Surging natural gas and coal prices amid a powerful economic restart have exposed a lopsided transition toward low-carbon power. We still see an orderly transition in the medium term – but with bumps on the way that could lead to growth and inflation volatility.
A failure on government’s part to exhibit any sense of urgency to make hard decisions regarding South Africa’s recovery process will exacerbate the country’s current economic challenges. A lack of economic growth over close to a decade – particularly compared to South Africa’s emerging market peers – has meant that the country’s income has not been able to accommodate either population growth or spending patterns.
Worldwide Google searches for the term stagflation are at the highest level in a decade. Bloomberg reported that its news service has published a record number of articles on the topic. There is clearly a worry that current elevated inflation will persist and coincide with global economic stagnation.
Prices have climbed around the world, with commodities prices surging and U.S. inflation hitting a 13-year high. It’s the first time since the 1970s that a supply shock is the main culprit. This is where the comparison ends. There’s no risk of 1970s-style stagflation, in our view. Economic activity is increasing briskly and has room to run.
We still see a low risk of technical default by the U.S. and expect the debt ceiling debacle to ultimately resolve. The broadening economic restart keeps us tactically pro-risk, yet we see a narrowing path for risk assets to push higher and markets more prone to temporary pullbacks. Key events toward the year end, including the lapse of the temporary debt ceiling rise, could potentially trigger market volatility. We favor looking through market jitters against the backdrop of the restart.
Every once in a while, investors collectively decide that risks that were lurking in the background are now worth paying attention to. When that happens markets can endure serious wobbles. This is pretty much September’s story, when a perfect storm of three risks suddenly loomed larger than before: inflation (and interest rates), Chinese property, and the US debt ceiling.
The “social distancing winners” of 2020 were undoubtfully the largest beneficiaries of lockdown, while many cyclicals were left behind. Positive vaccine announcements in November, vaccination progress since and continued fiscal stimulus have paved the way for a post-COVID world.
South Africa is in urgent need of implementing the economic reform policies it has promised to do, but failed to deliver on, to turn the South African economy around. These were the words of warning by Dr Thabi Leoka, founder of economic consulting and advisory company Naha Investments, at the recently held Allan Gray Investment Summit, who painted a grim picture of the state of the SA economy.
Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za