Macro Economic Commentary – August 2019

Author: Morotola Pholohane

| Uncertainty is known to cloud decision-making. The fact that the UK has not settled on a workable solution to exit from EU has created a great deal of uncertainty. It is becoming apparent daily that UK might be leaving EU without a deal which this has delayed investment. The halt in business investment and hiring of workers will affect the UK economy and that of the EU economy at large this year, and probably beyond. Economic output in the second quarter contracted for the first time since 2009. Faced with uncertainty, UK consumers have been cautious in their retail spending with surveys indicating that what purchases are being made are more with an eye to stockpiling.

In real terms, the UK manufacturing and construction sectors have started slowing down; however, at this stage the value of the slowdown cannot be quantified. The UK treasury has predicted that leaving the EU without a deal could push the UK economy into recession. It is also worth noting that pound sterling has been volatile since the June 2016 Brexit referendum.

Euro area GDP growth was lower at 1.1 percent compared to an expansion of 1.2 percent in the previous quarter. The high-frequency data suggest a two-speed economy with a healthy services sector somewhat offsetting a vulnerable manufacturing sector. Manufacturing PMI figures have been on the downward spiral on average since reaching the peak in 2017. The unemployment rate remains unchanged in July. Within the member countries, recent statistical data shows that Italy’s economy has stagnated; Germany’s economy shrunk by 0.1 percent in the most recent quarter; and Spain’s momentum has also slowed down. Elsewhere in Euro bloc, economic activity was not all gloom and doom: France’s GDP was broadly stable despite slump household spending, and Greece’s industrial production rebounded while that of Belgium’s soared.

In the US, GDP growth in the second quarter was revised lower from the preliminary reading of 2.1 percent to 2 percent. Personal consumption expenditure (PCE) was mainly boosted by the consumption of durable goods, and services consumption accelerated, supported by the resilience of the labour market. Federal, state and local government spending increased. Meanwhile, imports and business investment declined, affected by uncertainty due to the ongoing trade war. Residential investment shrunk for a sixth consecutive quarter, a new record post the global financial crisis. However, investment in intellectual property continues with solid upward momentum.

The American President, with his mission of placing America first in every circumstance, has announced another two tranches of tariff escalation on China, kicking-in effectively between September and December. These would see increases from 10 percent to 15 percent on a total USD300 billion in trade. All the current tariffs will rise from 25 percent to 30 percent in October on USD250 billion as currently confirmed by the US Federal Register. China has retaliated by adding between 5 percent to 10 percent in addition to existing duties levied against USD75 billion of US goods. US trade groups and manufacturers are protesting further tariff increases, citing their adverse impacts on their profits, but President Trump refuses to listen. In Trump’s view, slowing profits should be squarely blamed on bad management and the Fed, suggesting that profits have nothing to do with tariff policy.

China’s economy slowed due to continue weaker domestic conditions. Industrial production is well below market expectations with pedestrian growth of 4.8 percent in July, lower than 6.3 percent reported in June. Stringent financial tightening is not helping either. Rating agencies are forecasting severe lower-tier to mid-tier bank stress if a severe economic downturn were to occur. The smaller banks may either merge with bigger banks or be forced to exit the market. According to Standard & Poor’s, the smaller banks constitute about 4 percent of the sector’s total assets. Those banks have had their fair share of difficulties due to a clampdown on shadow banking and a tighter regulatory environment overall.

Still in China, the latest retail sales grew at a slower pace in July. Policymakers have intervened with another package to stimulate consumption and to push down the cost of borrowing. The economy is expected to remain in dire straits with the overall economic gauge activity tracked by Bloomberg to be on the weaker side. Smaller business confidence improved due to pro-growth measures by the lawmakers while all other indicators dropped. Monetary loosening seems to be supportive of domestically focused firms compared to export-oriented businesses. A weaker credit cycle is likely to remain as the nominal growth is expected to be on a downward trajectory. Unless the major banks come forward to provide credit to high-risk businesses, slower growth appears imminent.

Uncertainty also plagues Hong Kong where weekend protests have been ongoing for more than 3 months with no end in sight. The demonstrations have become violent, impacting investment sentiment, tourism (down 30 percent in August) and local businesses. Economic pain is likely to be severe as transport infrastructure is frequently brought to a standstill. This is not helping China’s currency either, as the yuan’s offshore use is mostly in Hong Kong, accounting for almost three quarters of offshore use. Global payment transactions using yuan have since dropped to the lowest level of 1.8 percent since October 2018, exacerbated by reduced global trade flows. The yuan depreciated beyond the psychological important level of 7 per dollar earlier in the month for the first time in more than a decade. For the exporters, weaker yuan created temporary relief in a trade climate wracked by tariffs. In investor’s minds is the question of whether the Chinese authorities will intervene to allow the yuan to weaken further to offset pressure on its exporters.

Back in Hong Kong, HSBC has launched interest rebates to support its SME clients to combat the negative effect of the Hong Kong protests and trade wars. An offer of rebates is not unusual. In 2009, as the global financial crisis was taking its toll, banks offered corporate clients rebates. The same relief was offered to individuals and companies in 2003 when the country was in the grip of a SARS (Severe Acute Respiratory Syndrome) outbreak.

Domestically, the South African economy has seen its growth disappear over the last five years. Growth has been disappointingly low. The economy is now growing at the levels below population growth. The National Treasury has released a discussion document to address the growth reforms agenda. While it highlights the importance of growth, its emphasis is on inclusive growth that results in job creation and narrowing inequality. Amongst the projection scenarios, the policy aims to grow the economy at a rate of 3.7 percent per annum in the long term from the current 1.5 percent path. The growth target is contingent on addressing reforms such as skilled labour, capital and investment. Also, combinations of various initiatives aimed at structural changes, deregulation, and lowering barriers to entry will be addressed. It stipulates policy certainty as a pillar prerequisite to increasing business confidence. As elegant as it may look, the policy proposal still requires input from the public and support from the Cabinet.

In the real economy, retail sales increased by 0.3 percent compared to the previous 2.3 percent month-on-month. SA manufacturing PMI came in at 52.1 points from 46.2 points in June, higher than consensus expectations of 51.4 points. In the meantime, the trade balance swung into deficit and business conditions deteriorated. Consumer inflation eased to 4 percent per annum, giving room for the SARB to cut interest rates; however, the rand has been relatively weak, making it more difficult for the central bank to consider cutting rates.