Economic growth prospects across the Eurozone are dire, with economists pencilling in negative numbers for Q4 2022 and Q1 2023. And prospects for Chinese growth, which usually underpin the global economic growth equation, are moderate following a bounce in Q3 2022. As for the United States (US), the jury is out on whether or not the world’s largest economy will slip into recession. Kamp notes, however, that historically whenever the yield on two-year US Treasuries exceeds the yield on 10-year US Treasuries, as they do presently, a recession has typically followed. Positive factors such as a high level of profits in the US firms relative to GDP and strong non-farm payroll numbers mean that the US could still avoid recession. Against this, the Eurozone is expected to experience recession and could be the deciding factor in the ‘global recession or not’ debate.

Although there are signs that the Fed should bring inflation under control, there are still plenty of factors keeping prices high in the world’s largest economy, most notably the upward pressure on wages due to a severely disrupted US labour market. There has been significant reluctance among those aged 55 and over to return to work post-pandemic, creating a labour force imbalance in the US that South Africa would love to have. “There are over 11 million job vacancies in the US versus around six million unemployed people; there are just too few people in the US labour market,” explains Kamp. “Young people went back to work after the pandemic, older people did not – and the 55 years and older age group is actually 25% of the US labour force.”

The US is also fighting the legacy of a multi-year period during which fiscal and monetary policy has been too loose. The bottom line, warns Kamp, is that “throughout history, periods of loose fiscal policy and money supply growth have resulted in the greatest inflation episodes”. What this means is that the Fed is not yet done with its rate-hiking cycle. “The guidance we are getting from the Fed is that they will have to keep pushing [interest rates] onwards and upwards, to just over 4.5% on the Fed Fund’s rate next year – there is significantly more tightening to come, and this is spilling over into the rest of the world, including South Africa,” said Kamp.

The South African economy is in a tough spot, with a few positive ‘lights’ struggling to pierce the doom and gloom caused by inflation; poor economic growth; and Eskom’s ongoing power supply woes. “South Africa’s fiscal position is looking relatively better; but the rand, at about R18 against the US dollar is trading very far from where we would consider to be “fair” value, at around R14,” says Kamp. He adds that the more recent, significant divergence probably has more to do with dollar strength than rand weakness, and that, over time, the rand should depreciate in line with the inflation differentials with the country’s major trading partners. Provided the South African Reserve Bank (SARB) succeeds in anchoring inflation at a low enough level, the rand should find support and over time trend towards “fair” value.

Low growth remains the biggest threat to South Africa’s fiscal outlook. “Against a global backdrop of tightening financial conditions, and higher real interest rates, South Africa is paying a very high real interest rate on our newly issued long-term debt… It is far too high in relation to the real growth rate in our economy,” says Kamp. Failing a significant improvement in economic growth, the country’s debt-to-GDP ratio will climb from around 70% currently, with more and more of the country’s budget being diverted to servicing debt. It is also expected that government will add around 3% points to the debt ratio over the medium term (potentially taking on R200 billion worth of Eskom’s debt).

“On the one hand, this would be a positive development, because stabilising Eskom’s finances and improving the long-term electricity outlook would be good for growth; the negative is that the overall balance sheet of the state remains weak,” says Kamp, using a graph of gigawatt hours of electricity produced by all producers in South Africa to illustrate the ‘Eskom effect’. The state-owned energy utility’s electricity availability factor recently fell to a low of around 53%, and unless we see an improvement back to at least the 63% level, it will continue to weigh on growth. Add to this the recent Transnet strike and the potential for the country’s greylisting by the global Financial Action Task Force (FATF) in February 2023, and South Africa’s 2023-4 growth prospects have dimmed.

There are some positives, including the base effects of energy and food prices reducing inflation; the SARB raising interest rates early in the cycle to curb inflation; potentially up to R100 billion to R120 billion or so in revenue overrun thanks to high commodity prices.

There are some promising signs that global inflation is settling down somewhat. “We are beginning to see a thawing of some of the factors that have been driving inflation higher since the start of the pandemic,” says Kamp. “Global supply chains are beginning to mend; manufacturing prices paid and received are coming down quite nicely; year-on-year commodity price changes are expected to be more benign heading into next year. We are confident that inflation is coming down, but we do not know how fast or how low it will go.”