Negative news about the global economy persists. Purchasing manager indices continue to signal a widespread deterioration in business conditions. Even in the US, where the economy remains buoyant, the momentum of growth has slowed. China has had to resort to increasing monetary stimulus in an attempt to meet its 6% annual growth target. American tariffs are having an increasingly damaging impact on Chinese exports. While China and the US have agreed to resume trade negotiations, the outcome of these talks is uncertain. Business investment has slowed because it is difficult to make long-term commitments when there is so much uncertainty about the longer-term impact of the trade war on global supply chains. Reduced business investment will exacerbate an already-deteriorating global outlook.
Financial markets seem to be surprisingly unconcerned about deteriorating global business conditions because it is widely expected that central banks will respond to any adverse economic developments with aggressive monetary easing, which will somehow keep the show on the road. Almost everywhere, inflationary pressures are benign, which makes it easier for central banks to contemplate such a response. The experience of the past decade suggests that while aggressive monetary easing does little for the real economy, it does wonders for asset prices.
South Africa remains trapped in stagnation, from which the deteriorating international outlook will make it difficult to escape. Year-on-year growth in the first quarter of 2019 was 0.1%. It is particularly concerning that private consumption grew only 0.7%, with weakness manifest in all sectors of expenditure. There was also a widespread contraction in fixed investment, which in aggregate was down 2.9% year on year. President Cyril Ramaphosa’s plan to promote investment to kick-start the economy has yet to gain traction.
As a consequence of weak domestic demand, the trade account is now in balance. This, together with capital inflows seeking to take advantage of South Africa’s high interest rates, has stabilised the rand. Annual consumer price inflation in May was 4.5%. With a very weak economy and a benign inflation outlook there are strong arguments for a significant cut in interest rates.