Geopolitical tension overshadows better news on global growth

The week in perspective written by Lisette IJssel de Schepper

There was good news for global growth this week – with China's Q1 GDP beating expectations (see international section) and the IMF lifting its global growth forecast for 2024 once more. ?SA economic data releases, however, were mixed, with a welcome downtick in CPI inflation but relatively poor internal trade data.

Most of the world’s economic policymakers were in Washington for the IMF/World Bank spring meetings, which took place against a particularly tense geopolitical backdrop. Over the weekend, Iran launched a huge drone and missile attack on Israel, while Russia seems to be upping the ante with its invasion of Ukraine. The Iranian attack was, however, anticipated in advance, and with help from allies, Israel was able to limit the damage. Western leaders urged Israel to show restraint in its response to Iran – but Israel was firm that it wanted to make its “own decisions”. There are reports that Israel launched an attack on Iran overnight. At the time of publishing, it is unclear what the attack entailed, how damaging it was and whether it was only directed at military sites or wider. Earlier in the week, Iran warned that it would review its nuclear stance should Israel threaten its atomic sites.

Despite (more) armed conflict involving Russia and Iran – big oil producers – the Brent crude oil price was fairly well-behaved this week (until this morning) and even dipped below $90/barrel on Monday. A possible retaliation from Iran was expected, which meant that the actual event did little to the price (if anything, the limited damage contributed to Monday’s decline as markets may have expected worse). The spot price was down by 1.3% yesterday from last week Thursday and traded around $88/89 per barrel for most of the week. The price spiked above $90/barrel this morning as markets turned risk-off following news of the Israeli attack on Iran. The current demand and supply fundamentals would normally suggest a lower oil price. This means there is a significant geopolitical risk premium in the price. However, there is concern that a sustained spike in the oil price would fuel inflation and reverse the expectations for rate cuts – with detrimental impacts for economic growth (and thus oil demand and prices over time). This should keep some sort of cap on price gains. That said, spikes (temporary or more sustained) in the oil price remain a real possibility. While mulling over more sanctions on Iran, the US will reimpose oil sanctions on another oil producer, Venezuela. In October 2023, the country was given a six-month reprieve on the condition that it would hold a fair election this year. Instead, president Nicolás Maduro has banned the main opposition party from participating.

The theme of ‘higher for longer’ interest rates is becoming increasingly true for the US, but not necessarily for the major banks in Europe. At the spring meetings, Christine Lagarde confirmed that the European Central Bank (ECB) bank would likely cut rates soon (barring any major surprises that could derail the slowdown in inflation – oil prices being top of mind). There were conflicting comments from Bank of England (BoE) officials this week, but some analysts now see the first cut in May. The situation in the US is, however, very different with sticky inflation, solid economic data (the bumper retail sales report is unpacked in the international section below), and recent ‘Fed speak’ all signalling that interest rates could remain on hold for longer. Indeed, some market players are suggesting that keeping rates at current levels will not be enough and that further hikes may be necessary to curtail inflation in the US. This is not our baseline view, but the probability of such a scenario is becoming increasingly likely. Moreover, the IMF’s forecast for US GDP growth in 2024 is remarkable. Not only is growth expected to accelerate from 2023 (2.3%), it is expected to be double the rate of any other G7 country. The IMF was critical of the ballooning fiscal deficits in the US (and China) and argued it would not only complicate its path to lower inflation but also pose significant risks to the global economy. The IMF estimates that the US will record a deficit of 7.1% to GDP next year – this is more than triple the average of other advanced economies. In all, the 0.6%pts upward revision to US growth contributed to a 0.1%pt upward revision to global growth to 3.2% in 2024. This is unchanged from 2023, and set to remain unchanged at 3.2% in 2025.

In contrast, the IMF is downbeat about SA GDP, with growth of just 0.9% expected in 2024. This is below our (downwardly revised) growth forecast of 1.3% and the consensus view for 1.1% growth. Clients can access our latest forecast data here, with an executive summary of the narrative underpinning the forecast here – both were updated this week. The IMF’s forecast for 2024 is now almost a full percentage point below the fund’s October view – global growth was upwardly revised by 0.3%pts over the same period.

Coming back to financial and commodity markets, the rand suffered from the broad-based dollar strength as markets further scale back US Fed rate cut expectations. Of course, the strong dollar or weaker euro (and rand) may prevent the ECB (and SARB) from cutting interest rates. While both have made it clear that they watch, not follow, the Fed, they are definitely keeping a hawk's eye on currency developments. Weaker currencies tend to fuel inflation, and should the banks no longer see inflation slow, rate cuts will be off the table. Unfortunately for domestic ?consumers, this is probably more true for the SA than the Eurozone as our currency is under more pressure amid SA (and EM) idiosyncrasies. Indeed, the rand lost 2% against the dollar, but also lost ground against the euro and UK pound last week. The rand weakened amid this morning’s risk-off trade. After a sharp increase the week before, the 10-year SA government bond yield was largely unchanged. US 10-year bond yields have been firmly above 4.5% in recent days on the ‘higher for longer’ narrative.

Read the Domestic and International sections of the rest of the publication here.

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Editor: Lisette IJssel de Schepper

Tel: +27 (21) 808 9777

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