Investment Perspectives: Q2 Economic view

The potential for the US economy’s “soft landing” and whether the high interest rates will guide inflation back towards target without causing the economy to go into a recession remains a pre-occupation for analysts.

Economy
Global economic growth is steady with the IMF expecting 3.2% growth this year, in line with 2023. They expect similar growth next year, with continued regional divergence in economic strength. The Euro Area will drive further acceleration in the pace of developed economy growth, despite the United States decelerating somewhat, after several years of better-than-expected growth. Emerging economies should also decelerate this year, with underwhelming growth from China being the main cause.

Like growth, interest rate policy is also currently out of sync across the world. A growing number of central banks have begun lowering rates, including the Euro Area, Denmark, Sweden, Switzerland, Canada, Brazil and Mexico, to name a few. The United States Federal Reserve on the other hand remains on hold, unsatisfied by the pace of US disinflation. The market is hopeful the US Fed will begin cutting rates later this year.

In South Africa, medium-term economic prospects are lukewarm; however, leading indicators suggest a cyclical recovery is brewing. Economic growth remains well below potential, but, like other parts of the globe, domestic economic growth will also accelerate (off a depressed base). Electricity supply has stabilised, and the past 100-plus days have been free of loadshedding. If maintained, this alone will lift growth noticeably this year, leaving the IMF’s 0.9% forecast for 2024 (compared to 0.6% last year) open to upward revision.

Other positives include the inevitable “dovish pivot” from the South African Reserve Bank, given inflation is under control. This in turn will start to lower consumers’ debt servicing costs, raising discretionary incomes. The stronger rand, post the formation of the coalition Government of National Unity in SA marks a smooth transition to a “business-friendly” government, is a further boost to confidence. This may indicate that a catalyst for accelerated pro-growth structural reform in SA is on the horizon. We are not oblivious to the deep structural challenges faced by SA, but we are nonetheless encouraged by the direction of travel for now.

The economy is at a cyclical inflection point, with growth set to recover and monetary easing poised to provide additional stimulus in the coming months.

Outlook
The macroeconomic environment over the last few years has been tremendously difficult to read. The global pandemic shock and the associated policy responses, followed by geopolitical flare ups and then slow-and-steady normalisation has concertinaed the overall business cycle, which is the heartbeat of the economy.

Although visibility has improved slightly, we still observe some conflicting signals and our guard therefore remains up, and our mindset flexible.