‘When facts change, I change my mind. What do you do, sir?” A statement variously attributed to Keynes, Churchill and economist Paul Samuelson, but whoever first coined this over-quoted line is unimportant. The point is, dogmatism rarely pays.
Objective analysis of the data is the best way to interpret complex systems.
When the data changes, it is best to revise one’s opinions of what is happening, both in the economy and also how that affects the broader geopolitical context.
Last week, inflation data in the US showed that the facts of the US economy are changing. Although inflation started trending down two months ago, the speed of that descent has remained in doubt.
Many, including this columnist, feared that the rate of decline was starting to flatten out, necessitating further interest rate hikes from the Fed to force it back into target territory. This could have had potentially disastrous implications for the economy.
Last week’s numbers offered reassurance on that front.
Core inflation, which strips out volatile food and fuel prices, rose less than 2% in June. Goldman Sachs called it a “turning point”. For Standard Chartered, it was a “game changer”. Ethan Wu wrote in the Financial Times that “good news is good news. Inflation appears to be unsticking”.
Markets have since been broadly optimistic. Stocks have moved higher, while the US two-year bond yield – a key indicator of short-term interest rate expectations – has moved down 25 bps to 4.73%.
This reflects moderating inflation, which should mean interest rates do not need to go as high, and remain there for as long, as the market (and this columnist) once feared.
Of course, this data, like any from a complex system, is incremental.
This does not suggest a “soft landing” – that a return to pre-pandemic inflation, stable interest rates and resilient growth is a done deal. But the chances of it happening have increased, and markets reflect that optimism. Similarly, this is not to say a recession cannot happen, but one in 2023 or even 2024 is looking increasingly unlikely.
Where this leaves emerging markets like South Africa is important, both economically and geopolitically.
First, moderating inflation in the US should be a net positive for riskier markets like SA as investors start to look further afield for compelling yields.
Markets seem to confirm this supposition; since mid-June, the SA 10-year government bond yield is almost a full percentage point lower, now trading at 11.72%, while the rand has strengthened almost 9% since June, now almost R18 against the dollar.
Should the inflation data out of the US continue on this lower trend, one could expect further strength in SA equities, bonds and the rand.
Second, the outlook in other parts of the global economy – particularly China – is not as positive. Data out this week showed that China’s economy lost further momentum in the second quarter, with gross domestic product expanding 0.8% against the previous three months, as falling exports, weak retail sales and a moribund property sector weighed on growth.
Read more in Daily Maverick: Chinese economy stutters, with massive geopolitical implications for SA
Perhaps the pandemic, war in Ukraine and ensuing energy crisis will be the factors that finally combine to trip up this autocratic, semi-free market economy.
China’s hybrid political economy has simply not managed to evolve and adapt fast enough to the volatile and shifting global macro fundamentals, laying bare its inherent contradictions.
Free markets like the US and Europe, with independent monetary authorities and adaptive political systems, are simply better placed to sail through such choppy seas.
Finally, this economic data has very real geopolitical implications.
Over the past few weeks, many commentators have been astonished by the about-turn of two extremely important actors.
In one week, Turkish president Recep Tayyip Erdoğan endorsed Sweden’s joining Nato and declared Turkey’s desire to recommence membership talks with the EU, an astonishing shift from someone who has always carefully balanced his interests between the East and West.
Then it was the turn of Indian prime minister Narendra Modi. In a rapid succession of state visits to the US and France in June and July, he signed a number of critical defence and technology agreements with Western partners, while the language at meetings with presidents Joe Biden of the US and Emmanuel Macron of France was unusually effusive and affectionate.
Unlike Turkey, which is of course (at times grudgingly) part of the Western alliance through Nato, India is still officially non-aligned. But perhaps these two leaders have seen which way the economic trends are moving, forcing them to reconsider their relations with Russia and China. They are now clearly looking westward for crucial military and technological support.
All these shifting economic and political realities compel questions to be asked of South Africa’s positioning.
Once again, by looking at the trend lines, the country is drifting ever eastward, increasingly in orbit around China and Russia.
ANC politicians would do well to look at the changing data, and on that basis change their minds about where best to take the country. DM