PPS Investment Perspectives – Economic performance in Q1 2024
Luigi Marinus
The diversion between local and global returns experienced in 2023 continued into the first quarter of 2024 and was further enhanced with rand depreciation against the US dollar.
Stickier than previously expected inflation was a key theme in the quarter, as the global decline in inflation came to a halt, although not at the levels targeted by central bankers. This resulted in both an expected delay in the timing of the first rate cut and a reduction of the number of cuts anticipated for the year.
Geopolitical risk remained high in the Middle East and Ukraine, with offensive measures appearing to have escalated since the beginning of the year. In South Africa, the date of the national elections was confirmed by the president and political posturing has begun with a strong focus on the possibility and implications of a coalition government. Loadshedding appears to be improving, with fewer affected days this year compared to 2023.
The South African economy
During the quarter, Enoch Godongwana, the finance minister announced the budget which highlighted disappointing GDP growth expectations and a reasonable budget deficit starting at 4.9% in 2024 and improving to 3.3% by 2027. The main talking point from budget was however the use of R150bn from the Gold and Foreign Exchange Contingency Reserve Account to assist with debt alleviation.
Although it has been widely discussed for more than two years, inflation remains the major macroeconomic variable being analysed, as the impact of higher-than-expected inflation affects all asset classes. Central bankers in the United States and South Africa have maintained a more hawkish stance, being cautious not to act too prematurely and allowing inflation to rise again.
South Africa narrowly avoided a technical recession with the latest quarter-on-quarter GDP growth of 0.1%, compared -0.2% the previous quarter. This coupled with low business (30) and consumer confidence (-15) levels gives an indication of the continued negative sentiment associated with local macroeconomics. South African consumers therefore continue to feel the effects of higher-than-average inflation in a low growth and confidence environment, which could prove important considerations when voters head to the polls in late May.
Looking ahead
Much of the remainder of 2024 will include debates around election prospects and outcomes in South Africa and the United States. Elections tend to bring about some uncertainty and lots of noise. Political analysts will explain the pros and cons of the various outcomes, and markets are likely to experience short-term volatility as the likelihood of the various outcomes change.
Meanwhile, we maintain a cautiously optimistic approach, as inflation remains sticky and interest rate hikes are pushed further into the future.
