Global Economic Review: Oil prices & Fed uncertainty

Our weekly podcast by Kevin Lings:

US economic growth depends increasingly on investment in artificial intelligence (AI)

In this podcast, Kevin Lings, Chief Economist at STANLIB Asset Management, discusses the below-forecast 2% quarter-on-quarter growth in US GDP for the first quarter of 2026. He explains how AI investment continues to support US economic growth and what this means for global markets. Kevin also discusses recent decisions by major global central banks’ to hold interest rates, and how this is likely to influence the South African Reserve Bank’s interest rate path.

The focus areas during the week included

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The STOXX Europe 600 Index ended broadly flat. It was hurt by the lack of progress in negotiations between Iran and the US, the ongoing closure of the Strait of Hormuz and a higher oil price. Year-to-date the STOXX Euro 600 is up a modest 3.3%. Japan’s equity markets delivered a mixed performance, with the Nikkei 225 declining 0.3% while the broader TOPIX gained 0.3%. Heightened currency volatility was a key market driver, including a sharp yen rebound that is widely suspected to reflect official intervention: the authorities were probably buying yen and selling dollars. In fact the yen was trading near its weakest level in roughly four decades before rallying strongly on Thursday. The local equity market declined by a very disappointing 1.2%, hurt by a 4.25% decline in the Resource 10 Index. Year-to-date the South African equity market is down 0.6%, but was up 4.7% as recently as 17 April.

In April the US dollar depreciated by 1.8% against the euro, while the emerging market currency index gained 2.2% against the dollar and the rand strengthened by 2.3%. This was all helped by the temporary ceasefire between Iran and the US announced on 7 April. Towards the end of the month geopolitical tensions resurfaced, prompting a renewed surge in oil prices and increased risk-off sentiment. The rand reversed most of the gains made in the de-escalation trade and is left with risk to the upside, if global uncertainty remains elevated. On a year-to-date basis, the dollar is 0.3% weaker against the euro while the rand is flat against the dollar and has lost 1.3% on a trade-weighted basis.

The United Arab Emirates (UAE) announced on Tuesday that it was leaving the Organization of Petroleum Exporting Countries (OPEC) and OPEC+. The UAE’s decision reflects a fundamental disagreement over oil strategy. The UAE has increasingly favoured maximising production volumes, based on the view that global oil demand could decline over time as the energy transition progresses. In contrast, Saudi Arabia - OPEC’s de facto leader - has pushed to restrict supply to support higher prices, which are critical for its fiscal position. These opposing priorities have strained co-ordination within the group and ultimately led to the split. The decision also underscores a broader rift between the UAE and Saudi Arabia that extends beyond oil policy. The UAE has taken a more independent stance in the region, diverging from Saudi Arabia on key geopolitical issues and signaling a shift in regional power dynamics. While oil prices have been supported in the near term by ongoing geopolitical disruptions, the UAE’s exit raises longer-term questions about OPEC’s ability to co-ordinate supply effectively, increasing the risk of greater competition and price volatility in global oil markets.

On Wednesday the US Federal Reserve (Fed) maintained its target range for the Federal Funds rate at 3.5% - 3.75%. This was in line with market expectations. The Federal Open Market Committee (FOMC) statement also maintained its easing bias, signaling that the next move in interest rates is more likely to be lower than higher. However, three FOMC members voted to remove the easing bias from the statement, while one member voted to lower the Federal Funds target range by 0.25%, highlighting the significantly divergent views among FOMC members. This was the largest number of dissents during Jerome Powell’s time as Fed chair. Markets interpreted the dissents as a hawkish signal. While the April FOMC meeting was Powell’s last as Fed chair, at his post-meeting press conference he said that he would remain on the Fed’s Board of Governors for an undetermined time period. Powell’s term as a central bank governor continues until January 2028, but it is unusual for a Fed chair to remain as a governor after their tenure as chair ends. Powell cited political interference in the form of legal actions against the Fed as the reason for his decision to stay on the Fed board. Earlier in the day the US Senate Banking Committee voted to advance Kevin Warsh’s nomination to take over as Fed chair when Powell’s term ends later this month.

In Q1 2026 US GDP grew by 2% q/q (annualised). This was below market expectations for growth of 2.3%, but an improvement from the 0.5% q/q recorded in the final quarter of 2025 (the Q4 2025 GDP performance was heavily impacted by the 43-day US government shutdown in October/November). In the first quarter of 2026 there was a 4.4% rebound in government spending and a 10.4% gain in non-residential investment. The increase in fixed investment was mainly due to a 43.4% surge in spending on information-processing equipment, which is likely to reflect ongoing investment in AI. Personal consumption, which makes up the vast majority of US GDP, grew at a modest 1.6% q/q, which is well below the average quarterly gain of roughly 2.75% over the past three years. There was also a 25.8% q/q increase in imported goods (which is negative for GDP performance) due to the reduction in US import tariffs because of the recent Supreme Court decision which ruled that the Liberation Day tariffs were illegal. Although the war in Iran poses downside risks to economic activity if it escalates further or extends well into the second half of the year, this is still not the base case expectation.

US PCE inflation rose by 0.7% m/m in March, which pushed the annual rate of increase up from 2.8% to 3.5% - in line with market expectations. In addition, core PCE inflation rose by 0.3%, taking the annual rate of change up from 3% to 3.2%. US core PCE inflation has been at 3% or higher in each of the past four months and has averaged 2.9% over the past 12 months. This indicates that US inflation remains elevated and is struggling to make meaningful progress back down to the 2% target – with risk to the upside, given the continued high oil price.

US weekly jobless claims declined to 189 000, the lowest weekly reading since 1969. This suggests that US economic activity remains steady, supported by strong corporate investment trends (mainly AI) and a stable labour market. This is despite the recent increase in inflation and decline in consumer confidence.

In March 2026, SA’s producer price index (PPI) rose by a substantial 1.1% m/m, mainly driven by higher fuel prices. Prices were unchanged in February (0% m/m) and fell by -0.2% m/m in January. The increase in March was well above market expectations for prices to increase by 0.8% m/m (Bloomberg). The large monthly increase pushed the annual rate of PPI inflation up from 1.8% in February to 2.3% in March. Despite the larger-than-expected increase, producer inflation remains well contained, helped by deflation in agricultural prices. However, the recent surge in fuel prices implies that PPI inflation will continue to accelerate over the coming months and is likely to increase above the SARB’s inflation target in the short term.

On 28 April, SA’s National Treasury announced that the R3 per litre reduction in the general fuel levy for petrol would be extended until 2 June 2026. The temporary relief for diesel was increased by 93c to R3.93 per litre (also until 2 June). However, in June the level of fuel levy relief will be halved to phase it out before July. As a result, the amount of relief from the general fuel levy will be reduced to R1.50/l for petrol and R1.96/l for diesel, effective from Wednesday 3 June 2026 to Tuesday 30 June 2026. From 1 July, the general fuel levies for petrol and diesel will return to their pre-Iran war levels (R4.10/l for petrol and R3.93/l for diesel). The estimated cost of the temporary fuel levy relief from April to June is R17.2 billion in foregone tax revenue. It will be funded through a combination of higher-than-expected tax revenue and underspending and will not have an impact on the fiscal framework adopted by Parliament after the 2026 Budget. The average monthly under-recovery on SA’s petrol price (93 octane) was estimated at R1.72/l on 29 April, while for diesel it was R4.96/l. All of this suggests that SA’s petrol price is likely to increase by around R1.72/l (93 octane) in May and by about R4/l for diesel.

In March 2026, SA’s broad money supply (M3) grew by 9% y/y from 8.4% y/y growth in February. This is the fastest growth in money supply since July 2023. For 2025, M3 money supply growth averaged 6.8%, an improvement compared to growth of 6.3% in 2024.

South African private sector credit extension fell for the second time this year, decreasing by -R0.76 billion (-0.01% m/m) in March. This follows a large increase of R80.5 billion (+1.5% m/m) in February. Over the past year, the rate of growth in private sector credit has eased for the first time since March 2025, coming in at 8.5% y/y, down from 10.5% y/y in February. The monthly breakdown of credit extension shows that corporates drove the decline, with corporate credit falling by R5.6 billion (-0.2% m/m). Consumer credit, on the other hand, increased by R4.9 billion (+0.2% m/m). While household credit remains generally muted, and has grown below its long-term average for over two years, there are signs of some build-up in momentum.

The European Central Bank (ECB) kept interest rates unchanged at 2%, in line with market expectations. However, officials acknowledged that the risks to the Eurozone economy have “intensified” as a result of the conflict in the Middle East. The governing council has discussed “at length and in depth” a potential interest rate rise.

In the Eurozone, the Economic Sentiment Indicator fell to 93.5 in April, its lowest level since November 2020 (data released by the European Commission). Consumer confidence was particularly weak, while industrial and construction confidence was slightly more resilient.

In the UK, the Bank of England kept its base rate unchanged at 3.75%, as expected. In the accompanying statement, the central bank’s Monetary Policy Committee noted that prospects for energy prices were “highly uncertain”, that consumer inflation had increased to 3.3%, and that it “stands ready to act as necessary”.

At its policy meeting on 27/28 April, the Bank of Japan (BoJ) left its key policy interest rate unchanged at 0.75%, in line with market expectations, but the decision was viewed as a hawkish hold. This is partly because the BoJ decision was split 6 - 3, with three board members calling for a rate hike to 1%, signaling an appetite for further policy normalisation. Like most other central banks, the BoJ faces a difficult trade-off. Oil prices have pushed inflation higher, but are also weighing on economic growth. BoJ Governor Kazuo Ueda noted that confidence in the baseline economic outlook had deteriorated significantly. Reflecting this backdrop, the BoJ revised up its fiscal year 2026 inflation forecast to 2.8% (from 1.9% in January) while halving its forecast for growth over the same period to 0.5%.

Credit rating agency Moody’s revised China’s credit rating outlook to “stable” from “negative” while affirming its international credit rating at “A1”. Moody’s highlighted China’s economic resilience, including GDP growth despite domestic and external headwinds. Although Moody’s expects the government’s debt burden will increase, the agency believes downside risks are contained as low interest rates and high domestic savings will help to limit debt-servicing costs. It also highlighted that China’s large and diversified economy, coupled with increased competitiveness in higher value-added sectors, will help to offset downside pressures from an aging population.

China’s Communist Party’s Politburo, the top decision-making body which sets the broad direction of economic and policy priorities, acknowledged a solid start to the year but flagged that the foundation for the country’s sustained economic recovery needed to be consolidated. It called for continued support for domestic demand, employment, and strategic industries alongside efforts to strengthen the country’s energy security. The Politburo emphasised the need to accelerate the development of a “modern industrial system,” expand (AI) adoption, and enhance technological self-reliance and supply chain control. It is interesting to see that Chinese courts recently ruled that replacing employees with AI solely for cost-cutting purposes was unlawful. The courts determined that AI implementation was a deliberate business choice rather than an unforeseeable disruption. Therefore, it does not legally justify terminating a worker without fair alternatives.

Industrial profits in China rose by 15.8% y/y in March, supported primarily by the equipment and high-tech manufacturing sectors. This was up from the 15.2% y/y increase in the January-February period. In Q1 2026, industrial profits rose by 15.5% y/y, the fastest pace since 2017. However, the pick-up masked a widening divergence between sectors. A breakdown of the data highlighted the strength of China’s production and export-driven recovery, particularly in policy-supported industries such as machinery, power equipment, and advanced manufacturing. Robust AI and electronics demand drove surging profit growth for companies in sectors such as high-tech manufacturing and intelligence products, while oil and metals producers also fared well. In contrast, businesses in other segments were hurt by rising raw materials costs.

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