Central banks running out of stimulus tools
THE past five years have been characterised by persistent global economic disappointments, with growth expectations revised downward repeatedly after optimistic forecasts at the start of each year.
However, the growth disappointments were repeatedly countered by central bank stimulus in the form of rate cuts and balance sheet expansion. This supported risky asset prices like equities, corporate credit and property. However, the stimulus has seemingly failed to conjure up a sustainable recovery in economic growth.
Recently, the Organisation for Economic Co-operation and Development indicated that weak trade and investment are likely to result in global growth not improving in 2016 compared to a poor 2015. This bearishness is fast becoming the consensus, in contrast to previous expectations of a gradual improvement in global growth characterised by stabilising emerging markets and gradual growth among developed economies.
There are rising concerns that central banks are running out of effective tools to support growth. These macroeconomic concerns are reflected in financial markets by lower developed market bond yields and in the volatility of equity markets.
In the US, recent data have been mixed. While non-farm payroll gains and consumer confidence were somewhat lower than expected, there was a recovery of sorts in industrial production and durable goods sales. Minutes of the US Federal Open Market Committee meeting in late January suggested that members were becoming more concerned about weak global economic and financial conditions. The implication of this is a much more cautious hiking of interest rates by the Fed.
As for the rest of the world, indicators have not been encouraging. In the eurozone, annual GDP growth in the fourth quarter eased slightly to 1.5% from 1.6% in the third quarter. In Japan, fourthquarter GDP shrank by a worsethan-expected 1.4% annualised. In China, imports declined steeply, faster than exports. Imports have contracted for 15 months.
In South Africa, the focus has been on the 2016 budget. The finance minister revealed plans for reduced spending and higher taxes. Whether these will be sufficient to avert a credit rating downgrade remains to be seen. It boils down to whether evidence of the belt-tightening and reforms can gain traction before the decisions are made. Our political arrangements may make this tough.
Local economic indicators have been mixed. Retail sales were better than expected at 4.1% up year on year in December. However, mining and manufacturing production remained relatively weak, although recent numbers came in slightly ahead of expectations. Annual consumer inflation was worse (that is, higher) than anticipated, at 6.2% in January, with food prices exerting upward pressure. The unemployment rate dropped to 24.5% in the fourth quarter from 25.5% in the third quarter, but the fourth quarter typically sees seasonal increases. Year on year, unemployment actually rose by 0.2%.
The outlook for the economy continues to be constrained by a lack of confidence, low levels of private and government fixed investment and low commodity prices. In this environment of low growth and rising inflation, domestic equity market valuations appear a little demanding relative to averages.
Bond yields are regarded as fair value. While a credit downgrade is a source of uncertainty (the likelihood appears to have been pushed back to December) we do not anticipate much more upward yield pressure.
There are signs that the current account deficit is responding to a weak currency and very weak demand, which tend to boost exports and contain imports, respectively. This, coupled with a more gradual hiking of US interest rates, should lead to some rand strengthening from oversold conditions.
Finally, despite an expectation of some exchange rate appreciation, offshore investment continues to retain merit, given the uncertainty.
Nxedlana is FNB chief economist