World in search of a cure for growth ills
GLOBAL equity markets made little if any headway over the past month as incoming data continued to paint a mediocre economic backdrop.
While easy monetary policy has been carrying the load of weak economic activity to date, there has been a growing chorus of central bankers calling for fiscal help to break out of the low-growth environment.
In the absence of this stimulus the performance of risky assets is likely to remain constrained.
From a pure monetary policy perspective, the only prospect for an interest rate hike among the developed nations is in the US, where Janet Yellen, the Federal Reserve chairwoman, said the case for a rate increase had strengthened. Any action would, however, remain data dependent.
To this end, recent data in the US has had a positive bias, with payrolls, durable-goods orders and new home sales coming in better than analysts’ expectations. However, US inflation remains subdued.
Elsewhere, there was little to suggest any real economic vitality, hence the growing search for additional ways to provide stimulus.
In the UK, the Bank of England cut interest rates in the face of a challenging economic environment following Brexit. As if to emphasise these challenges, UK manufacturing purchasing managers’ index readings came in at the lowest reading in more than three years.
In the eurozone, manufacturing PMI readings eased slightly, while in China the manufacturing PMI slipped marginally into contractionary territory.
In Japan, GDP growth was flat on a quarterly basis for the second quarter, and CPI inflation posted a 0.4% year-on-year contraction.
On the local front, the data continues to paint a picture of painful adjustment.
Spending remains weak, with retail sales disappointing and the contraction in vehicle sales deepening. This is being offset by ongoing trade surpluses, improving manufacturing production and less negative mining production growth.
The acceleration in second-quarter GDP also reflects this adjustment. Slower output growth in the tertiary sectors, reflecting weak domestic demand, was offset by better mining and manufacturing production. Inflation also declined to a 6% yearon-year reading.
Bond yields have declined again as the latest bout of political intrigue subsides, returning focus to an economy that is slowly adjusting and whose assets offer value when the exchange rate is too weak and bond yields too high in a yield-hungry world. However, this remains an investment environment that requires extreme caution and diversification.
Low global economics makes for significant earnings forecast risk, and, while interest rates will likely remain at low levels for some time, it is unlikely that they can go meaningfully lower to offset increasing earnings uncertainty.
The only source of further meaningful acceleration in risk assets would be an easing in fiscal policy for those that have the ability. The odds of such an outcome have increased following the latest G20 summit, where the US and China made a commitment to use fiscal, monetary and structural policies to encourage confidence and bolster economic growth.
From a local perspective, the outlook has begun to brighten a little, with peaceful elections, a relatively strong rand (although it remains volatile), a declining inflation trajectory, a more buoyant trade account, little need for any further interest-rate hikes and confirmation of improved economic growth in the second quarter.
Unfortunately, political upheavals may continue and remind us that a political-risk premium remains very much part of the South African investment landscape.
Overall, the economy is likely to underperform and remains hamstrung by a lack of confidence, low levels of private and government fixed-investment expenditure and generally low commodity prices.
Nxedlana is FNB’s chief economist