Macro Economic Commentary – January 2020

Author: Ntsekhe Moiloa

| Dogs scurrying under kitchen tables and all sorts of new hiding places is an enduring worry of modern homeowners on the fifth of November each year. For many people, it is a day whose sole utility is the license to send Chinese-made fireworks into the night sky. In history, it represents the day that an Englishman by the name of Guy Fawkes was part of a rebellion against the Crown and laid siege upon Parliament. If we were attentive in school, we might remember that much. Why Guy Fawkes and his co-conspirators felt so seized to do that is much less known, but it had to do with their desire to see the restoration of a Catholic monarchy. Most people assume that Guy Fawkes was the plot leader but in fact, the rebellion was led by Robert Catesby, an English Catholic who tried to overthrow Elizabeth the First four years before he tried his luck again against the James who would sponsor a translation of the Bible into English. And perhaps only a handful will ever recall that on 31 January in 1606, Guy Fawkes along with co-conspirators Thomas Wintour, Robert Keyes, and Ambrose Rookwood, was hanged, drawn and quartered in the Old Palace Yard, opposite Parliament.

This year the thirty-first day of January has been in focus because it marked the day the United Kingdom ceased being a member of the European Union. Our attention spans are so short these days that it is likely a significant number of people believe that Brexit was conceived and led by the present British prime minister, Boris Johnson. The carapace of Brexit ideologue may be ill-fitting on Mr Johnson, but the Robert Catesby of his time has somewhat faded into the fog of memory. Nevertheless, despite stepping onto the Brexit bus at the last minute before causing ructions for the parliamentary leadership of David Cameron, Mr Johnson has figuratively avoided the scaffold this 31 January while shepherding the most consequential event of the past half-century of British life. The European Union that Mr Johnson threatens with tariffs happens to be the destination of 45 percent of British trade, while Great Britain only accounts for less than 10 percent of EU trade. The Britain that countries like Turkey could look towards for a moderating and encouraging voice in their ascension aspirations has left the building and the less accommodating member states are even more united.

The fortunes of Turkey are not Great Britain’s greatest concern. The Brexit narrative has been about reclaiming a sovereignty that large numbers of British people thought had been surrendered, and striking concords with other nations which would presumably remember the gravitas of the nation at the helm of the Empire. There was not a great deal of listening to the facts. For example, sovereignty is not the same thing as power. Or that having been one of the largest European economies is an interesting footnote; at last count, all of Europe was estimated to account for about 3 percent of global growth. Bear in mind that the non-British part of Europe is about 6 times the economic size of the United Kingdom. The United States that Britain hopes will view it as a sovereign peer in a comprehensive trade deal accounts for about 10 percent of global growth. Asia excluding China is estimated to account for about 30 percent while China is estimated to account for close to 40 percent of global growth.

In his negotiating positions, Mr Johnson is making demands as unconventional as his predecessor’s shoes. In the space of less than a year he expects that a deal will be inked with the European Union that brings free trade bliss to the British Isles. One practical problem is that the European Union has made clear that it is pursuing a package of agreements – including foreign policy, security policy, security coordination, justice coordination, transport, education, energy, environmental protections, tax policy, and others – while the United Kingdom only seems able to publicly comment on trade. While Mr Johnson’s simplifications in public have endeared him to many of his countrymen, it remains to be seen whether by 31 January 2021 he will have been politically hanged, drawn and quartered if he fails to bring back the promised bounty. Moreover, it is not only the share of the trade market that he is targeting that raises questions; it is the size of the market itself that will prove to be a significant headwind.

For the first quarter of 2020, we anticipate that economic figures will be underwhelming due to the impact of Novel Coronavirus on global travel and trade. Coming into 2020, we had already expected to see a measure of decline in global growth despite some of the cuts we saw from central banks around the world in 2019. We did not expect a collapse in growth, partly because the US and China appeared to be approaching a lull in their trade war; partly because interest rate cuts would lend some support albeit with a lag; and partly because inflation was low, lending support to demand.

The Coronavirus outbreak does weaken the picture we have just described; however, given the resources committed around the world to find a solution to the outbreak, we expect the hit to global GDP to be temporary. We may see year-on-year Chinese growth drop to a little under 5 percent during the first quarter of 2020, but we expect a return to the recently lowered national target of around 6 percent thereafter. The message from the Chinese Politburo to all levels of domestic government is that growth targets in 2020 should remain. While a lot of attention has been given to the impact of Novel Coronavirus on manufacturing and supply chains, service sectors will have to carry more of the load to maintain previously set growth targets. Under China’s thirteenth five-year plan, the country’s economic planners were targeting a 56 percent economic contribution from services by 2020 which at the time were forecast to have to grow at an average annual growth rate of 5.5 percent. To support those ambitions, fiscal stimulus remains in place and monetary policy is becoming even more accommodative. Panic is not warranted, in part because the Chinese government’s response to Novel Coronavirus has been broadly lauded, and because a reading of the 2018 results of the Plan for National Economic and Social Development show an enviable hit rate.

Domestically we expect that weak demand is set to persist through the quarter with very little in the way of domestic positive news. Local market participants will look forward to the national budget due in February, although we have not noticed an optimistic tone. The support we may see to risk assets may come from external influences; with China plus Asia ex-China accounting for an estimated two-thirds of global growth, if China can get on top of the Coronavirus crisis decisively, the growth picture should be supportive of emerging-market assets. Furthermore, we note that roughly 60 percent of investment-grade global bond debt yields below 2 percent and about a fifth register negative yields; high yielding emerging market bonds will enjoy some attention in such a climate, despite the troubles that South Africa faces. Yes, despite vanishing electrical power, despite echoing state coffers, and despite bulging ranks of the unemployed.