The year is off to a rocky start for financial markets, with the rand-dollar exchange rate slumping by more than R1.00/$ since the middle of December (from R17.86/$ to above R19.10/$ by January 10) while long-term interest rates (the yield on 10-year government bonds) spiked by about 0.5% (from 10.18% to 10.6%).
This is to a large extent underpinned by the rout in global financial markets, which reflects the elevated uncertainty about the policies that will ultimately be implemented by the incoming Trump administration, with the president-elect proposing potentially inflationary policies during his recent election campaign.
The US Federal Open Market Committee (FOMC) cautioned about these inflation risks at its interest rate meeting in December, and investors significantly trimmed their forecasts for US interest rate cuts this year. This also puts the interest rate relief likely to be provided by the South African Reserve Bank (Sarb) this year at risk. That said, the exceedingly weak momentum in domestic prices in recent months, along with generally tame inflation and wage pressure still tilt the odds in favour of modest further interest rate cuts, in our view.
The downside surprises in inflation at the end of last year partly counteract the impact of the rand’s slump on the inflation forecast trajectory, though our unchanged 4% consumer inflation forecast for 2025 is premised on a recovery in the rand in due course. While financial markets are understandably cautious in anticipation of the policy changes that will ultimately be announced by the US president-elect (potentially as soon as this month), these markets are likely to recover if, as we expect, the policies are generally more pragmatic than the extreme possibilities currently discounted.
This growth recovery should be quite broad-based, with both consumer spending and fixed investment likely accelerating this year
Nevertheless, the reverberation of global financial market trembles through South Africa's financial markets will have an economic impact in itself. The increased borrowing cost (higher longer-term bond yields), depending on how long the spike lasts, will negatively impact the fiscus. The weaker rand will (if everything else remains the same) lift the inflation forecasts if it persists.
But while South Africa's financial markets can’t escape the global tide, we still expect the economy to be relatively more resilient: out of 22 key emerging and advanced economies that we track, South Africa's growth improvement should be the fourth largest this year (from last year). This mainly reflects the expected benefits from the improvement in confidence since last year’s election as well as ongoing policy reforms, ranging from the electricity reforms ultimately responsible for the reduction in load-shedding since early last year, to the gradual improvement under way in the logistics sector, to the visa and spectrum changes implemented over the past few years.
This growth recovery should be quite broad-based, with both consumer spending and fixed investment likely accelerating this year. Consumers are expected to benefit more meaningfully from interest rate and inflation relief, which will hopefully not be tempered much by tax increases in the budget next month.
Of more interest is the strength of the fixed investment recovery, which follows a relapse in 2024 after a spike in energy investments in 2023. In most sectors, companies have in recent years continued with their maintenance investment (that is, replacement investment), without expansionary investments. In other words, the economy’s capacity stagnated.
Our forecasts imply that this may well improve this year, with some expansionary investment (in other words, growth in the total capacity of the economy). Amid considerable hope and hype around the improvement in sentiment (and indicators such as business and consumer confidence) since the middle of last year, this is the ultimate test of the impact of the political and policy changes under way. This also holds the key to a virtuous growth cycle in which the improvements become self-reinforcing. In what will likely be a particularly volatile and noisy year ahead, our domestic focus will thus be on guidance whether the aggregate private sector is starting to invest beyond maintenance investment.
• Moolman is head of South African macroeconomic research at Standard Bank Group
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