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 confidence 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 flows 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 flows 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 first quarter. The rebound was mainly evident in tertiary sectors. Demand-side sectors also showed broad-based improvements, including a rebound in fixed investment which fuelled an increase in imports and a consequent widening of South Africa’s current account deficit. The current account deficit widened to 4.0% of GDP, from 2.9% in the first quarter and 3.5% in 2018 .

South Africa’s consumer inflation picture has remained benign over the past quarter, with both headline and core consumer inflation below the midpoint of the Reserve Bank’s target range. CPI inflation rose to 4.3% in August, from 4.0% in July; core CPI inflation rose to 4.3%, from 4.2% .We expect consumer inflation 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 inflation of 4.2% in 2019, 5.1% in 2020 and 4.75 in 2021. With inflation and growth expected to remain low, the MPC will remain under pressure to ease the repo rate further.

The modernisation of supply chains and positive secular demand drivers for logistics space continue to support the industrial property sector in South Africa. Shopping centres that are appealing destinations or offer convenience are better positioned to grow their trading densities and rentals in a more competitive environment. The demand for South African office space is linked to confidence and the employment outlook, which is going to take time to recover. Risks to the listed SA property sector include the stagnant economic environment, negative rental reversions and the timing and quality of offshore investment. This increases the importance of stock selection and our funds are well positioned due to our focus on quality, value and diversification.