Global economic activity continued to lose momentum over the last quarter, with major risks weighing on the outlook. These include escalating trade tensions, disruptions in Global Supply chains, ongoing BREXIT uncertainty and rising Middle East tensions, all of which are dampening condence and further restraining investment spending. Recent forecast updates by the OECD showed further downward revisions , with growth of 2.9% projected for 2019, down from 3.25% projected as recently as May. This follows growth of 3.6% in 2018, and will be the weakest growth recorded since the Global Financial Crisis. The OECD expects growth of 3.0% in 2020, down from its May projection of 3.4%. The downward revisions were broad-based, but countries with greater exposure to global trade saw the biggest negative revisions. These included most Emerging Economies and some advanced economies like Germany.

A collapse in trade ows has been a major source of weakness for the global economy, fuelled in part by an escalation in the US-China Trade War. Although trade tensions go back years, recent escalations have had a more dramatic impact on global activity. More export-orientated economies, and emerging economies generally, have been hit hard. In advanced economies, the slowdown in trade ows has had a huge impact on their manufacturing sectors, with services sectors more resilient since they are more exposed to domestic demand. But concern is rising that services sectors are succumbing to weaker activity as well. Although job markets in advanced economies have remained strong, bolstering domestic demand, the fear is that the weakness in manufacturing has started to feed through.

The South African economy rebounded over the second quarter, growing by an annualised 3.1%, following a contraction of 3.1% over the preceding quarter. The recovery was driven by a dissipation of major headwinds like load shedding and supply disruptions in sectors like mining evident in the rst quarter. The rebound was mainly evident in tertiary sectors. Demand-side sectors also showed broad-based improvements, including a rebound in xed investment which fuelled an increase in imports and a consequent widening of South Africa’s current account decit. The current account decit widened to 4.0% of GDP, from 2.9% in the rst quarter and 3.5% in 2018 .

South Africa’s consumer ination picture has remained benign over the past quarter, with both headline and core consumer ination below the midpoint of the Reserve Bank’s target range. CPI ination rose to 4.3% in August, from 4.0% in July; core CPI ination rose to 4.3%, from 4.2% . We expect consumer ination to end the year at around the midpoint of the target range, with an annual average of 4.3% for the year. The biggest upside risk at the moment is higher oil prices. The SARB forecasts growth of 0.6% in 2019, 1.5% in 2020 and 1.8% in 2021 . The Bank forecasts CPI ination of 4.2% in 2019, 5.1% in 2020 and 4.75 in 2021. With ination and growth expected to remain low, the MPC will remain under pressure to ease the repo rate further.

The deteriorating global economic conditions encouraged investors to bet on monetary stimulus by the major central banks. Over the quarter, the US Federal Open Market Committee (FOMC) cut its benchmark twice amid the worsening outlook. In September 2019, acknowledging weakening momentum and increased trade war risks, the US Federal Reserve (Fed) cut rates by another 25bps to a range of 1.75-2.00%. Elsewhere, the European Central Bank (ECB) materially exceeded market expectations on stimulus, launching open-ended asset purchases, cutting rates and improving lending terms to banks. Emerging economies such as China, India and Middle Eastern countries also followed suit and engaged in a rate cutting cycle.

In South Africa, the Reserve Bank left the repo rate at 6.50% at its September meeting, following a cut of 25 basis points at its July meeting. With global yields in developed markets declining or in negative territory, the South African Generic 10 Year Bond remains attractive on both a nominal and real yield basis. It ended the quarter at 8.89%, peaking at 9.03% and with a low of 8.48%. Local yields remained steady over the third quarter with the weakening currency. The country’s risk premium increased following the uncertainties around Eskom turnaround plan and the increased risk of scal shortfall thereof. In addition, with Moody’s review expected at the end of October 2019, overseas ownership of SA government bond declined to 37% at the end of August 2019, from a high of 43% in March 2018. Foreigners were net sellers of ZAR 30.4bn of South African bonds in the third quarter while in the second quarter, although yields were at similar levels, the net selling was ZAR 14bn of government bonds. However, with ination below target range at 4.5%, real return on South African bonds remains attractive at close to 4.7%.