I am in Cape Town, and it is rainy and cold. In Johannesburg, the summer highveld rains are still a feature, but now with a nip in the air. Autumn is upon us, and winter is not too far away.
The global economy is at the same point in its cycle. The strong momentum towards the end of 2024 has given way to caution, and we are looking for the next source of growth.
In the US, the largest economy in the world, the optimism of 2023 and 2024 is fading rapidly. Equities are lower, rates are lower and the dollar is weaker, consistent with rising growth risks. All indicators seem to have suspended their declines for now, but the incoming economic data is still mixed and policy uncertainty continues to depress sentiment.
Since 2022 the US economy has been the shining light against a bleak global backdrop. That global growth remained at about 3% a year was thanks to the US, which maintained momentum at above potential in 2023 and 2024. However, the US now seeks to rebalance its economy, and the authorities appear ready to tolerate some economic pain. Global growth needs a new champion.
In China, the second-largest economy, authorities have announced plans to stimulate, but only enough to keep growth from slowing below the 5% target. Chinese growth continues to add to global output, but is a shadow of the high rate of the past.
Stimulus in China spurred a strong rebound in the wake of the global financial crisis in 2010 and the commodity meltdown in 2015. Alas, China is now more interested in rebalancing its economy rather than supercharging it, and is no longer in the business of rescuing the global economy.
Which brings us to Europe, the third-largest economy. We can no longer rely on the US or China to propel us and Europe appears to be promising to step into the breach. At least that’s how markets have been trading.
Europe is expected to increase spending on defence and undertake fiscal expansion overall. European equities have rallied, interest rates are higher, and the euro is stronger, based on an improvement in sentiment and incoming data. There is some rotation out of US assets into European assets as a result.
But is the European story strong enough to offset a weaker US should the current trend continue? I best answer is, it’s complicated. The heavy lifting of the US and China were supported by fiscal expansion. Collectively, Europe has space for material fiscal easing. But unlike the US and China Europe is fragmented.
While some countries have the fiscal room many do not. Germany is the largest economy in Europe and the eurozone, and, at less than 65% of GDP, has a low debt level compared with other large countries. The second-largest country in Europe, the UK, has debt in excess of 100% of GDP, and no fiscal space. France, the third largest, is sitting at just under 100% of GDP.
Italy is a fiscal basket case. Germany has walked away from its tight fiscal orientation, but it cannot do it alone. That suggests Europe’s ability to fill a breach left by the US is circumscribed, which matters a lot for asset prices.
The relative stability in local assets in the face of turbulence in offshore markets has been interesting in this context. The dollar has weakened, and the rand seems to have just shrugged it off. I like the rotation out of US assets, and I like the rotation into European assets. However, I remain wary of risky assets, including the rand and local equities.
Both have simply shrugged off US equity weakness, but it is important to remember the US remains the key economy and market for global valuations. The rand will not be able to also shrug off a US economic meltdown. Winter is coming.
• Lijane is global markets strategist at Standard Bank CIB.
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