By The global economy is feeling the brunt of the on-going geopolitical tensions across the world. The current elections taking place in a number of countries also contribute to political uncertainty affecting the pace of global growth.
In its report, KPMG International forecasts a slowing in global economy from 2.7 percent in 2023 to 2.5 percent in 2024 before returning to 2.7 percent in 2025. KPMG says inflation is expected to continue to cool, but in many countries the price pressure will take longer to unwind than it took to emerge.
According to the report of Q2 of Global Economic Outlook, the wars unfolding and trade tensions are not helping the economy; furthermore with the countries heading to polls and some having voted already, investors are a bit uneasy on which direction the countries will take.
South Africa is now in a Government of National Unity (GNU) to which, at first markets warmed up to but later grew cold. France will be made up of a political party of the far right and that of the far left; however markets seemed to approve of it.
KPMG’s international team of economists believe the resulting risk could be more frequent bouts of inflation and the possibility of activist monetary policies.
“A slower expected glide path on rate cuts by the U.S. Federal Reserve, which plays an outsized role in global financial markets, will have a larger impact on rate decisions by developing economies. These markets are more sensitive to the exchange rate movements than we have seen in the past. Weakening currencies relative to the U.S. dollar are inflationary for those economies. To further complicate matters, foreign exchange markets have been reacting to unexpected election outcomes.
Between interest rate uncertainty and the elections, business leaders remain hesitant to engage in major investment projects. Consumers are cutting back on financed goods due to elevated rates, while governments face higher financing costs as debt rolls over at higher interest rates,” said KPMG.
The report says friend-shoring, re-shoring and near-shoring are reshuffling supply chains as producers hedge against geopolitical risk, often at higher costs. The conflict in the Middle East has caused seaborne trade to be rerouted, while higher-than-expected demand and weather have also increased shipping costs.
The National Atmospheric and Oceanic Administration expects a record number of major storms for 2024, which will only add to shipping times and snarled travel.
Yael Selfin, Chief Economist at KPMG in the UK says though the world is faced with so many challenges and risks, he remains optimistic regarding the global economic outlook for 2025.
“Prospects for 2025 are better, with inflation expected to return towards target and central banks more confident to cut policy rates from the current restrictive levels. The silver lining is a tailwind for big-ticket consumer purchases and business investment. Merger and acquisitions activity could also gather steam, as financial conditions ease and dry powder is deployed. However, the uncertainty remains around the policy shifts, which will likely fuel more insular and protectionist policies,” said Selfin.
“For politicians and central banks, the challenge going forward is contending with the rise in political uncertainty, deglobalization and a changing workforce demographic, at a time when international collaboration and – simply – the availability of people to increase productivity, is at a premium.
While challenges remain, the outlook – in my view – is cautiously optimistic. The inflationary pressures are easing in many parts of the world and the political will is gradually shifting toward consensus on the need to drive growth. There will be bumps in the road ahead, but we’re slowly seeing light at the end of the tunnel,” added Regina Mayor, Global Head of Clients & Markets at KPMG International.
“South Africa had its general elections in the final week of May 2024 and results have shown that the largest party, the ANC, has failed to gain a parliamentary majority for the first time since the end of apartheid.
Government mismanagement and malversation especially over the last 15 years have led to a lower-than-expected voter turnout pushing for change. Substantial uncertainty, as was witnessed from the depreciation in the rand over the days following the midweek election, surrounded the government that was to be formed depending on whether that coalition is struck with more populist fundamental parties or more market friendly centrist parties,” concluded Frank Blackmore, Lead Economist, at KPMG Southern Africa.
