By Maarten Ackerman
After four volatile years in the global markets, we are eventually starting to see some green shoots.
Economies are winning their fight against inflation, and central banks are offering some relief by easing monetary policies and cutting interest rates. With this, most developed markets – except the US, which is starting to see an economic slowdown – are also slowly emerging from their economic growth slumps.
Following a prolonged 18 months, inflation is being brought under control and interest rates are starting to be cut without any real damage to their economies.
The good news is that despite the economic winter brought on by record-high inflation and interest rates, a global recession was prevented. We attribute this to the way in which central banks have proactively managed their monetary policies to target soaring inflation.
With inflation numbers finally starting to fall within target limits, central banks are moving to ease monetary policy.
The Bank of Canada was the first to cut rates in June and was closely followed by the European Central Bank (ECB).
The Bank of England and the Reserve Bank of New Zealand cut rates in August. The US Federal Reserve, on the back of weaker economic data, is expected to start cutting rates in September.
The risk for economies, however, lies in how central banks continue to manage their monetary policy. While it appears that most of the major central banks have avoided any damage by keeping rates high for an extended period, any policy mistakes at this point could inadvertently cause unintended harm. For example, keeping policy tight for too long could result in an economic slowdown.
Cutting rates too soon, however, could open them to the risk that they do so before inflation is fully under control, which could prolong the need to keep rates higher for longer – putting businesses and consumers under pressure.
An example of this is the ECB. Although it has started to cut rates, it has increased its inflation expectation.
This means that over the next two or three quarters, if EU inflation has not been adequately controlled, it will rear its head again, meaning that the ECB will have to pause its rate cuts or even hike rates again, which could trigger another slowdown or, worse, a recession.
SOUTH AFRICA – the GNU boosts the outlook
On the local economic front, we hope that, in line with the US Fed and the more stable local inflation numbers, the South African Reserve Bank will also provide businesses and consumers with some relief by starting to cut rates before the end of the year.
This year has also seen the South African economy stagnate. It is clear, not only from gross domestic product (GDP) numbers but also from high-frequency numbers, that business took a wait-and-see approach before the elections, with orders and investment down in the first two quarters of the year.
But it is not all bad news.
With the elections over, foreign investors are watching from the sidelines, wondering what will happen.
The formation of the Government of National Unity might just provide the political stability that investors are looking for to risk investing through foreign direct investment (FDI). The GNU appears to be proving itself to be a stable government with growth as its priority.
It must be noted, however, that South Africa’s FDI of 2% of GDP equates to around R100 billion, so there is a sizeable amount of investment flowing into the country annually. With a more stable government and economy, this could grow sizeably.
However, the impact of stronger governance does not happen overnight. Looking ahead to the remainder of 2024, we believe South Africa will be lucky if it achieves 1% growth and 1.5% over the next two years. Higher sustainable growth will be possible only if the GNU can start addressing investor concerns and key economic challenges as soon as possible.
Chief economist and advisory partner at Citadel, Maarten Ackerman.
BUSINESS REPORT