America is a massive global economy. Whilst we can all agree that whatever happens over there will certainly affect our economy and investment opportunities (local and offshore), you may have some questions as to how it affects us.
Brian Kantor, chief economist and strategist with Investec Wealth, recently published his thoughts online on the BizNews website. The article presents some insightful graphs and specific trends that may not interest everyone, but certainly paint the scene in a way that allows us to see ‘real-time’ affect on our economy.
As a short precursor it’s important to note that Trump’s post-election rallying, from an economic perspective, with all his promises of various reforms, led to a peak in the real bond yields in the US towards the end of December. Real rates have been very low recently as the world-wide demand for capital to invest in extra capacity shrunk away and as global savings rose. This essentially means that the Trump-inspired increase in real rates portended faster economic growth in the US and the extra demands for capital that can be expected to accompany faster growth.
Still… the Trump administration will need to deliver on its promises to deregulate and lower taxes and also to bring jobs home.
As Kantor notes: “These are prospects that have received particular favour from small business in the US, whose confidence levels have reached record highs, as well as from the customers of the leading banks that apparently are now willing to borrow more.
It is this additional confidence of households and business that will influence their willingness to spend and borrow more. Balance sheets of US households have greatly strengthened in recent years, with more saved and more equity in their homes, while lower interest rates have reduced their interest expenses; similarly for business borrowers.”
For our local trade and economy, it is interesting to note just how consistent has been the recent behaviour of the gold price in response to real interest rates. Real interest rates represent the opportunity cost of holding gold. The more expensive it is to own gold, the lower its price.
Aside from a locally perceived inflation trends in the US, the Trump election raised inflation expectations in SA to over 7%. Very recently, however, as the Trump rally faded, inflation expected in SA over the next 10 years, as revealed in the RSA bond market, has receded sharply to below 6.5%.
This must be regarded as helpful for the SA economy.
The Reserve Bank has a highly exaggerated view of the influence of inflation expectations on inflation itself. This retreat in inflation expectations as well as a much improved outlook for inflation itself may encourage the Reserve Bank to reverse the course of short term interest rates – an essential requirement if growth in SA is to pick up momentum.
In addition to this positive perspective is the evidence of a strengthening rand value against the dollar that comes with better inflation. The Rand, after initially weakening in response to the Trump election, has benefitted from a strong recovery of about 7% since November.
As Kantor concludes his statements he says: “Clearly the extra growth and higher US interest rates associated with a Trump administration have neither raised long term rates in SA nor weakened the rand. Indeed the opposite has happened. This should encourage the Reserve Bank to focus on the downside risks to economic growth in SA rather than the upside risks to inflation. These surely have declined, both with the stronger rand and the prospects of lower food prices. The case for lower interest rates in SA has strengthened with the Trump election so that SA too can look forward to faster growth.”