to in the future?

Annabel: Despite what we see as a temporary situation in 2026, we continue to expect after 2030/2031 that we're going to see as significantly stronger economic environment in South Africa, pulling people into employment and providing a lot more in terms of decent wages. Then really seeing an entrenchment of the gains we've made in terms of embedding a low inflation target of 3% and ringing in our fiscal anchors, which will help to embed a lower debt to GDP ratio. But more importantly it will be flexible but to improve our fiscal government finances and our fiscal credibility further. So, I think that's all going to talk towards an improvement in our investor environment and that in turn will obviously be very helpful in terms of South Africa seeing more investment and more economic growth. So, we really do think this is something that globally will not persist endlessly.

Phil: On the basis that this isn't a very long conflict, our forecast suggests that we'll still get global growth of about 3% this year. We've downgraded that from 3.3% a month ago, and with some central banks raising rates, but not all of them, you will certainly see an interruption to the rates cutting path. On the basis that this is relatively short-lived, inflation pressures begin to become diminished next year. Central banks can perhaps start easing policy cautiously over 2027. But I think in terms of broader implications, what we're seeing is a manifestation. We think of globally disruptive events that have arisen from the shift in world political tectonic place. And of course, for every reason, we hope that this conflict does end relatively promptly, and we don't see many more like it.

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