The Coffee Table Economics (CTE) with Anchor note by Casey Sprake is distributed intermittently. It is a collection of Casey’s thoughts and perspectives on key economic factors, socio-political events, and the multiple dynamics shaping markets globally and in South Africa (SA).
Executive summary
In this week’s edition, we highlight the following:
- Global debt soars to new highs: According to the latest data from the Institute of International Finance (IIF), global debt reached a new record in 1Q24, adding US$1.3trn in just three months to a total of US$315trn. While rising global debt has risks, it can play a critical role in economic development and crisis recovery when managed carefully and used for growth-enhancing purposes.
- Anchoring the future: How inflation expectations help shape SA’s economic outlook. Inflation expectations are critical in determining SA’s inflation and interest rate trajectory. These expectations influence consumer spending, business pricing, wage demands, and, ultimately, the South African Reserve Bank’s (SARB) policies.
- SA consumer confidence hits a five-year high: The FNB/BER Consumer Confidence Index (CCI) rose from -10 to -5 index points in 3Q24, marking its second consecutive five-point increase. This rise, while still below the long-term average of zero since 1994, is the highest confidence level recorded since 1H19.
Global debt soars to new highs
According to the latest data from the IIF, global debt reached a new record in 1Q24, adding US$1.3trn in just three months to a total of US$315trn. This surge in borrowing is a widespread phenomenon across economies. The US and Japan were the biggest contributors among advanced economies, while China, India, and Mexico led the increase in emerging markets (EMs). The global debt-to-GDP ratio climbed to 333% as rising debt-servicing costs and growing burdens persist. Since the COVID-19 pandemic, debt has surged by 21%, adding US$54.1trn to the global total. Non-financial corporations hold the largest share of debt at US$94.1trn, followed by government borrowings at US$91.4trn, the financial sector at US$70.4trn, and households at US$59.1trn.
Global debt continues to rise due to a combination of government spending, low interest rates, and economic models reliant on credit. Governments often borrow to cover budget deficits, fund social programmes, or respond to crises like the COVID-19 pandemic, while low interest rates make borrowing attractive for businesses and individuals. Debt rollovers, ageing populations driving healthcare and pension costs, and private sector debt accumulation further contribute. Additionally, global trade imbalances, monetary stimulus, and the need to address geopolitical and environmental crises exacerbate the debt burden, raising concerns about its long-term sustainability.
While stimulus measures have fueled a surge in borrowing, they have left many economies in a more precarious position. In the US, debt-servicing costs now exceed defence spending, with interest payments expected to rise further. This may force the government to raise taxes or cut spending to address its growing debt. However, neither political party (Republicans or Democrats) has presented a clear strategy for ensuring fiscal sustainability. For EMs, rising debt burdens pose even greater risks, especially if they face slow growth in a high-interest rate environment. In such cases, many may need to restructure their debt as borrowing becomes increasingly unaffordable. Alarmingly, about one-third of EMs have not fully recovered from the COVID-19 pandemic, with per capita income still below 2019 levels. Over the past quarter, EM debt hit a record US$105trn, an increase of US$55trn over the past decade.
The bottom line
Rising global debt poses significant risks by increasing debt-servicing costs, straining government budgets, and diverting resources from essential investments. It heightens the risk of defaults and financial crises, especially in EMs, as debt becomes harder to service in a high-interest rate environment. Excessive borrowing can crowd out private investment, slow economic growth, and lead to fiscal imbalances, forcing governments to cut services or raise taxes. Additionally, rising debt creates global financial instability, as a crisis in one country can have widespread economic repercussions, threatening long-term global growth. Conversely, increasing global debt can offer benefits when managed responsibly, such as stimulating economic growth by financing infrastructure, innovation, and development. It provides governments with the flexibility to manage crises, fund large-scale projects, and spread costs over time. In low-interest rate environments, borrowing is relatively cheap, allowing for investments that boost long-term growth. Debt also helps consumers and businesses finance spending and investments, driving demand and economic expansion. Additionally, global debt supports financial market liquidity, ensuring smoother trade and investment flows, which is essential for economic stability and development.
Anchoring the future: How inflation expectations help shape SA’s economic outlook
Inflation expectations play a critical role in determining SA’s inflation and interest rate trajectory. These expectations influence consumer spending, business pricing, wage demands, and, ultimately, the policies of the SARB. If people expect higher inflation, they may demand higher wages or raise prices pre-emptively, creating a feedback loop that pushes actual inflation higher. This dynamic highlights the need to keep inflation expectations well-anchored to avoid a self-fulfilling cycle of rising prices. The SARB monitors inflation expectations closely as they guide the central bank’s decisions on interest rates. If inflation expectations rise, the SARB may raise rates to cool demand and prevent inflation from spiralling. Conversely, stable expectations allow for lower interest rates, supporting economic growth. Inflation expectations also play a key role in wage- and price-setting behaviour. Businesses expecting inflation may raise prices, while workers demand higher wages to preserve purchasing power, potentially creating a wage-price spiral. This behaviour can make it harder for the SARB to control inflation without aggressively hiking interest rates. Additionally, inflation expectations can affect the value of the rand. If investors expect inflation to rise, capital outflows may weaken the currency, driving up the cost of imports and further fuelling inflation. In such cases, the SARB may raise interest rates to stabilise the rand.
There are several types of inflation expectations, each with unique influences on economic behaviour. Households, businesses, analysts, financial markets, and central banks all form expectations based on different factors like personal experiences, cost pressures, data analysis, and market signals. These expectations can be short-term, reacting to immediate conditions, or long-term, reflecting confidence in central bank policies. Well-anchored expectations suggest belief in stable inflation, while unanchored expectations signal concerns about persistently high inflation. Understanding these dynamics is essential for central banks in shaping monetary policy and managing price stability.
One such example, or rather, a type of inflation expectation, is that of survey data. In 2001, the SARB tasked the Bureau for Economic Research (BER) with conducting a quarterly survey to measure inflation expectations and related macroeconomic variables. The survey covers four social groups: analysts, business leaders, trade union representatives, and households. Each group provides a unique perspective and influence on inflation. For example, business leaders directly impact prices in the real economy, while analysts influence financial markets. Meanwhile, as employees, trade union representatives and households affect wage growth, significantly contributing to inflation.
The BER’s latest inflation expectation survey shows that the average inflation expectations of analysts, businesspeople, and trade unions dropped in 3Q24. Headline inflation is now forecast to hit 5.1% this year, declining to 4.8% in 2025 and 2026. In 2Q24, the survey respondents expected inflation to be 5.3% for 2024 and drop to 4.9% by 2026. Among the three groups, analysts foresee the lowest inflation rates across the forecast period, with trade union officials slightly higher. In contrast, business leaders anticipate inflation will stay above 5% throughout, easing from 5.4% in 2023 to 5.2% in 2026. On average, all three groups expect inflation to be 4.8% over the next five years, down from the earlier estimate of 4.9%. However, only analysts predict a rate near the 4.5% target, while trade union officials and business leaders expect around 5%.
Household inflation expectations rose sharply in 3Q24, reversing the decline that began in mid-2023. One-year-ahead expectations increased by 0.6 percentage points to 6.9%, the highest level this year, while five-year-ahead expectations jumped 0.9 percentage points to 10.6%, the highest since the second quarter of 2023. During 3Q24, the three groups continued to expect GDP growth of just under 1% in 2024 but revised their 2025 forecast upward by 0.2 ppts to 1.5%. Trade unions also significantly raised their wage growth expectations, predicting increases of 5.6% in 2024 and 5.9% in 2025. As a result, the average wage growth forecast for 2025 edged up from 4.9% to 5.0%, and for 2026, it rose from 4.9% to 5.3%.
The bottom line
The results of the 3Q24 survey are likely to reinforce expectations that the SARB will cut its key rate for the first time in more than four years when the central bank meets on 19 September. One factor that is likely to raise concerns for the SARB from the latest inflation expectations survey is that the inflation forecast of households rose steeply, reaching its highest level this year at 6.9%. The rise was driven by the respondents in the low-income category, suggesting the poorest South Africans may be more exposed to price pressures. Overall, inflation expectations are critical in determining both inflation and interest rate trajectories in SA. They influence consumer and business behaviour, wage and price-setting, and the actions of the SARB. When inflation expectations rise, it can lead to higher actual inflation, prompting the SARB to raise interest rates to maintain price stability. Conversely, well-anchored inflation expectations allow for more accommodative monetary policy, which can support economic growth. In the context of SA’s economic volatility and exposure to global shocks, managing inflation expectations is essential for maintaining macroeconomic stability. By keeping inflation expectations well-anchored, the SARB can foster a more predictable and stable economic environment, benefitting both businesses and consumers in the long run.
SA consumer confidence hits a five-year high
The FNB/BER CCI rose from -10 to -5 index points in 3Q24, marking its second consecutive five-point increase. While this reading is still below the long-term average of zero since 1994, it is the highest confidence level recorded since 1H19. Over the past six months, the CCI has increased by 10 points and, since mid-2023, by 20 points, indicating a significant rise in consumers’ willingness to spend. This naturally bodes well for consumer spending in the remainder of this year. The 2Q24 increase was primarily due to an improved economic outlook following the end of loadshedding. In contrast, the 3Q24 rise is attributed mainly to a better household financial outlook and an increased perception of the current appropriateness of purchasing durable goods, such as vehicles and appliances. It is worth noting that the 3Q24 CCI survey was conducted between 19 and 30 August, following the recent elections and before the anticipated interest rate-cutting cycle. Lower inflation has contributed to improved real incomes, thus enhancing consumer confidence readings. Within the latest CCI reading, the economic outlook improved from -37 in 3Q23 to -7 in 3Q24. Meanwhile, the assessment of the timing for buying durable goods remains low at -23 but is expected to improve with the upcoming anticipated interest rate cuts.
A breakdown of the CCI by household income group reveals that the overall increase in confidence during 3Q24 was primarily driven by significantly improved sentiment among high-income households, along with a rise in middle-income confidence. After dropping from -14 to -16 in the 2Q24 survey (conducted before the formation of the Government of National Unity [GNU]), high-income households (earning over R20,000/month) saw their confidence rebound to a five-year high of -6. Meanwhile, middle-income households (earning between R5,000 and R20,000/month) improved their confidence from -9 in 2Q24 to -4 in 3Q24. Several positive developments have contributed to the rising confidence among SA’s affluent consumers over recent months, including the establishment of the GNU, the end of loadshedding, a stronger rand, significant fuel price drops, a slowdown in inflation (and subsequently the improved outlook) and expectations of forthcoming interest rate cuts. Low-income households (earning under R5,000/month) experienced a notable surge in confidence, jumping from -17 to -4 index points in 2Q24 (the most significant increase among the three income groups) but declined slightly to -7 in 3Q24. While the end of loadshedding, lower food inflation, and reduced fuel prices have likely helped boost their confidence, low-income households are less impacted by debt linked to the prime interest rate. Thus, anticipated interest rate relief has less bearing on their confidence outlook.
The bottom line
Consumer confidence indices are important because they provide insights into how optimistic or pessimistic consumers are about the economy. High consumer confidence typically indicates that people are more willing to spend money, which can drive economic growth. Conversely, low confidence can signal reduced spending, potentially leading to slower economic activity. These indices also help businesses and policymakers gauge future economic conditions, make informed decisions, and adjust strategies accordingly. The five-point increase in consumer confidence during 3Q24 represents the third consecutive rise in sentiment this year, elevating the CCI from an average of -20 in 2023 to a five-year high of -5. This reflects a significant improvement in consumers’ willingness to spend. Alongside this, the anticipated rate-cutting cycle and the fact that inflation has slowed from 6% in 2023 to 4.4% in August 2024 will enhance real disposable income and consumers’ spending capacity. This positive trend suggests a favourable outlook for real consumer spending in the coming months, particularly benefitting durable goods consumption (especially among affluent consumers) due to rising confidence and the anticipated interest rate cuts.
