The IMF has revised its global growth outlook for 2022 and 2023 downwards to 3.6% for both years. This is despite inflation risks falling. The question is whether we are now facing a recessionary environment.
According to UBS research, there are three factors that can mitigate this risk: First, European spending firepower should limit the fallout from higher energy prices, while “higher income US households have savings, and homeowners have more spending power than inflation implies”; second, central banks are tending to be “cautious, not wishing to extinguish the post-pandemic recovery”; and third, “structural changes mean the economy is biased to be better than reported”.
So how have financial markets responded as they digest these views? Shorter dated US yields have surged, the S&P 500 is down 1.42% for the week in dollars, while the MSCI is up 0.22%.
Looking ahead, what should provide some underpin to US equities, is the early earnings trend of S&P 500 stocks. Of the 91 companies that have already released their Q1 results, 80% have beaten their profit forecasts.
Meanwhile, in South Africa, the IMF left the country’s growth forecasts disappointingly unchanged at 1.9% for 2022 and a mere 1.4% for 2023, notwithstanding the organisation’s concurrent upgrades on the growth forecasts of other commodity exporting countries such as Brazil and Nigeria. A shift in domestic growth concerns, combined with the KwaZulu-Natal floods, and an increased focus on other SA-specific risks, led to the rand weakening by 6.1% against the dollar for the week!
“The constant lesson of history is the dominant role played by surprise. Just when we are most comfortable with an environment and come to believe we finally understand it, the ground shifts under our feet.”
– Peter L Bernstein, American financial historian, economist and educator
Global News
- World Bank Chief Economist, Carmen Reinhart, is warning of possible further downward revisions to economic growth forecasts. This comes as the world has reached a point where growth risks are greater than inflation risks, as the demand normalisation process post-pandemic runs into reduced real incomes.
- The Russian economy is forecast to contract 10% this year, although there are currently a lot of variable factors. Although that economy rebounded quickly post its Covid 19 setback, its recovery following the Ukraine conflict is likely to be more protracted due to the drag from sanctions.
- Gracelin Baskaran, a development economist and bye-fellow in economics at the University of Cambridge, has written an opinion piece, published by BusinessLive, on what steps can be taken to curb an inflation-induced downward spiral. She says the financial sector can protect itself by cutting exposure to climatic shocks and invest in sustainable projects.
- The strategic importance of Ukraine’s natural resource wealth, particularly as it relates to Europe’s energy and resource independence in coming decades, is being somewhat overlooked as a potential contributing factor to the regional war and in terms of its long-term implications. Ukraine has one of the largest untapped lithium reserves in the world, with large accumulations in the contested Donbas region.
- In the ongoing war between Russia and Ukraine, economists believe the conflict is upending the global transition away from fossil fuels in the fight against climate change. In some ways, the war is slowing the shift and giving old energy new life. In others, it’s bolstering the argument that adding more electric vehicles to roads and installing additional wind turbines and solar panels can boost energy independence. In some places, both are happening at once.
- France’s President, Emmanuel Macron, is facing off against Marine le Pen in a televised debate. Although polls suggest a Macron victory, fears of a “shy” voter (unwilling to admit supporting the far right), and the precedents of the 2016 US presidential election and the UK Brexit vote, are enough to raise investor interest.
- An increasing list of risks is turning China into a potential quagmire for global investors. Many distrust the country because of its relationship with Russia and are asking what could happen in a country willing to go to great lengths to achieve its leader’s goals. On Monday, China’s better-than-expected economic data prompted questions from analysts, who pointed to inconsistencies with alternative statistics that paint a grim picture of the economy.
- The cost of living is set to rise in Germany as producer prices rose 30.9% for the last 12 months in March, reflecting the effects of the war in Ukraine for the first time. March’s figures mark six consecutive months of increasingly steeper increases, mainly due to rising energy prices, according to the Federal Statistics Office.
- Meanwhile, the era of carefree spending is over for Netflix. The company ran up a huge bill over the past few years as it expanded across the globe and produced a mountain of programming, prioritising growth over cost efficiency. Now the company is imposing more financial discipline, according to senior executives. The shift is a result of increasing competition from the likes of Disney, HBO and Paramount.
Local News
- The rand has been pummelled this week – a 6.1% decline at the time of writing making it the worst of its emerging market peers. The country is battling a range of headwinds, including the aftermath of catastrophic floods, signs of a resurgence of the pandemic, and rolling power cuts that continue to undermine the economy.
- South Africa’s inflation rate has increased to 5.9% from 5.7%, bumping up against the South African Reserve Bank’s 6% top line. As we’ve highlighted before, this underscores the tough choice the Reserve Bank faces in striking a balance between taming price growth and supporting the nation’s sluggish economy.
- The ANC has appointed Human Settlements Minister, Mmamoloko Kubayi, as head of economic transformation. She succeeds Enoch Godongwana, who relinquished the powerful party position after he was appointed finance minister in August 2021. However, her credentials are questionable: As former tourism minister, Kubayi faced criticism last year for championing black-ownership as a requirement for access to a relief fund created to help the tourism industry overcome the effects of the Covid-19 pandemic.
- Writing for FM, Justice Malala has argued that the ANC’s manifesto of 1999 vowed to root out corruption, nepotism, and bribery, but was promptly ignored. This statement comes ahead of the ANC national elective conference in December, which will also most likely determine who the next head of state will be. The signs are not encouraging.
- Three eThekwini council staff members arrived at the Virginia Airport in Durban North on Monday, attempting to hijack food and care packages destined for the KZN flood search and rescue teams arriving from around the country. The Durban municipality has tried to cover this up, but the DA opposition party says this attempted theft cannot simply be swept under the carpet. A video of the incident has since gone viral on social media.
- Former member of the board of the National Nuclear Regulator, Peter Becker, has served papers on the Minister of Mineral Resources and Energy, Gwede Mantashe, the National Nuclear Regulator, and the chairman of that body to challenge his dismissal in February. Becker believes the minister’s decision to discharge him was unlawful and wants an order reviewing and setting aside this decision. Becker had expressed critical and challenging views on the use of nuclear energy.
- The property market has bounced back from negative returns in 2020, although figures are far from their historic highs. Growth in the local economy and property sector remains a concern as South Africa’s operating environment remains challenging, characterised by oversupply of property in the office market, and rental growth still under pressure.
- This comes as Fortress Reit announced the development of Eastport Logistics Park at an estimated cost of R4.4 billion. The flagship asset is located in Gauteng’s prime logistics node, northeast of the intersection of the R21 and R25.
Sources: Dynasty, UBS, Reuters, BusinessLive, Business Insider, News24, Bloomberg, Wall Street Journal, Daily Maverick, etc.
