While the crosscurrents in global macro conditions were strong, the macro environment in South Africa was proving resilient, albeit a low growth steady state, according to PPS Investments.
The financial advisor's portfolio manager Reza Hendrickse said that low single digit growth was persisting and the South African Reserve Bank’s (SARB’s) response to modestly higher inflation had been gradual rate hikes.
“The ABSA Purchasing Managers Index recently reached its highest level since Covid-19, confirming relatively lively economic activity. The mining sector is benefitting from high commodity prices, which has been positive for our trade balance and in turn for the rand. Strong commodity prices have also been helpful for the fiscus, through higher taxes on mining sector profits, with the National Budget in February showing an improvement in the sovereign debt outlook,” Hendrickse said.
However, the portfolio manager warned that despite all of this, SA was dependent on the global economy, and it would not be insulated from any pronounced global economic weakness.
Hendrickse said that the first quarter began with worries about the shift in US Federal Reserve rhetoric, which implied that they no longer considered higher inflation as being transitory; the implication being that the outlook for monetary policy had become more hawkish. In a further dent to sentiment, geopolitical tension between Russia and Ukraine culminated in a full-blown invasion of Ukraine, because of Russia’s strong opposition to Ukraine’s wishes of joining NATO.
PPS Investments said that the rest of the world responded with economic sanctions on Russia, and energy prices skyrocketed, with Russia being a key oil producer, a major supplier of natural gas to Europe, and also an important supplier of agricultural commodities to developing nations. It said that this further stoked inflation fears, while also denting the global economic outlook, which was later also threatened by renewed Covid concerns in China. “Back home, the environment was more benign, with the equity market proving resilient, the economy muddling along, and the National Budget in February instilling confidence.”
The firm said that at the start of the year the global economy looked poised to grow comfortably at above-trend pace once again, but after the events of this quarter, there was sufficient grounds to be more cautious on the outlook. It said that firstly, monetary policy looked set to tighten more aggressively than initially anticipated, in response to persistently high inflation. It said that secondly, the war in Ukraine was having far-reaching indirect consequences, despite Russia and Ukraine together making up only 3.5 percent of global GDP, and only 0.2 percent of G7 exports. Lastly, the recent re-introduction of lockdowns in China were said to once again prove disruptive to global supply chains.
Hendrikse said that the key question was “how much can we expect growth to slow?”. “Are we facing a stagflation scenario of slower growth, high inflation, and potentially rising unemployment, or perhaps even a recession? One of the most reliable recession indicators, being the US yield curve (specifically the difference between 10-year and 2-year bond yields) is flashing red, with the curve having inverted recently, which is adding to market worries. Fluctuations in the business cycle are normal, but what makes this time unique is that there is limited scope for policy intervention from central banks and governments, given the past decade of ultra-stimulative policy.”
PPS Investments said that as a result, central banks around the world, including in SA, were hiking interest rates, and the US Federal Reserve (US Fed) was preparing to shrink its balance sheet, which has swelled through asset purchases, referred to as Quantitative Easing. It said this was a headwind to growth at a time when global trade disruptions, including the impact of Russian sanctions, are a risk to inflation. According to them, this was most evident in the sharp rise in energy prices, where Russia was a key player, historically providing 12 percent of the world’s oil. “It is too soon to tell how all this will play out, but what is clear is that there are more downside risks than upside at this point.”
BUSINESS REPORT