ECONOMIC AND MARKET OVERVIEW
Global
Continued monetary easing by central banks again dominated the headlines and market narrative during September. The European Central Bank used most of what is left of its monetary policy firepower when it opted to reduce interest rates and revert to quantitative easing again to revitalise economic growth in the region.
According to a Reuters report, the ECB cut its deposit rate to a record low -0.5% from -0.4% and will restart bond purchases of 20 billion Euros a month from November. With inflation falling, Germany skirting a recession and a global trade war sapping domestic confidence, the ECB had all but promised more support to the economy and the only question was how extensive stimulus would be.
On the other side of the pond, the US Federal Reserve cut its official interest rate by 25 basis points, as broadly expected, but this also pointed to a moderate outlook for interest rates, which put a dampener on investor optimism. US President, Donald Trump, again criticised the modest reduction interest rates, wanting far more to boost the economy ahead of Presidential elections next year.
According to Sanlam Investments, geopolitics kept financial markets on edge through the month, with US-Iran relations in the balance after the US accused Iran of being responsible for a drone attack on Saudi oil fields, which slashed 5% off the global oil industry’s production. Oil prices soared in response before easing back when Saudi Aramco, the state- owned oil producer, optimistically estimated that it would take less than two months to recover the lost oil production.
An overview of the state of the global economy would not be complete without a reference to the US-China trade war. September started with the introduction of the first round of tariffs put in place by both the US and China and hopes of a tariff agreement bubbled under for the rest of the month, with a high-profile meeting due to take place between the two countries in Washington in October. Trade tensions are weighing heavily on the global economy, sentiment, and emerging markets. In late September, the news that the US may be considering introducing capital controls on US equity investing in China, upped the ante and pointed to a long road ahead for the two global superpowers.
South Africa
In South Africa, there was good news on the economic front when the gross domestic product came in at 3.1% for the second quarter, all but reversing the 3.1% decline in the previous quarter. Business confidence remains under severe pressure though, and all eyes are on whether the government will actually implement Treasury’s latest economic policy plan.
The Reserve Bank’s monetary policy committee (MPC) decided, in a unanimous vote, to leave interest rates unchanged. The governor repeated calls for structural reforms to raise South Africa’s potential growth rate, saying weakness in many sectors of the economy remained a cause for concern.
In a recent Stanlib report, they note that economic growth has weakened, but the upside risks to inflation remain muted. It is possible that although key economic variables (growth and inflation) would support a further interest rate reduction of 0.25% but the SARB adopted a “wait-and-see” stance. They are concerned about the market’s reaction to the impending news about Eskom’s restructuring, the medium-term budget policy statement (MTBPS) at the end of October, and the credit rating decision by Moody’s, which is currently scheduled for 1 November. This would suggest that a rate cut is still possible at the November 2019 MPC meeting, under the assumption that the upcoming economic policy announcements do not have an adverse effect on the exchange rate and government bond yields.
After a strong rebound in growth in all economic sectors in the second quarter, incoming third quarter data has been reasonable – wholesale trade and manufacturing having a positive month. However, leading economic indicators and confidence surveys are painting a grim picture. Business sentiment (an indicator for future investment) recorded its lowest level since 1999. It appears that South Africa’s economic growth could meet its projections of 0.6%. However, the focus is now moving to 2020 and 2021, which is likely to be revised lower, unless we see a significant turn in policy delivery and improvements in business and consumer confidence.
It’s clear that government’s ability to implement structural reforms and partner with business are paramount in this country’s path to economic revival.
