With global inflation returning to normal ranges – albeit slightly slower than anticipated a year or even six months ago – some economists are questioning whether investors should still be ready for an aftershock in the form of wage-fuelled inflation. This seems like a reasonable concern, given how resilient the US labour market has proven to be throughout a cycle of rising prices and tightening interest rates.
In the context of low unemployment rates and shortages of specific skills, it makes sense that the cost of labour should go up as employers raise wages to attract and retain workers. This, in turn, could increase the costs that companies pass on to their customers and also stoke inflation because of an abundance of employees with plenty of disposable cash to spend.
However, Paul Donovan, chief economist at UBS Global Wealth Management, wrote a recent research note suggesting that automation may well save the global economy from a potential fourth wave of inflation. With the Fourth Industrial Revolution (4IR) in full swing, artificial intelligence, advanced robotics and other hyper-automation technologies may drive dramatic productivity gains. These gains, in turn, could be enough to offset rising wage costs.
Donovan cites research from the St. Louis Federal Reserve, which shows that publicly traded companies in developed economies struggling with a tight labour market tend to adopt automation and cutting-edge technologies to address labour shortages. The study suggests that a scarcity of labour leads to short-term inflationary pressures. But in the longer run, stronger productivity growth leads to expanded production capacity and, thus, reduced pricing pressure.
Other economists and business leaders have also pointed to the impact of automation on inflation in recent years. BlackRock CEO Larry Fink, for example, said in mid-2023 that AI has huge potential to increase productivity and transform margins across sectors – in turn bringing down inflation. Fink argues that a slowdown in productivity growth after the pandemic was one factor driving price rises.
Process automation and the efficiency gains it drives have been a feature of our lives since the first industrial revolution. But with the advent of digital commerce, cloud computing and AI, we have entered a period of exponential and accelerated automation—with stocks such as Nvidia, Microsoft and Alphabet among the most direct beneficiaries of the automation boom.
But 4IR technologies are transformative for margins and productivity in every industry—not just technology. As Donovan notes, automated platforms enable companies to pass menial tasks on to a combination of machines and customers. Many retailers worldwide use self-service checkouts and apps to process orders and payments. “On many occasions, the customer is also expected to provide most of the necessary capital equipment. Companies expect customers to carry smartphones,” says Donovan.
Also noteworthy is that advanced AI tools and models such as generative AI are encroaching on knowledge-based work that was once the sole domain of expensive and highly qualified human professionals. Tasks such as writing, customer service and programming, for example, can potentially be partly automated with software such as ChatGPT. McKinsey estimates that AI could “automate work activities that absorb 60% to 70% of employees’ time today,” and grow productivity by between 0.2% and 3.3% each year.
We are moving into a brave new world, one where optimists believe that most employees will be better paid, more productive, and more able to focus on the meaningful and exciting parts of their jobs that involve creativity, empathy and strategy. For investors, automation could unlock massive growth opportunities over the years to come – and not just from the Magnificent Seven.
Yet the benefits will not be shared uniformly across the globe, with the more lightly regulated countries likely to pull ahead. In developing nations such as South Africa, government and trade unions may fight automation to preserve employment. Low labour costs may also discourage companies from making large capital investments in automation. This is one key reason to maintain a healthy exposure to offshore markets and multinational companies that are able to increase profitability through embracing the 4IR.
“The combination of employing fewer workers (who earn more money) and exploiting customers working for free allows companies to avoid wage cost pressures, lessening the risk of a fourth inflation wave.”
– Paul Donovan Chief Economist UBS Global Wealth Management
Global News
- Former President Donald Trump repeatedly attacked a disjointed President Joe Biden during the first debate of the 2024 presidential campaign on Thursday night. Biden, 81, who entered the debate hoping to reassure voters concerned about his age and mental acuity, delivered an incoherent performance inflaming those fears, and raising questions about whether he would be able to carry on as the Democratic nominee.
- 16 Nobel Prize-winning economists are warning that Trump’s proposals to cut inflation wouldn’t just fail to fix the cost of consumer spending but would make matters worse. The economists point to Trump’s “fiscally irresponsible budgets”. Trump’s bid to cut taxes, which would cost the economy at least $5 trillion, would risk accelerating an economy at a time when the Fed is working hard to slow it down to fight inflation.
- The S&P 500 Index has likely logged most of the gains it will see this year as investors are growing increasingly nervous about the stock market’s rich valuations, according to the latest Bloomberg Markets Live Pulse survey. The 2024 rally has driven the US equity benchmark to 31 record closing highs. After soaring roughly 50% since October 2022, driven by technology shares, the bull market has delivered a greater advance than the median of its predecessors going back to 1957.
- Mortgage rates in the US slipped for a fourth straight week. Despite the slight relief from the pullback in borrowing costs over the past month, rates are still hovering near 7%. That pushed new home sales in May down to the slowest pace since November and sent transactions of previously owned properties falling for a third straight month. US sales of newly built homes also dropped last month as mortgage rates remained elevated according to government data released on Wednesday.
- Britain’s housing crisis has become so bad that the next government will need to build the equivalent of another city the size of London to make up for five decades of below-target construction, analysis of official data shows. For almost five decades, developers and local authorities have failed to deliver homes at the pace of other wealthy nations in Europe or even at home in the 1960s. This will be a crucial issue in the upcoming elections.
- The Japanese currency fell to the weakest level since 1986, dropping as much as 0.6% to 160.62 per dollar on Wednesday, well past where officials intervened in the market in April, and taking losses this year to more than 12%. Against the euro, it dropped to the weakest on record. The depreciation is raising the price of imports, hurting Japanese consumers and causing growing unease among businesses. This has created speculation authorities may soon be forced to support the currency again in a bid to stem the worst selloff in the developed world.
- Nvidia stock staged a comeback on Tuesday after a multi-day sell-off that cost the US chipmaker its crown as the world’s most valuable public company. On the day, it closed nearly 7% higher, reversing three straight days of declines, which caused some investors to worry that Nvidia’s role in the AI revolution may be cooling. It has become the most expensive stock in the S&P 500. It remains up almost 140% this year, making it the second-best performer in the benchmark gauge, behind Super Micro Computer, another favourite AI play.
- Amazon.com reached a $2 trillion market valuation for the first time as an artificial intelligence-fuelled rally pushed the tech giant deeper into record territory. Shares rose 3.9% on Wednesday to close at $193.61. It is now a member of an elite club with valuations of above $2 trillion, which includes Alphabet, Nvidia, Microsoft, and Apple – the last three now being worth more than $3 trillion.
- PwC has warned that revenues and net profit for the world’s top 40 mining companies – including BHP, Rio Tinto, Anglo American, Gold Fields and South32, among others – are expected to fall further this year. In its Global Mine 2024 report, PwC said revenues for the global top 40 miners were expected to fall 6% to $793 billion this year after dropping 7% to $844 billion in 2023. (Dynasty’s offshore active managers do not have any exposure to this sector).
- French billionaire Bernard Arnault, Europe’s richest man and chair of high fashion to champagne group LVMH, has bought a stake in smaller luxury rival Richemont. The exact size of the shareholding in the owner of Cartier jewellery and Arnault’s intentions are unclear. Richemont shares rose 2.8% after the news on Tuesday. The company’s stock has gained 21% this year.
- As at Thursday’s close the S&P 500 was 0.33% up for the week.
Local News
- Negotiations between the ANC and the DA on the composition of Cabinet have stalled after President Ramaphosa altered the terms of an earlier offer on Wednesday night, with negotiators trying to rescue the government of national unity that faces collapse. Ramaphosa has reduced the number of deputy ministries offered from seven to six but has kept the offer of deputy minister of finance on the table. The DA is outraged and says Ramaphosa must stick to the initial offer or else the deal is off. Previously, BusinessLIVE indicated that the DA agreed to take a deal in which it would get Trade, Industry, and Competition as well as Public Works and Transport among others. Paul Mashatile is set to return as deputy president, while Enoch Godongwana will likely remain as finance minister. Meanwhile, Ramaphosa has called for the opening of Parliament on Thursday 18 July 2024, so he can outline the priorities of the 7th Administration.
- The National Assembly’s rules committee decided unanimously that there would be 15 permanent voting members of portfolio committees, compared with 11 members in the previous parliament. The ANC would have five members, the DA three, MK two, EFF one and all the other smaller parties combined would have four members.
- The 58 representatives of the MK party who did not participate in the initial swearing-in of MPs earlier in June finally did so on Tuesday. Among those are several people with tarnished reputations including Dr John Hlophe, the former Western Cape Judge President who was impeached for gross misconduct, Duduzile Zuma-Sambudla, Andile Mngxitama, and Des Van Rooyen.
- The rand was both volatile and speculative this week, taking its direction from the flow of news as to whether the relationship between the ANC and the DA, the two major parties in the government of national unity, would hold. The exchange rate fluctuated between R17.98/USD on Monday to its weakest point of R18.52/USD earlier this morning. In a research note, Bank of America Global Research says it is bearish on the rand due to rising political risk related to ANC-DA talks and the global backdrop. However, it expects the rand to outperform from the fourth quarter of the year. It has dampened expectations that the government of national unity will be stable.
- South Africa is at a “significant” risk of terror financing by Islamic State (IS) and authorities must closely monitor the terror financing activities within the country’s borders, according to the terror financing national risk assessment. South Africa’s current terror financing threat primarily emanates from IS, its affiliates, supporters, and ideology, it said. One of the reasons the country was greylisted by the Financial Action Task Force in 2023 was related to weakness in its anti-money-laundering system. The Financial Action Task Force announced today that South Africa remains on the grey list as it has yet to show it can investigate and prosecute complex financial crimes.
- South African Reserve Bank (SARB) Governor Lesetja Kganyago has again hinted at a tighter headline inflation policy targeting, noting that the current range of 3% to 6% was higher than the country’s peers and places South Africa at a competitive disadvantage. In the SARB’s annual report released on Tuesday, Kganyago said that the central bank must restore faith in its ability to achieve its inflation target after struggling to slow consumer price growth to 4.5% for about three years. SARB noted that banks are not charging high margins on top of the repo rate.
- A recent Statistics South Africa report showed a decline of 67,000 jobs in the first quarter of 2024, with total employment falling from 10,731,000 in December 2023 to 10,664,000 in March 2024. This decline represents a quarter-on-quarter decrease of 0.6%. Trade, business services, and mining are among the sectors that experienced significant declines in employment.
- Eskom is fending off loadshedding even through the winter period despite reduced off-take of coal from suppliers such as Exxaro Resources, which said this week that it expects a 12% half-year decline in sales of the energy commodity to the power utility. The power utility is diverting some of its local coal sales for export.
- The Legal Practitioners Fidelity Fund, which reimburses attorney’s clients if they suffer a loss caused by the lawyer, has been hacked. An entity with administrative rights successfully breached security protocols and accessed certain sensitive data. The fund has reported the matter to the relevant authority, strengthened its security, and hired an independent cyber security expert firm.
- In upholding the appeal by Coronation Investment Management against the Supreme Court of Appeal judgment in favour of the South African Revenue Service, the Constitutional Court said the previous judgement was “legally and factually unsustainable” and did not make “commercial sense at all”. The Constitutional Court ordered the tax man to pay Coronation’s costs, including the costs of two counsels – and the company will no longer be liable for the R800 million claimed by SARS. Tax commentators have called the Constitutional Court judgment “clear, smart and well-reasoned”.
- Naspers’ market capitalisation grew by close to R80 billion as the technology investment firm made good on its pledge to realise profits from ventures other than Tencent in China. With a trading profit of $24 million, Naspers has successfully achieved consolidated e-commerce profitability in the second half of the full year to March. Naspers-owned Takealot group lost R253 million for the year to March but is betting that increased taxes on Chinese exporters such as Shein and Temu will boost sales. From next month, all clothing imports will be subject to a 45% import duty and an additional 15% VAT.
- De Beers sold rough diamonds valued at $315 million at its fifth sales cycle of the year on Wednesday. This was lower than the $383 million worth of diamonds at the fourth sales cycle and the $456 million sold at Cycle 5 sales in 2023 as the northern summer is generally a quieter period for rough diamond sales.
- Rainbow Chicken was listed on the JSE on Wednesday after being spun out from parent RCL Foods. The company’s shares were listed at R4 each and will start trading on Monday. The listing is the second in two days after medical cannabis investment company Cilo Cybin became the first such entity to list on the JSE’s AltX Board on Tuesday. The JSE has been struggling to attract new listings after only three companies were listed last year. It had predicted up to 10 new listings this year.
- Former Pick n Pay CEO Pieter Boone has been paid a termination fee of nearly R16 million after the disastrous rollout of his Ekuseni strategy led the group to bring back its former boss, Sean Summers, to come and keep the company afloat. Pick n Pay said in its 2024 annual report released on Wednesday that Boone, who left the role in September, would receive total remuneration in the period, including the termination fee, of approximately R25 million – about the same as he was paid the year before.
- As at the time of writing the rand was 1.3% weaker and the ALSI was flat for the week.
Sources: Dynasty, Business Report, eNCA, ITWeb, BusinessLIVE, CNN, Bloomberg, News24, Daily Maverick, Moneyweb, etc.
