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Summary of views
Growth: We see downside risks to growth in SA relative to our forecast, prompted by higher energy prices, excessive load shedding and slower global growth. Our forecast for real GDP growth in 2022 is 2%, while the 2023 estimate is 1,9%.
Inflation: We continue to see headline inflation peaking in July at 7,7% before easing towards 6,6% by year-end. We see inflation falling below the 6% upper target level only in June 2023, with average annual CPI forecast at 6,6% for 2022 and 6% for 2023. A weak rand exchange rate, an oil price above USD100/bbl and still-elevated food inflation are key drivers of elevated inflation projections over the next four quarters.
Monetary policy: SARB raised the repo rate by 75 bps, in a much more hawkish split-vote decision. With this action, which took the repo rate to 5,50%, SARB is moving ahead of its own repo rate curve. SARB’s QPM forecast for the repo rate is now 5,61% by the end of 2023 (up from 5,3%). Whatever hike SARB effects at the next MPC meeting would put it ahead of its own, current QPM repo rate curve. Following the more hawkish stance by the MPC, we have revised our repo rate forecasts higher, to 6,25% by year-end (from 6,00% previously) and 6,75% by the end of 2023 (from 6,50% previously).
Fixed income: With higher US real yields, we adjust our three- to six-month fair-value estimate for the 10-year yield to 10,4% from 9,9% previously. On a 12-month view, we continue to see upside for yields, holding a fair-value estimate of 9,3% for the 10-year yield in 2023.
Global developments: Global inflation rates continued to rise in June, driven by higher input costs
IMF revises global growth forecast lower, cites inflation as a key risk
Global central banks chase inflation with higher interest rates
Fed hikes by 75 bps in July, ECB surprises the market with +50 bps, BoE persists with hikes
SA’s real economy: SA 2Q and 3Q macroeconomic data reveals sluggish growth may persist
The rand and key risks: USDZAR U-turns in July, driven by USD weakness. EM FX momentum driven by a weaker USD
Other markets: Equity indices post relief rally due to less hawkish Fed
Source: Bloomberg, Nedbank CIB Markets Research
Disclaimer – The views and observations in this report represent the analyst’s own and not the Multivest nor Nedbank Group house view.
Multivest Chartbook - July 2022
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Disclaimer: The investor is liable for CGT on any transactions in the units of the underlying unit trusts within the wrap funds. Compulsory investments are not subject to CGT. Performance is calculated using net returns(after fees) of the underlying unit trusts, and quoted excluding wrap fund fees. Performance quoted is pre-tax. Fund performance numbers shown are for a notional portfolio and do not reflect the actual performance of the client invested in the wrap fund due to timing differences of investments or disinvestments of the client. Benchmark returns for CPI are based on actual published returns and an estimated one month return for the month of the report date. ASISA Benchmark returns are the ASISA returns available as at the time of reporting.
A worldwide race to reach the terminal rate … and full-blown economic recessions?
Economic growth will be the victim of aggressive interest rate increases across the globe as central banks upped their efforts to contain high consumer price inflation (CPI). An approach of gradualism made way for front-loaded hikes, which may see many countries reaching terminal rates by end 2022.
The US entered a technical recession in Q2 2022 (a technical recession occurs when production contracts for two consecutive quarters), but this will not deter the Federal Reserve from being aggressive. Economic growth contracted by 0.9% in Q2 2022 (from Q1 2022), following a contraction of 1.6% in Q1 2022 (from Q4 2021). Less investment and government spending were the main causes of the contraction in Q2 2022. However, household consumption expenditure grew at a brisk pace, which makes it easier for the Fed to follow its previous two rate hikes of 75 basis points each with another large increase (75 or 50 basis points) in September. The US may reach a terminal rate of 3.25% - 3.5% by end 2022 – if CPI slows in line with the Fed’s expectations (from the current 9.1% and a target of 2%).
The European Central Bank (ECB) surprised markets when it started its interest rate hiking cycle with a 50-basis point increase (expectation was 25 basis points following the ECB’s earlier guidance of 75 basis points over two meetings). CPI in the Euro area increased to 8.6% in June, way above the target of 2%. The ECB is expected to stray from its guidance of 75 basis points over two meetings and is likely to follow with another hike of 50 basis points, given high CPI and further pricing pressure from energy (gas and oil). Russia’s decision to decrease gas flows to especially Germany caused further upward pressure on gas prices, which now needs a significant decline in demand to reduce the price. However, this will affect production and economic growth going forward – especially after the EU decided on a voluntary reduction of 15% in gas usage to secure more supply in the winter months.
In the UK the Bank of England (BOE) expects CPI to approach 11% from the current level of 9.4% (and target of 2%). The BOE increased interest rates by 25-basis points in June to 1.25%. The expectation is for an increase of 25 basis points at its next meeting. Although economic growth will be a victim of rate hikes to above 2%, a prominent BOE member said the risks of hiking too little too late outweigh the risks of doing too much too early – referring to the danger of high CPI becoming embedded in the economy.
These acts of central banks, coupled with other shocks which hit the world economy such as COVID- 19 outbreaks and lockdowns in especially China and negative spillovers from the war in Ukraine, contributed to the International Monetary Fund downgrading its world economic growth outlook. The forecast is for growth to slow from 6.1% last year to 3.2% in 2022 – 0.4 percentage point lower than the forecast of April 2022 (3.6%). And then there is China’s more aggressive attitude towards Taiwan, which started speculation of a military “take-over” of Taiwan and war with the US, should the latter interfere, which may increase uncertainty, CPI and growth going forward.
In South Africa, the SARB increased the repo rate by 75-basis points in July to 5.5% (following 50-basis points in May) and the odds are for another 75 basis-points in September and 50 basis points in November to reach a terminal rate of 6.75%, aimed at reducing second round CPI and inflation expectations (CPI increased to 7.4% in June vs a target point of 4.5%). The other big announcement came from Pres. Ramaphosa, who revealed measures to introduce large power generation into the system. Together with current projects, this may add 10 000MW to the system and increase investment, while the national treasury will take over some of ESKOM’s debt – all positive for future growth and should boost the country’s credit rating.
Multivest Economic Division