During the fourth quarter of 2022, Central Banks hiked interest rates further and were expected to continue, despite the loss of momentum in economic growth at the time.
Optimism is now starting to creep in, however, given that inflation might be peaking, which arguably paves the way for less aggressive monetary policy action.
In South Africa, our economy appears to be muddling through reasonably well despite the challenges. Economic growth is on par with major developed markets; although growth forecasts have been trimmed this year, with loadshedding taking a further toll on the economy. Like abroad, inflation here has also risen and is currently outside of the Reserve Bank’s target range. The market expects the rate cycle to be peaking, and outside of tighter financial conditions, loadshedding remains the greatest challenge for near-term output growth.
In the global context, one of the main concerns currently is the path of economic growth. Global growth forecasts for 2023 halved over the course of 2022, but the IMF recently revised (marginally) higher its forecast of real GDP growth to 3% for this year. Their continued muted growth outlook is mainly due to monetary policy tightening, aimed at combating high inflation, which is posing a headwind for growth. A further obstacle is the broader impact of Russia’s invasion of Ukraine which has had ripple effects across energy markets especially.
Is a US recession likely?
Although inflation appears to be peaking, causing some investors to become optimistic that interest rates will soon come down, we remain circumspect regarding the global economic outlook. Indicators, such as the inverted US yield curve, the sharp decline in the US Conference Board’s Leading Economic Indicator, and troughing US unemployment suggest to us that a recession of some sort is inevitable over the coming quarters. Fragility has also increased with financial conditions having tightened considerably, creating vulnerability towards any potential negative surprise event. Although a recession seems likely, the timing of its onset is highly uncertain, as well as the severity.
Is there anything to be positive about?
The US economy, which is significant in the global context, has shown remarkable resilience, and for now, the labour market still suggests a degree of underlying strength.
Other potential positives are, with interest rates having risen significantly, there is scope for sufficient easing in response to significant economic weakness, which means the recession, if any, could be mild.
Outside of the US, pressure on Europe has also eased somewhat, with gas prices have fallen significantly. Lastly, China has abandoned its zero-COVID policy, and the government is currently in stimulus mode given its pro-growth shift, which could rekindle economic activity.