South African business owners should position their businesses for the likelihood of central bank interest rate increases over the next two years. Moreover, local businesses that are exposed to European and Chinese markets should take heed of negative economic indicators in the Chinese and European markets. These are some of the findings in business interest organisation Sakeliga’s new complimentary quarterly economic update, which is produced in collaboration with ETM Macro Advisors and was released today.
“The analysis for September 2018 suggests that the South African Reserve Bank (SARB) will feel strong pressure to increase rates to protect a weakening rand, especially following yesterday’s Q2 GDP shock and the current panic in emerging markets. As of September 2018, the financial markets anticipate three to four interest rate increases of 25 basis points (0,25 of a percentage point) each over two year,” says Gerhard van Onselen, senior analyst at Sakeliga.
Van Onselen warns that interest rate increases are by no means guaranteed. “The market’s expectations for rate increases need to be tempered with an understanding that the SARB may also feel pressure to cut rates amid mounting structural economic weakness, sizable government budget deficits and political pressure. This even though, in our estimation, rate cuts do not inherently support savings in the long run, investment, capital growth and employment.”
“Our recommendation to our members is to position themselves for an environment in which three to four 25 basis point interest rate increases over two years are more likely than rate cuts,” Van Onselen says.
Sakeliga’s new economic update report aims to distil important economic trends that affect most businesses in South Africa. “Our report contains a range of macro-economic barometers, local and international economic insights, as well as concise macro-economic considerations for corporate strategy, which we believe our members and the broader business community in South Africa will find valuable. We plan to update the report on a quarterly basis,” Van Onselen explains.
The update for September 2018 shows that general business trading conditions remain under pressure. This, Van Onselen comments, has been strongly confirmed by two quarters of poor GDP growth (the first and second quarters of 2018) among other poor economic numbers.
The September 2018 update also highlights the marked growth recovery of the US economy, which, according to Sakeliga, may lend support to local businesses that are exposed to US markets. However, declining leading indicators in various European countries, a weakening in the growth of Chinese exports, and a dollar-measured decline in emerging markets’ stock indices, point to a potential for global economic slowdown. Sakeliga emphasises, however, that this does not necessarily mean a full-blown recession, especially when one considers the strong current expansion of the US economy.