Markets may be celebrating the Iran deal too soon

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JEREMY MAGGS: Acclaimed peace deal between the United States and Iran has sent a wave of relief through global markets today, oil prices falling sharply on hopes that the Strait of Hormuz will reopen and the immediate energy shock will ease.

But this is not just a simple good news story. I think the details still matter.

The durability of the deal is still uncertain, and the economic damage from months of disruption is simply not going to disappear overnight.

I’m in conversation now with economist Dr Azar Jammine from Econometrix. Azar, a very warm welcome to you and let’s assume this deal is going to hold, do you think it’s a genuine turning point for the global economy?

Or maybe the markets are getting a little ahead of themselves. What’s your assessment?

AZAR JAMMINE: My assessment is I think the markets are getting ahead of themselves.

They have been over-blown and excessively valued for some time based on the belief that the AI investment boom is going to generate a new wave of global economic growth in the future.

But there is, as yet, just speculation. There is not too much concrete evidence regarding the potential outcomes thereof.

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And there is still a concern that even at $85 a barrel, oil prices are way above where they were a few months ago, and therefore inflationary pressures might still be around over the next few months, despite the fact that oil prices have fallen back substantially.

Higher inflation, in turn, might mean that interest rates cannot come down the way the markets seem to be thinking they will.

JEREMY MAGGS: Azar, let’s talk timeline then, let’s assume that oil does keep falling, how quickly does that feed through then into lower inflation and fuel prices, or is there still a significant lag?

AZAR JAMMINE: There is a lag. I don’t think it’s an unduly long lag, but the concern that one has is of second-round price effects, namely the fact that oil prices have been elevated already for the better part of three, four months and that that is already feeding through into higher wages and higher prices of a variety of goods whose input costs do include oil and oil-related products.

Therefore, it’s not going to be a simple case of inflation falling back to where it was, and in South Africa’s case, simply falling back to 3% in a hurry.

I think the Reserve Bank’s view of getting inflation back down to 3% by 2028 is far more realistic than the markets might be anticipating.

JEREMY MAGGS: Azar, for South Africa, though, is the biggest benefit lower petrol prices, is it a stronger rand – and we are seeing an improvement in the rand today – or is it more about improved investor sentiment?

AZAR JAMMINE: I think it’s more the former. One is concerned about the issue of improved investor sentiment. Last week’s GDP figures saw that, gross fixed capital formation (GFCF), which had shown signs of bottoming out in the previous two quarters, had resumed its decline.

I don’t think that was purely on account of the outbreak of hostilities in the Middle East. I think there are fundamental issues related to South Africa’s structural problems that are holding back the willingness of both locals and foreigners to invest.

JEREMY MAGGS: You referenced that it might take some pressure off the central bank, but obviously too early to talk about easier interest rates.

AZAR JAMMINE: It’s far too early to talk about easier interest rates. But the good news is that the fear that we had had of two or three more interest rate hikes through the course of this year has probably faded.

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We are now looking at, at most, one further interest rate hike, maybe in July, but no more than that. That is relatively good news.

JEREMY MAGGS: It’s good news, Azar. But South African consumers are still under an enormous amount of household budget pressure.

AZAR JAMMINE: Without a doubt, South African consumers are feeling the squeeze of elevated fuel prices. Even if fuel prices come down a little, the fact is that they are still likely to be substantially higher than they were at the beginning of the year.

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In addition, interest rate cuts that were being looked upon as a real prospect at the beginning of the year, that possibility has faded, and we are still looking at the potential for interest rates to increase a little more.

Then on top of that, we’ve had a fairly big setback on our stock market, which may deprive the wealthier consumers of that feel-good factor that has been contributing towards higher consumer spending.

So undoubtedly, I think we are looking at a slower rate of growth in consumer spending.

But the good news is, at least we are not looking at a major economic downturn at the moment.

JEREMY MAGGS: But as you said, let’s not get ahead of ourselves. What happens if the deal breaks down and oil spikes again?

AZAR JAMMINE: If that happens, then I think we’re back to square one, and that is what we’re very concerned about. The big concern that a lot of people have is that markets are just not taking the downside potential sufficiently into account, and that that could come home to bite us in due course.

JEREMY MAGGS: Azar, while we might benefit from calmer global markets, our own structural problems still limit in the longer term the upside, don’t they?

AZAR JAMMINE: Absolutely. This is precisely what I was alluding to in the fact that we’re not going to get a new wave of investment if we do not address these structural factors, and they go way beyond just energy and logistics, as many people are wont to suggest.

They incorporate issues such as crime and corruption and the structure of the economy in terms of the lack of resilience of small business activity that is needed to really create the jobs that are required to reduce unemployment at low levels, poor levels of education, especially in more technical areas, and overregulation of the economy.

That is really stifling the desire of private sector investors to commit to South Africa.

JEREMY MAGGS: Azar, just a final question to you, how much modelling or work has been done by economists such as yourself about the broader damage that has been done by the Gulf crisis and the disruption around the Strait of Hormuz?

AZAR JAMMINE: I would say that the amount of research has been relatively limited. It’s been confined to just the immediate knock-on effects of higher fuel prices. There are many outcomes that have still not really been taken into account, and might emerge only over time.

For example, the effects on the fight against climate change, that being just one and the need to finance that.

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There is a major structural weakness in the global economy that needs to be addressed, and that is over-borrowing by governments, not only in South Africa, but especially in your leading industrialised countries that could come home to bite us quite badly, except that we might benefit in the longer term from higher precious metals prices if push comes to shove, but not in the short term.

JEREMY MAGGS: My thanks to Dr Azar Jammine from Econometrix.