Macro economic commentary – May 2019

Author: Ntsekhe Moiloa.

Swanage is a small fishing village in Dorset, as far from London as one can care to be. Almost as far from London as Doonbeg to Dublin. While President Trump will make Doonbeg the focus of his visit to Ireland in early June, he is not following a similar script in the United Kingdom, opting to rather land at Stanstead despite the proximity of urban protestors with the creativity to mow offensive messages in the nearby greenery. On the other side of London and well beyond lies the bay of Swanage which has variously been listed as Swanawic, Swanwich and Sandwich during its history. Yet it is not for sandwiches that it is well-regarded. During the summer, its beauty draws many to its beach and surrounds. That is not all that is interesting about Swanage, for it is here that British Nobel laureate in economics, James Meade, was born in 1907. Professor Meade was awarded a laureate for his work with Bertil Ohlin on international trade and capital movements. However, Meade’s Keynesian bent is possibly a reason Mr Trump has not scheduled to land in nearby Bournemouth and travel on to pay homage to Meade’s birthplace.

It would be a curious homage at a time that Mr Trump has figuratively ripped up the rule-book on the conventions and common understanding of how international trade works. He spent most of the month of May confounding investors who thought the China trade debacle of last year had been settled. As May ended with escalating threats on either side, US bond yields adopted the brace position while Mr Trump packed his bags to travel overseas without first having resolved the crisis he ignited.

After accusing Janet Yellen of not raising US interest rates fast enough, Donald Trump went on to replace her with Jerome Powell and complain that interest rate normalisation was killing off prosperity. The US Fed under Mr Powell has decided that it would act on the basis of evidence, and evidently this process has been too slow for Mr Trump whose escalation of the US-China trade spat has conveniently driven government bond yields lower. What the US administration has thus far refrained from doing is to name China as a currency manipulator, an action that could stifle Chinese access to dollar-based funding and throw the world economy into proper disarray.

Disarray is what awaits Mr Trump when he arrives in the United Kingdom. Theresa May’s leadership of the British government is finally coming to an end, putting a bookend to one of the most tortured premierships in modern British history. Mrs May heated and re-heated her withdrawal agreement with the European Union but the British Commons just could not get used to the taste. Outflanked by both hard-line Brexiteers and determined Remainers, the prime minister eventually started losing the support of key members of her government team. Although popular in her Maidenhead constituency, Theresa May found herself rather pilloried beyond her constituency’s borders. Her government’s guest in London, Mr Trump, may be eyeing the disarray with some glee. After all, the UK is almost single and dating while the US seems to have tired of its Chinese and Mexican dalliances. The leaders of the two nations are figuratively going to meet in a pub and either a good time or a brawl could ensue. Both are hoping for the former.

Having failed to exit the European Union in time, the UK had to participate in European parliamentary elections held during the month. The Conservative Party’s share of the vote dropped from nearly 24 percent to less than nine percent, placing it only ahead of the Scottish nationalists in the number of seats won. Remarkably, Nigel Farage’s two-month old party drew just over 30 percent of the votes, making a loud statement that a significant minority of Britons cannot wait for Brexit to be complete. Whether those voting for Farage’s party prefer a hard or soft exit was unclear because the party surprisingly declared that it would not publish a manifesto until after the European elections. Perhaps more helpful would be to look at the vote haul of the pro-Remain parties which was a paltry 35 percent combined. What remains clear as mud is the answer to the question, “what does Britain want?”

In a month of plebiscites, South Africa successfully held elections in early May and ushered in its sixth Parliament in the democratic era. There was plenty of controversy leading into the election, including the governing ANC submitting nomination lists that included many people who had been accused in the court of public opinion of lacking integrity. The party nevertheless claimed that accused members would still be vetted by its Integrity Commission before taking up seats in parliament. The process ensnared the party’s deputy president, David Mabuza, and created something of a stand-off ostensibly between him and his party boss, Cyril Ramaphosa. After some backroom manoeuvres, Mr Mabuza was belatedly sworn-in as a member of parliament, paving the way to his re-appointment as deputy president of the country.

The presence or absence of David Mabuza in the country’s government was regarded as one of several yardsticks to test the ability of Mr Ramaphosa to implement a reform agenda. Since his days as a provincial leader, Mr Mabuza has been dogged by accusations that he was corrupt and potentially even murderous. Thus far, he has deftly dodged being politically buried by the allegations, in contrast to other provincial leaders such as Supra Mahumapelo. On his journey, Mr Mabuza had some help in the form of reports by the Public Protector, Busisiwe Mkhwebane, that cleared him of wrong-doing during his time as a provincial premier. With his swearing-in, Mr Mabuza at least has a finger in the jamb of the door to the highest office in the land. Ms Mkhwebane was not done reporting though; a different report issued by her office seemed to preclude the return to Cabinet of one of Mr Ramaphosa’s most trusted lieutenants, Pravin Gordhan. The potential loss of Mr Gordhan’s reform energy and the prospect of Mr Mabuza’s return to parliament appeared to compound the rand’s woes on top of the weakness that was already present due to the US-China dispute.

With a vote haul of nearly 60 percent for the ANC and a diminution in the share of the vote of the main opposition, Cyril Ramaphosa would have hoped that the spotlight was shining with less intensity on him. However, as with elsewhere in the world the centrist parties saw support flowing to the far wings, both left and right. The EFF and the Freedom Front Plus increased their share of the votes, putting them in a position to claim increasing political legitimacy. As with the UK, it is not immediately obvious that the path ahead is clearer now after the elections than it was before they were held.