Global economy: mid-year health check

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00:00 - Introduction

Jeremy: The global economy has reached the halfway point of 2026 and is in better shape, but in weaker shape than markets perhaps would like. Growth is holding unevenly. Inflation has cooled, but not enough. Rate cuts are coming slowly, and geopolitics still sits inside every forecast. For South Africa, the global backdrop is no abstraction, it feeds directly into the rand, into inflation, capital flows, commodity prices, and the reserve bank's room to move. Although reform momentum and improved energy stability offer some support, weak growth, tight fiscal space, and fragile confidence do remain the hard constraints.

Hello and welcome. I'm Jeremy Maggs.

This is No Ordinary Wednesday, it's Investec's podcast on the forces shaping economies, markets, and business. Today, we continue our quarterly global economic update with Ryan Djajasaputra, Economist at Investec in the United Kingdom, and Chief Economist here at Investec in South Africa, Annabel Bishop.

And today we're going to review the first half of the year, but also look ahead to what the rest of the year could mean for the global economy, South Africa, markets, and capital allocation.

So Ryan, Annabel, a very warm welcome to No Ordinary Wednesday. And Ryan, let me start with you. And looking at the global picture, at the start of 2026, markets expected cleaner disinflation and a clearer rate-cutting cycle.

 

01:34 - Why inflation and interest rates surprised markets

Jeremy: At midyear, what do you think has proved most wrong in that consensus?

Ryan: I think if you took the views at the start of this year, clearly things have changed. I'm not sure I'd necessarily call it wrong, rather unforeseen. I think as we came into 2026, the broad consensus and our own view was that the disinflation trends that we saw through last year, would continue into this and central banks would lower interest rates.

Instead, that view was very much turned on its head by the conflict in Iran. What has surprised most has been Iran's ability to close the critical Strait of Hormuz. Yes, it was a known risk, but they have been more effective in shutting that down to shipping than may have been thought. The consequence, as we have all seen, is the impact on energy prices and subsequently on inflation around the world.

That previously held view of easing monetary policy has now been replaced by one of caution by central banks. To note, in the majority of cases, we see interest rates on hold now through the course of this year rather than a renewed tightening cycle. And actually, we see a resumption of interest rate cuts in 2027 among the major central banks as inflation pressures fade.

And I think developments, you must acknowledge, in the last couple of weeks have been evident on that front, and obviously the decline in energy prices back towards pre-war levels.

Jeremy: Annabel, for South Africa, we entered the year hoping for lower inflation, easier policy, maybe stronger reform momentum. What then, in your opinion, has improved and what has disappointed?

Annabel: Hi, Jeremy. Look, I think we were already at low inflation before the Middle East war began, and of course, our inflation rate was about 3%, 3.1%. In fact, on the back of last year, coming through on a very low inflation environment, and of course the drop in the inflation target itself to 3%. All of this had caused really interest rate cuts, and expectations were for more interest rate cuts this year.

Of course, I think that's where, you know, the big disappointment has come in, and that's obviously affected financial markets in South Africa. We've seen the impact on the JSC and the bond market. But, you know, we also have seen some recovery since March. You know, as Ryan unpacked on the Middle East war, we have of course seen that in our significant disruption.

But the financial market indicators for South Africa are nowhere near as bad as they were. What has improved? Well, we obviously continue to look at the South African economy from a domestic perspective as well, not just the international impact, and we have seen very good improvements in shipping and container.

Part of our South African constraints to economic growth have really come through in terms of exports, and we have seen the number of containers rise significantly. We've obviously seen a lot of repair and rebuild in that space. It is not complete. There's still a long way to go, many years to go. But in fact, we did see good GDP results in the first quarter also as a consequence of that.

Of course, the second quarter's going to be beset by the Middle East war, but we really see this as a temporary interruption. We continue to believe that we're eventually going to get to a 3% economic growth rate in South Africa.

04:26 - Global growth: Resilience amid uncertainty

Jeremy: Ryan, global growth has held up, but the distribution is uneven. So is this, in your opinion, a resilient global economy or a US-led cycle with weaker economies simply being pulled along?

Ryan: I think if you're looking at the global growth picture right now, the distribution is uneven. Firstly, global growth has held up better than expected, certainly defying some of the gloomy warnings at the start of the conflict of a possible global recession, which has not happened.

I think when you want to try and look into some of the reasons why, a degree of uneven distribution has been seen. Net energy exporting countries such as the US have certainly been more insulated to the energy shock. That said, economies generally have been resilient, and I think there's some factors behind this.

I think one part is the manufacturing sector, which has held up better than you may have thought, particularly when you compare it back to 2022. The energy shock as a result of the Ukraine crisis resulted in significant, headwinds to the sector. But actually, what's happened is that you've seen a rush of front loading, i.e. firms rushing through new orders in attempts to avoid expected price rises and supply chain disruptions, which is what you saw last year ahead of Trump's Liberation Day tariff. So that's been a factor. That is only a temporary boost, and we are starting to see some signs of that fading.

But I think given that at least we appear to be on a diplomatic path with regards to the conflict in Iran, that hopefully reduces some of the uncertainty and leads to some improvement in confidence, leading to some recovery in the service sector, which has actually been soft of late.

06:13 - What global trends mean for South Africa

Jeremy: Annabel, in your opinion, what does US resilience actually mean for South Africa?

Annabel: I think that's quite a key question because it actually does have a significant impact. One often wonders whether the fearing of the US economy, can really impact us, our livelihoods here in South Africa? But of course, we are facing potentially US interest rate hikes.

Now, that doesn't mean that they're definitely going to materialise, but certainly expectations are that they're going to be at least one hike in the US, possibly more. And that tends to weaken the rand. Now, of course, as you know, the rand is very important for us from an inflation perspective. A weaker rand feeds through into higher prices in South Africa, and not least of all because we obviously import oil and petroleum products which are priced in US dollars, and of course there's a translation effect there of the rand.

The rand is also quite key as well from, other perspectives, whether it's a sentiment issue, and indeed overall, the fact that the US economy has been very resilient and actually continues to likely be so, will obviously feed through into a good impact on global economic growth as well.

For South Africa, from an economic growth perspective, we need a low and more moderate inflation rate, and that obviously does come back to some currency strength as opposed to weakness. The stronger the US is, the more likely they probably will look to hike, given their higher inflation environment.

And we'll just have to see what happens with the overhaul of the monetary policy in other areas they're looking at.

Jeremy: Ryan, I think it's fair to say that Europe, the UK, and China are not necessarily moving in the same cycle as the United States of America. What explains that gap?

Ryan: I don't necessarily say that they're not moving in the same cycle.

I'd say there's certainly a difference in performance. I think when we look at the US, the US has certainly been and expected to be the outperforming major advanced economy this year, and I guess into next year as well. I think there are key reasons for that. As I mentioned earlier, it's been more insulated from the energy shock because of its net energy exporter.

Added to that are some specific factors. For example, at the start of this year, you saw some tax rebates, which have been a boon for household consumption. And I think the big thing which you can't ignore is the AI boom in the US, and that is certainly more evident there than it is elsewhere and shows no signs of slowing.

I guess just to put this into some kind of context, if you look at estimates of AI CapEx expenditure, this year, you're looking at around $700 billion. Next year, estimates topping a trillion dollars, roughly equivalent to around 2% of the GDP. That is a significant factor. That's not to say we're not seeing growth expected to pick up elsewhere now that it appears that the headwinds from the Middle East may be ebbing.

Europe, for example, should benefit from the ramp-up in defence and infrastructure spending, especially in Germany, which is the largest member of the EU. I think at the moment it's just the case that there are more US idiosyncratic factors that are providing a greater uplift.

09:10 - South Africa's structural growth challenges

Jeremy: Annabel, talking about growth, South Africa's constraint in that respect is often described as structural.

If you look at the lens right now, what do you think the most binding constraint is?

Annabel: We've already talked about Transnet and of course the impact on South Africa's economy from that perspective, and that is a very big binding constraint for us. The inability to meet export demands and indeed even the demands of internal producers in our economy in order to obviously provide both the rail capacity and sea capacity to get the goods out the country or around the country.

What's quite key for South Africa is that we have a lot of constraints coming through from our municipalities, and that often manifests in insufficient water supply or other areas, that also talks to damaged roads. The municipalities as well have debt and also the impact on the fiscus and the impact on credit rating agencies.

But overall, the bottom line I think for South Africa is rather one of an overall improvement in all areas of the structural constraints. So not only looking at perhaps transport or only looking at municipalities and water supply, which of course are very key as well, but rather perhaps looking through the lens of Operation Phula, what looks to overcome many of these areas and really in a strong concerted working environment, including electricity.

While we've moved away from load shedding, we have what's known as load reduction. So there's a huge amount of work to be done for South Africa still from a structural perspective, and I think all of these areas are actually getting equal support. The transport industry is absolutely key.

The more improvements we can make there, the more job creation we'll have as well.

10:46 - Rethinking emerging markets

Jeremy: Ryan, I want to ask you a question about language and definition. Investors still talk about emerging markets as one asset class. I just wonder if that framing maybe has become a little too blunt a word in an environment where policy, credibility, trade exposure, and I guess fiscal risk all differ so widely.

Ryan: I think the use of such terms is true in any sense when you frame several different countries under one very broad-brush banner. I think that can be the case whether you're talking about emerging markets or indeed advanced market economies, too. I think the term can be useful as a differentiator between advanced and emerging markets perhaps.

I totally agree that you need to assess the individual countries on their own merits. And I think one point that highlights this is for example the MSCI, they categorise South Korea, one of the wealthiest countries in the world, as an emerging market, and you can't really put that into the same basket as Egypt, for example.

Jeremy: So Annabel, to pick up on what Ryan is talking about judging a country on its merits, where then does South Africa sit in that more selective emerging markets landscape, do you think?

Annabel: Jeremy, I'd say we are a bit differentiated, having a look at the rand, that really is sitting closer to the top half of the EM currencies, for example.

But if we have a look at our CDS spreads, we are sitting quite close to the bottom. So there is a bit of a differentiation around South Africa. Now, we've gained on the improvement in the global financial market sentiment as a consequence of the improvement really, I think you've seen in equity markets and elsewhere an increased risk appetite.

As we moved away from the month of March when it became clear that the Middle East war was not going to spread into a multi-country NATO-type war but instead remained contained in the Middle East. Those were initial fears. And now that we obviously have seen a lot more risk-taking from financial markets increasingly over the months of April, May, and June, the rand strengthened, but of course the bond market has strengthened very substantially as well.

A lot of that talks to the fact that we've had a strong improvement in the investor climate in South Africa since mid-2024, and I think that's differentiated South Africa from an emerging market landscape perspective. We've managed to move into the more selective perhaps, EMs from an investment perspective, and I think that's expected to resume after the fears around the Middle East war pass again.

Because South Africa's improved so much in terms of its inflation environment, its monetary policy and confidence in general, there’s reduction in political risk. And as I said, the Middle East wars derailed this, we do expect that we'll continue to see further improvements as the government of national unity gains more traction.

14:08 - Fiscal policy, debt and investor confidence

Jeremy: This is No Ordinary Wednesday, and let's return now to our conversation.

Ryan, back to you.

Advanced economies now face tougher scrutiny over debt and deficits. Do you think fiscal policy has become as important as monetary policy, particularly for bond markets?

Ryan: I think if you're looking at global bond markets at the moment, both monetary and fiscal policy are both a consideration.

Wouldn't necessarily say there's a primacy of either of them at the moment. I think the situation is dynamic, and it really depends on what is happening at the time and which country you're specifically talking about. I think if we're looking at fixed income markets at the moment, really it's the Middle Eastern developments which is the main focus, given the implications for inflation and consequently monetary policy.

But we know that the fiscal picture remains challenging across many of the advanced market economies. If you were to take the UK, for example, debt to GDP this year is estimated at around 95%. If you take the US, that stands at about 100% and is only expected to rise further in the coming years. Trying to disentangle fiscal concerns in bond pricing is perhaps not as clear-cut as it can be in emerging markets at times.

I think what we have seen in recent years is a rising term premium and an underperformance at the longer end of some sovereign curves, and that provides some indication that from the fiscal metrics, the outlook is on markets' minds.

I think, though, in terms of real fiscal pressures, those worries only really show up in bond markets when you've really got a problem.

And I think if you were to take the UK as an example, former Prime Minister Liz Truss' ill-fated mini budget in 2022 provided a prime example of that.

Jeremy: Annabel, fiscal credibility remains central to South Africa's investment case. What do you think markets would need to see by the end of the year to believe that our path is improving?

Annabel: I think we've already seen an improvement in our perception from financial markets, and that of course talks to the fact that we've already seen a credit rating upgrade last year from Standard & Poor's, and of course this year as well from Fitch, and in fact, even Moody's has put us on a positive outlook as well.

These are all recognition of the fact that our government finance has turned a corner, that there's not an expectation that we're going to continue to see, for example, rising debt, and in fact, we've actually seen a primary surplus as well. Overall, the impact from the Middle East is not anticipated to cause a negative impact on government finances from the point of view of government absorbing the cut in the general fuel price levy to aid motorists in South Africa.

There is likely to be some impact on GDP growth, and here we obviously talk to the fact that import costs have rised very substantially because of the fact that the oil and most importantly petroleum products that import into South Africa have really doubled in terms of cost and that has obviously caused South Africa to see, a negative impact on our trade account, which will obviously have some impact on our GDP growth as well.

Financial markets want to continue to see fiscal consolidation in South Africa. That's what they want to continue to track, to believe that we're on a steady upward trajectory. And of course, the mini budget towards the end of this year will be key, as will continued careful expenditure and continued growth support as well.

 Jeremy: So Annabel, you talk about the fiscal consolidation. In this world then where all governments are needing capital, what must South Africa do to avoid being treated simply as optional?

 Annabel: I think it comes very much back to the return we can give investors. Talking not only on the bond market, but in terms of equity markets as well, and in terms of fixed investment, South Africa needs to show that it's a good investment case.

But from a bond perspective, what's helped us very much has been the fact that our borrowing costs have dropped down very substantially. Bond yields, which were above 12% in 2024, have actually dropped down to 8% and even below 8% before the Middle East war. Perhaps since the war, they might be running closer to 8.50, 8.40, but really there's pressure for bond yields to come down further as well.

What this really means is that you're experiencing a lower cost of funding government, and this has been key in improving the fiscal outlook for South Africa. In other words, embedding not only rating agencies' perceptions, but also for financial market investors as well, globally or domestically, that South Africa is a solid investment case, and that we are able to finance our government debt.

I think from that perspective, it increases the safety perhaps, although there always is some risk. But it will increase the ability for investors to continue to place money in South Africa.

We've seen a lot of foreign investment in South Africa. But what will help, you know will be South Africa managing to get back into its investment-grade credit rating, a status that it had.

Now, we're generally on a double B. We were on a double B minus, and expectations with these positive outlooks that a number of rating agencies still have us on means that we can go to double B plus. They're indicating we'll go to double B plus if we continue on this path. So essentially, that's one notch below investment grade.

And moving to investment grade I think will certainly give a boost to confidence that many investors require.

18:59 - The biggest global and local risks ahead

Jeremy: Let me ask you both a question about risk, and Ryan, to you first, what do you think is the most mispriced global risk right now, and what's the most plausible upside surprise maybe for the rest of the year?

Ryan: I think if we were to look at major global risks, financial market-wise, there's two which are very prevalent at the moment. I guess not particularly surprising equity markets, AI stock valuations and whether future earnings growth can underpin current valuations is certainly something which remains a risk.

I think private credit remains one too. To highlight this point, if you're looking at central banks, so for example, the Bank of England, the European Central Bank and others, and various other regulatory bodies, what two main risks do they quite often cite? Well, it's both of those. If you take the Bank of England's case, they have issued stress tests for banks to run based on those type of risks.

So that's perhaps unsurprising in terms of global risks for the downside. I think if you were to talk about upside risks, and quite often we forget about upside risks or perhaps more positive outcomes. If you asked us a month ago, the only risks we talked about in terms of the global economy were downside ones in the form of the crisis in the Middle East getting worse, an escalation and much higher energy prices.

What we've actually been discussing in the last week or two is actually the possibility of a milder scenario, a potential positive surprise. And I think the memorandum of understanding signed between the US and Iran, that's not going to move in a straight line. There will be periods of uncertainty.

There may be minor skirmishes between the two, but I think looking through all the noise, neither the US or Iran really want to be drawn back into a full conflict once again, and it does look as though kind of the diplomatic path is, is the one that we're on. I think considering that, we kind of have to consider, well Markets had priced in or were expecting energy prices to fall under kind of some diplomatic assumption, but prices not returning back to pre-war levels until well into next year.

Now, actually, if you look at energy prices in terms of oil, last week, we went back to pre-war levels. And one thing it gets lost somewhat, we always talk about energy prices. We get some of the other prices as well. So for example, fertiliser prices. They are now back to and actually below where we were at the start of the conflict.

So principally, we're looking at urea prices here and the fact that that's come back so much actually reduces the risk of higher food price inflation going forward. I think what we have to be aware of, or certainly keep a dial on, is the possibility that Gulf exports return to normal faster than expected.

Maritime traffic at the moment's picking up. Yes, it's not back to where we were pre-war, but it's moving in the right way, and we're only two weeks into the 60-day MOU. So I think we have to consider that at least. That there is a possible path whereby energy prices, other prices come down quicker, and actually the impact on inflation is perhaps less than previously expected.

Headwinds to growth ease and central banks actually return to a path of easing earlier than previously expected, i.e., next year

22:06 - South Africa's outlook: Risks and opportunities

Jeremy: And Annabel, in a similar vein, the most underappreciated South African risk perhaps, and what, in your opinion, would count as a genuine upside surprise?

Annabel: I think one of South Africa's most underappreciated risks at the moment is the impact of the El Niño conditions which would lead to  a harsh drought conditions.

And the reason why that's important is, South Africa is a very water-scarce country, and we obviously have been through very severe droughts historically as well, which actually can push our food price inflation into double digits and up towards 30% and that's a very high figure.

But obviously the impact could be much worse if we move into quite a harsh El Niño environment. The reason I mention it is that a number of key agencies who monitor the weather have actually confirmed that we have now gone into an El Niño cycle, that the worst period will be November, January and February.

That's really key for our planting and our major crop production, such as maize. It's also important as well to note that last year we had an economic growth of 1.1%. Now close to half of that was from our agricultural sector so it actually does matter quite a bit from a GDP growth per sector, from a government finance revenue collection and all the feed-through impacts as well.

So the concern certainly is that next year might see the impact of severe El Niño in terms of our inflation figures. This year not as much, partly because we're halfway through the year, but also of course we have high soil moisture content from a very good La Niña rainfalls previously. All of that really talks to the fact that this year, we're not expecting to see, significant negative impacts on our planting season from October onwards in terms of agrichemicals, that we actually could find ourselves/

And at the moment we had expected an inflation figure to come down to about 3% next year after the jump from the Middle East war works out the system. But of course, that figure might now be closer to 4%. And of course, that has a feed-through impact on economic growth when your inflation's higher than you expected, along with salaries and wages, inflation, interest rates, et cetera, it could curb cuts.

So all of these factors are actually quite key for South Africa. I think from an upside risk perspective, the weather's never terribly certain. And you know, if we do see a mild, a moderate El Niño and in fact less than is currently being warned of, that's always possible. Weather conditions can change and switch.

But also of course a genuine upside surprise would be if we continue to see a good strength in economic growth and further credit rating upgrades as well. That certainly would be a positive situation for South Africa's investor climate. Overall, I think that the base case is really one where we see South Africa move back towards the 1.5% growth metric that we're looking to target for this year, perhaps next year instead, and then steadily move out to 3% longer term.

There is some skepticism, but South Africa has certainly the capacity for substantially stronger growth.

24:57 - The key global indicators to watch

Jeremy: Folks, I want to start wrapping up this conversation. And Ryan, to you finally, the three global indicators that you're going to watch most closely between now and December?

Ryan: It's inflation broadly across all advanced markets, whether you're looking in the UK, the Eurozone, the US, as Annabel just mentioned.

Inflation's really is going to matter to what happens with monetary policy. And when I talk about inflation, I don't just mean the headline rate of inflation, it's the details. The detail's is what matters. What central banks are watching out for are, are we seeing indirect effects from developments in the Middle East?

Are we seeing second-round impacts on wages? And it's those factors and whether it results in a more persistent higher inflation backdrop which really matters. So I think that is very much going to be key going forward. What fascinates me in terms of other variables is the Strait of Hormuz and vessel traffic.

Why is that something  I keep an eye on? Because crucially, it's key to understand how the energy supply disruption is evolving and would give you some insight into possibly whether we are moving to a situation where actually the outlook is more mild than previously been expected. So I think that in turn will feed into the kind of the inflation backdrop and central bank policy as well.

So how developments evolve through that strait is really going to be the key thing for everything through the rest of this year.

26:16 - South Africa's economic outlook

Jeremy: And Annabel, what are you looking for that will tell us whether the economy is gaining traction or losing momentum?

 Annabel: Three indicators I'd look at certainly, one of which is fiscal policy, which we've discussed a lot, but it's absolutely key.

Poor fiscal policy can actually make or break a country. We have seen ourselves, very substantial turnarounds. I think if that persists, we'll continue to see the economy benefiting as well as investor climate and of course supportive for government expenditure and finances overall, because it does have a positive feedback loop.

But secondly we did talk about GDP growth, and it is very much an indicator for us because it really does cover the fact that we have obviously seen extremely poor employment performance in South Africa and moving to a substantially stronger economy, improving on infrastructure perspective, and of course then being able to turn around and lift our employment figures would be absolutely key for South Africa.

Of course, we have credit rating upgrades and a number of other factors, and that's certainly a path that we can return to and beyond. So I think that's a very good indicator for South Africa. But you know, what's also absolutely important for us is the ease of doing business. And that I think is an indicator that's not really talked about enough in South Africa, not just reducing business costs, but improving regulations and bureaucracy, particularly reducing the regulatory burden.

It's not just red tape, it's also the great difficulty that we have in terms of getting a number of factors moving quickly, whether it's permits or meeting regulations. So for us, that's very important, reducing the regulatory burden and really moving forward in the minerals sector and the petroleum sector to allow far more investment, which really has not manifested to date.

Jeremy: And that's where we are going to leave it. Ryan Djajasputra, economist at Investec in the United Kingdom, along with Annabel Bishop, chief economist at Investec in South Africa. To both of you, thank you for joining me on this edition of No Ordinary Wednesday. Now a new episode of No Ordinary Wednesday drops every two weeks.

To ensure you don't miss out, search for Investec Focus Radio SA wherever you get your podcasts and hit the follow button. Until next time, goodbye from me, Jeremy Maggs, and the entire Focus Radio team.

Disclaimer: The views expressed are those of the contributors at the time of publication and do not necessarily represent the views of the firm and should not be taken as advice or recommendations. Investec Limited and subsidiaries, authorized financial service providers, registered credit providers, and long-term insurer.

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