Economists expect South Africa’s economy to remain subdued this year, with growth forecast at around 1.2%
Image: File
Recent renewed tensions in the Middle East have injected fresh uncertainty into South Africa’s economic outlook, with higher oil prices adding to inflation risks that could complicate the path for future interest rate cuts.
Currently, a fragile pause in US-Iran hostilities is holding as mediators attempt to resume diplomacy. Earlier this week, the US struck Iranian sites after merchant ships were attacked in the Strait of Hormuz, prompting retaliatory Iranian missile strikes on US-linked bases in a Gulf state
Investec chief economist Annabel Bishop said Brent crude had climbed back to near $80 a barrel following renewed military action involving Iran and the US. While it was too early to determine whether the latest conflict would escalate, she said prolonged instability could weigh on global growth, fuel inflation and influence interest rate expectations.
“While early July has seen a resumption of some of the conflict in the Middle East, it is too early to tell if there will be further escalations in tensions, negatively affecting growth and inflation and interest rate outlooks yet,” Bishop said.
Bishop noted that the rand had only weakened slightly and the increase in oil prices had so far been moderate.
“The rand has only slightly lost ground, and the oil price has only seen a moderate jump, and while risks remain to the outlook, and volatility is likely to persist, there is hope of an extension to the timing of the conclusion of the peace talks,” Bishop said.
This morning, Wichard Cilliers, head of Market Risk at TreasuryONE, noted that the local currency shrugged off some of the concerns and was the best-performing emerging market currency overnight, outperforming its peers.
“We expect the rand to remain strong throughout the day, especially if oil prices continue to fall. That said, since the rand has already rallied a lot recently, there may not be much room for further gains right now,” said Cilliers.
The renewed uncertainty comes days after Statistics South Africa data showed trade was holding up.
Export prices continued to outpace import prices in May, improving South Africa’s terms of trade – the relationship between the prices the country receives for its exports and pays for its imports. Stronger terms of trade generally support economic growth by improving export earnings and strengthening the country’s external position.
However, South Africa imports most of its crude oil, meaning sustained increases in international oil prices could eventually feed through to local fuel prices, transport costs and broader inflation.
That, in turn, could make it more difficult for the South African Reserve Bank to continue lowering interest rates if inflationary pressures begin to build.
The latest developments also come as economists expect South Africa’s economy to remain subdued this year, with growth forecast at around 1.2% as global uncertainty and cautious consumer and business spending continue to weigh on activity.
Bishop said geopolitical risks remained elevated beyond the Middle East, with uncertainty over global trade and defence spending also contributing to market volatility.
“While risks remain to the outlook, and volatility is likely to persist,” she said, there was still hope that peace talks could be extended before the conflict escalated further.
IOL BUSINESS