In a changing global economy, where does South Africa's future lie?

In a changing global economy, where does South Africa’s future lie?

When the facts change, I change my mind. What do you do, sir?” A statement variously attributed to Keynes, Churchill, and the economist Paul Samuelson, but who first coined this quoted line is not important. The point is that dogmatism rarely pays off.

Objective analysis of data is the best way to interpret complex systems.

When the data changes, it is best to review one’s views on what is happening, both in the economy and how this affects the broader geopolitical context.

Last week’s US inflation data showed that the realities of the US economy are changing. Although inflation started to trend downward two months ago, the speed of this decline has remained questionable.

a lot, Including this columnist, for fear that the rate of decline has begun to stabilize, which necessitates further raising interest rates from the Federal Reserve to force it back to the target area. This could have had dire ramifications for the economy.

Last week’s numbers provided reassurance on that front.

Core inflation, which excludes volatile food and fuel prices, rose less than 2% in June. Goldman Sachs called it a “turning point”. For Standard Chartered, this was a “game changer”. Written by Ethan Wu financial times That “good news is good news. Inflation seems unstable.”

Market optimism

Markets have since been broadly bullish. Stocks rose, while the two-year US yield – a leading indicator of short-term interest rate expectations – fell 25 basis points to 4.73%.

This reflects moderate inflation, which should mean interest rates don’t need to go up, and stay there for as long as the market (and columnist) fears.

Of course, this data, like any data from a complex system, is incremental.

This does not suggest a “soft landing” — that a return to pre-pandemic inflation, stable interest rates, and resilient growth is a done deal. But the chances of that happening have increased, and markets reflect this optimism. Likewise, this is not to say that a recession cannot happen, but that a recession in 2023 or even 2024 seems increasingly unlikely.

Where this leaves emerging markets like South Africa matters, both economically and geopolitically.

First, moderate US inflation should be a net positive for riskier markets like South Asia as investors start looking away from compelling returns.

The markets seem to confirm this assumption. Since mid-June, South Africa’s 10-year government bond yield has fallen by nearly a full percentage point, and is now trading at 11.72%, while the rand has strengthened nearly 9% since June, and is now nearly 18 rand to the dollar.

If inflation data from the US continues this downward trend, one can expect more strength in stocks, bonds and the South African rand.

Second, the outlook in other parts of the global economy — In particular, China – not positive. Data released this week showed that China’s economy lost more momentum in the second quarter, with gross domestic product expanding 0.8% versus the previous three months, as slumping exports, weak retail sales and a moribund real estate sector weighed on growth.

Read more at The Daily Maverick: The Chinese economy has faltered, with huge geopolitical ramifications for South Africa

Perhaps the pandemic, the war in Ukraine, and the ensuing energy crisis are the factors that finally combine to disrupt the authoritarian and semi-free market economy.

China’s hybrid political economy simply has not managed to evolve and adapt quickly enough to the fluctuating and shifting global macro fundamentals, exposing its inherent contradictions.

Free markets like the United States and Europe, with their independent monetary authorities and accommodative political systems, are simply better placed to navigate such choppy seas.


Finally, this economic data has very real geopolitical implications.

Over the past few weeks, many commentators have been amazed at the transformation of two very important actors.

In one week, Turkish President Recep Tayyip Erdogan endorsed Sweden’s accession to NATO and announced Turkey’s desire to resume membership talks with the European Union, a startling shift from someone who had always carefully balanced his interests between East and West.

Then it was Indian Prime Minister Narendra Modi’s turn. In quick succession to state visits to the United States and France in June and July, he signed a number of important defense and technology agreements with Western partners, while the language in meetings with Presidents Joe Biden of the United States and Emmanuel Macron of France was unusual. Excessive and affectionate.

Unlike Turkey, which is of course (sometimes reluctantly) part of the Western alliance through NATO, India is still not formally aligned. But these two leaders may have seen the direction in which economic trends are moving, which has forced them to reconsider their relations with Russia and China. It is clear that they are now looking west for crucial military and technological support.

All these changing economic and political realities raise questions about the position of South Africa.

Again, looking at the trend lines, the country is heading east, increasingly in orbit around China and Russia.

ANC politicians would do well to look at the changing data, and on that basis change their minds about where it is best to take the country. DM

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