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In Focus: South African Election, War in Ukraine and German Economy 

Word of the week Wednesday, most significant election since apartheid end for South Africa, 'worst crisis since the war begin' for Ukraine, report on the future of German economy from the IMF, and what's happening today.

Word of the Week Wednesday
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South Africa Head to the Polls

South Africa goes to the polls today in what is being billed as the most significant election since the end of apartheid.

The reason it is being billed as such is because the ANC could lose power for the first time since they took it thirty years ago, under the leadership of Nelson Mandela.

There’s a lot of discontent in the country, owing to high unemployment, inequality, water shortages and power cuts. The new generation of voters doesn’t feel the same loyalty to the ANC as those that witnessed the struggles that brought them to power.

If the ANC do get less than 50% of the vote then we could see a coalition government with the ANC remaining in power, but propped up by a handful of smaller parties, whilst if the largest opposition party, the Democratic Alliance, were to fare very well they could potentially cobble together a coalition of many smaller parties.

Ukraine Faces “worst crisis since the war began”

The International Editor of BBC News, Jeremy Bowen, has said that Ukraine is facing its “worst crisis since the war began”. Bowen reiterates that the defence of Ukraine is heavily contingent on the resolve of Western allies, particularly as Kharkiv comes under renewed attack from the Russians.

While Western support has included sending tanks, armoured vehicles and munitions in addition to training thousands of Ukrainian soldiers, the plan last summer to break through the Russian lines between Donbas and Crimea ultimately failed, not least because of a lack of air cover, he maintains.

Moreover, while the EU and US have managed to release additional funds for Kyiv, Ukraine’s armed forces now have to battle with the lag time between bill being signed in parliament and arms being supplied on the ground. There is also the question over what a Trump presidency could mean for Washington’s policies towards Ukraine.

All the while, Bowen notes that the Russian economy has been “redesigned for a long war”, as Moscow looks to allies such as Iran and North Korea for additional lethal supplies and drones. China is also understood to be helping Russia in other ways and continues to increase its share of oil imports from Russia.

In a conflict which is increasingly becoming a war of attrition, Russia also continues to recruit and conscript from its population which far outnumbers that of Ukraine. As such, Ukraine is now ramping up their efforts to recruit and conscript.

Accordingly, Bowen concludes that “Russia is pushing hard, as it senses it has a window of opportunity before Ukraine gets its new weapons”.

The full article can be read here.

IMF Issue Warning for German Economy

The IMF have written a report on the future of Germany, which doesn’t make for an upbeat read.

The paper warns that over the medium term the Germany economy risks stagnation, as baby boomers are retiring en masse which is set to massively increase pressure on public finances whilst the tax take also reduces accordingly. On the other side of the equation, less people will be entering the workforce as birthrates have been lower than the baby-boom era, whilst immigration has been curbed too.

The prognosis is that annual growth could sink to 0.7% and the situation is being likened to that of Japan’s, which has had stagnation since the 90’s and a whole host of issues relating to an ageing population which remain unresolved.

Germany’s outlook isn’t dissimilar to many nations, including the UK, but one card that Germany could play is to release their “debt brake” which restricts borrowing, and could in turn borrow to invest in long term infrastructure, net-zero transitions and other areas that give the economy long term gains.

Another item to look at is apparently indexing retirement ages to the increase in life expectancies. As we have done in the UK and that France did last year, moving from 62 to 64. One thing that isn’t recommended is handing pensioners a massive tax break as Rishi Sunak is proposing with the triple lock plus!

Today’s Data

As markets gear up for the string of central bank meetings next month, attention today will turn to German CPI released at 1300. Here, the market consensus is pointing to a 2.4% print annualised, an increase of 20bps from April’s print, indicative of how Frankfurt is not out of the woods when it comes to its battle against inflation.

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