In storytelling, a ‘rule of three’ often applies.
Over the past 15 years, the idea of a ‘Goldilocks’ global economy – not too hot, not too cold – has been on investors’ radar screens. In this environment, there is enough economic growth to keep company earnings ticking over, but there is no overheating that results in elevated inflation, forcing central banks to hike rates.
One of the timeliest indicators of global growth is provided by the purchasing managers’ indices produced by S&P Global. These are also constructed to be easy to read, with a level of above 50 indicating expansion. Firstly, though inflation might still be sticky and elevated, in most countries it is no longer at a crisis level and therefore rates don’t need to be at crisis levels. Central banks can be more balanced in their assessment of the inflation and growth outlook and set interest rates with future inflation in mind. This means there is some scope for rates relief.
Supply-side problems, notably load shedding, has been a common problem on both the growth and inflation front. Read: South African assets primed for post-election rally, but old challenges persist But much else needs to improve in terms of infrastructure provision and the quality of public services and regulation to get the country to sustainable growth rates above 3%. We’ll also need lower interest rates, both short-term policy rates set by the South African Reserve Bank , but also lower bond market rates.
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