EDITORIAL: Surprising US inflation rate is a double-edged sword

Some good news at last on the global economic front has raised spirits and buoyed the rand. But as often in economics, it’s a question of whether the glass is half-full or half-empty. Last week’s lower-than-expected US inflation rate has made financial markets a little friendlier to emerging markets. But it reflects an increasingly bleak economic outlook that could prove quite unfriendly to SA and its peers over the next year or two.

October’s US inflation rate came in at 7.7%, surprising the market, which expected something closer to 8%. That raised the prospect of the hoped-for “pivot” by the US Federal Reserve (Fed), which has implemented four consecutive 75 basis point interest rate hikes since June — but is now expected by the market to slow the pace to 50 basis points when it meets in December. Comments by one or another of the Fed governors last week fuelled pivot prospects, which prompted a surge in global equity markets and a weaker dollar, with investor sentiment turning more “risk-on” than it had been for a while.

SA’s own equity and bond markets gained. The rand, which is one of the worst performing emerging market currencies this year, has staged a comeback, lifting from the R18.40/$ range at which it started in November to trade at about R17.19 on Tuesday. Some even see it breaching R17 if the risk-on sentiment continues.

As it is, most believe SA’s inflation rate peaked in July, when it hit a 13-year high of 7.8%, subsiding to 7.5% in September. A somewhat less aggressive Fed and a stronger rand could take some of the pressure off the Reserve Bank when its monetary policy committee meets next week. So too is the prospect that global food and fuel price inflation is starting to moderate — which is expected to translate quite rapidly into lower inflation rates in emerging market countries such as SA, where food and fuel have a sizeable share of the inflation basket.

But all of that is against a global backdrop that is rapidly deteriorating. There is much debate over a global recession next year — usually defined as global growth of below 2%. But 92% of the global fund managers surveyed by Bank of America in October predict 2023 will see “stagflation” — that horrible combination of inflation and economic stagnation. The IMF has already lowered its global growth forecast for next year to 2.7%. And in its latest report prepared for the Group of 20 meeting in Indonesia this week, it says recent high-frequency economic indicators confirm that the outlook is gloomier.

Commodity boom

Europe, which as a bloc is SA’s largest trading partner, is expected to be particularly hard hit because of its energy challenges and the proximity of the Russia-Ukraine war. China, also a key trading partner, is showing signs of pivoting from its growth-quashing zero Covid-19 policy but its economy is under pressure.

Oxford Economics points out that though commodity prices are down from their recent peaks, they are still 30% above their pre-Covid-19 level — and they are likely to slide over the next year as global demand weakens. That’s a key reason global food and fuel prices will come down. But for SA, which has depended so heavily on the commodity boom for its recovery, sliding commodity prices and weakening trading partners are not good news.

As it is, SA’s economy contracted in the second quarter and could do so again in the fourth quarter, with load-shedding at record levels. Even if we don’t go into a technical recession, growth is expected to come in well below 2% this year, with the Treasury expecting it to average just 1.6% over the next three years.

On the upside, if reforms and renewable energy take off, private investment could climb quite steeply, and sentiment could improve. But that makes it more important than before that the government clear the path to allow new private producers into the energy space, and speed up resolving Eskom’s operational and financial issues. It makes it as important as before too that it fast-track reforms in areas such as spectrum and skills visas. The good global news opens a window to use to offset some of the bad news.