David Crosoer, Chief Investment Officer at PPS Investments

Global growth is expected to remain above trend but is expected to slow from 2021’s strong rebound, with the Economic Cooperation and Development (OECD) forecasting 4.5% global growth in 2022, compared to its 5.6% expectation for 2021. South Africa’s anticipated slowdown is even more dramatic with just 1.7% growth expected in 2022 compared to 5.2% in 2021.

Our base-view remains that the global macro environment is still broadly supportive for growth but expected US Federal Reserve interest rate tightening and a Chinese economic slowdown both provide possible headwinds.  

Closer to home, the implementation of structural reforms and improvement in investor confidence would be positive surprises for South Africa, where growth expectations for the coming years remain lackluster. 

Why is the US Federal Reserve needing to hike interest rates? 

US Federal Reserve committed to keeping interest rates near zero and tolerate current inflation above its 2% target, but the recent sharp spike in US inflation has meant that it has now increased by at least 2% p.a. for an extended period.    

The US Federal Reserve is now expected to raise short-term interest rates at least three times in 2022 (and possibly from as early as March 2022). Importantly, these increases come from a period where the US Federal Funds Rate has been kept at near zero levels to artificially help the economy recover from the COVID lockdowns.  

The market always anticipated that the US Fed would need to hike rates, but the tightening cycle is coming sooner than previously expected, because strong employment growth and high inflation make it harder to argue that the economy is still operating significantly below full capacity.    

Do you anticipate that the inflation problem will go away? 

It is difficult to assess how soon inflation could revert to less elevated levels, and it is possible that the US Federal Reserve will need to hike rates aggressively, but this is not our base case.  

SA inflation should remain in the target band of 3% to 6% over the foreseeable future, but the SARB has indicated a further 2.75% cumulative interest rate increase may be possible during this cycle, even if inflation remains relatively contained.  

Is there anything to be positive about? 

There is a possibility that central banks will not need to tighten interest rates aggressively, and global economic growth could remain relatively strong.  

Despite the recent spike in developed market inflation, the gradual normalisation of global interest rates, and modest inflation, would be a positive development if it can occur in an orderly fashion. Most medium-term expectations of inflation remain contained, and it appears that the US Federal Reserve is still targeting a neutral Federal Funds Rate not much above 2%. Given how quickly the market has priced in interest rate increases in 2022, a more dovish response would be a welcomed surprise.   

The publication of the first installment of the Zondo commission early in 2022, with its far-reaching recommendations on public sector procurement and other areas, could be a positive catalyst, if the government can follow through. In our view, it is too early to argue that South Africa will not be able to exceed low investor expectations on implementing the required structural reforms to place the economy on a higher growth path.  

There is also greater traction on transitioning the global economy to a more sustainable path. Like South African structural reforms, it is easy to argue that the pace is still far too slow, but there are indications of improved intent.  

Of course, government commitments at COP26 have fallen short of what is needed to limit global warming to less than 1.5 degrees above pre-industrial levels, and most global listed companies still do not have credible net zero plans. Nevertheless, momentum has shifted, and investors and regulators are increasingly focused on transitioning the global economy towards a more sustainable path.