Q2 Macro Economic update – Summary
This post is a heavily summarised version of our quarterly economic update. For the full update, please talk to your financial advisor.
In the second quarter of 2023, several significant macroeconomic themes have emerged:
Global Themes
Global Monetary Policy Normalization: The Federal Reserve (the Fed) is nearing the end of its aggressive rate-hiking cycle that began in early 2022. Declining US inflation rates and a tight labor market has influenced the Fed's decision to pause rate hikes for now. Despite this, the Fed remains focused on its 2% inflation target. This policy shift from low to higher interest rates is impacting various sectors, particularly highly leveraged companies.
Inflation Trends: Inflation in the US has decreased from its peak, driven by an easing in supply chain constraints and lower oil and food prices. However, core inflation remains more sticky underpinned by high services inflation, due to a tight labor market and wage growth.
Global Economic Outlook: The world economy is returning to normalcy, supported by China recovering after strict lockdowns. Despite uncertainties, the IMF does not predict a global recession. The US, however, is still facing some recessionary risks. Geopolitical shifts, including Russia's actions and China's rise, contribute to heightened global uncertainty.
Technology and Digitalization: The tech sector continues to grow, with generative AI gaining prominence. The success of platforms like ChatGPT signifies the widespread adoption of AI. While this trend has transformative potential, concerns about cybersecurity, alignment and ethical considerations persist.
Local Themes (South Africa):
Political and Economic Instability: Political shifts and ideological differences within the ANC continue to impact South Africa's policies. Some of the national government's decisions, including supporting Russia and passing the NHI bill, raise questions about the government’s political ideology and its implications for South Africa’s growth outlook and stability.
Energy Crisis: Loadshedding and unreliable electricity are significant challenges to economic growth. Efforts to address energy issues through alternate energy sources and regulatory changes are crucial for business confidence and economic prospects.
Business Confidence: Ongoing policy uncertainty, corruption, load-shedding and the lack of structural reforms have eroded business confidence. The private sector's involvement and market-friendly policies are needed to boost the economy.
Government Fiscal Position: Budget deficit projections are worsening due to load-shedding, weaker commodity prices, and public sector wage agreements. Fiscal consolidation efforts face challenges, affecting investor sentiment and bond yields.
Rand Uncertainty: The South African rand has been volatile due to political and global factors. While it is currently undervalued compared to its purchasing power, global risk off sentiment, the firm dollar, the deterioration in our terms of trade and our political own goals warrant cautiousness.
Overall, the global economic landscape is characterized by evolving monetary policies, inflation dynamics, and technological advancements. Locally we continue to face political headwinds that suppress consumer and business confidence. We have considered these factors in our investment strategy and positioned the funds accordingly. For more information on what we have done in the funds, get in touch with your financial advisor.
