Old Mutual Investment Group has joined Standard Bank and Absa in moderating growth expectations for SA, citing slowing momentum in global growth just as central banks hiked interest rates to curb rising consumer inflation.
Addressing a virtual media conference on Wednesday, chief economist Johann Els said SA’s economy is likely to grow 2.3% in 2022, slowing from a projected level of 5.5% in 2021.
Els said there was potential risk of a policy error in the US, where the Federal Reserve was under pressure to rein in consumer prices which have been running at four-decade highs.
“The Fed could potentially hike a total of 100 to 150 basis points this year, plus starting a balance sheet reduction in the second quarter,” Els said.
“This is quite a hawkish pivot from only a few months ago. Given slowing growth indicators and with inflation expected to ease markedly over the course of the year, the risk of policy error remains large.”
Policymakers in developed markets in particular have an unenviable task of managing rising price pressure by tightening policy.
“Rates are going up, but how fast they go up will depend on how panicked the Fed and other central banks are,” said Urvesh Desai, a portfolio manager at Old Mutual Investment Group.
The aggressive increases in rates in the US could draw capital from emerging markets such as SA, which are invariably perceived to be risky. This could weaken the rand and worsen domestic inflation.
However, the rand has been relatively resilient against the dollar despite the rise in US treasury yields, which have boosted the dollar.
The relative resilience in SA’s currency is partly attributable to rising prospects of higher rates in the eurozone and other developed markets, which have limited upside move in the dollar, according to Els.
The SA Reserve Bank is also likely to further hike rates by a cumulative 100 basis points in 2022 to respond to high inflation, which is expected to average 5% in 2022 from a previous estimate of 4.6%, Els said.
A higher domestic rate will also support the rand.
Turning to investment markets, Desai said tighter liquidity and rising rates were a major risk to global bond returns.
“We therefore prefer global equity and hold no global government bonds,” Desai said.
“The bull market in commodities means SA earnings are high, but valuations are low,” he added. “Typically, financials and industrial companies outperform in this part of the cycle; and given the outlook for consumers and interest rates, we prefer banks to retailers for now.”
Last week, Standard Bank said it expects SA’s economy to grow 2% in 2022, slowing from its projected level of 4.9% in 2021 and underscoring the crucial need for structural reforms to unlock the country’s growth potential.
With the ruling ANC due to hold its elective conference in December, Standard Bank chief economist Goolam Ballim said reorganisation of the party’s top six officials was critical for President Cyril Ramaphosa to foster long-lasting reforms.
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