Weekly Economic Focus: G20 meetings will be dominated by the US and China’s trade negotiations

By Alexander Forbes Investments on Nov 28, 2018 in Market and Economic Commentary

 

Global wrap – G20 meetings will be dominated by the US and China’s trade negotiations

• Trade talks between China and the US will dominate G20 meetings in Argentina this week.

• Brexit and Italy’s budget discussions continue to cast a shadow over European market sentiment with EU leaders scheduled to hold a special meeting next Sunday to confirm the draft withdrawal agreement.

• The potential for the US Federal Reserve (Fed) to hike interest rates to less than what it’s currently priced by markets can revive emerging markets.

• The oil price dropped below US$60 per barrel following Saudi Arabia’s energy minister signaling that output may have peaked at the same time US oil inventories rose.

• Inflation will likely show subdued pressures in November while economic growth will come out weak in Europe.

• The South African Reserve Bank (SARB) raised the repo rate to 6.75% from 6.5% to anchor inflation expectations at 4.5% – the midpoint of the target band.

• S&P Global Ratings affirmed South Africa’s BB (stable) credit rating.

• President Ramaphosa signed the minimum wage bill into law but its impact on employment remains unknown.

 

US-China trade talks to dominate G20 meeting this week

The G20 will hold meetings in Argentina later in the week where three priority areas will be discussed: the future of work, infrastructure for development and a sustainable food future. While these are ongoing discussions globally, the focus for markets will likely be the trade negotiations between the US and China. Recent pronouncements pointed to expectations of a ceasefire between the two countries, which, if it happens, will provide a reprieve to emerging markets. China’s trade numbers already show the impact of higher tariffs, and this will likely result in the materialisation of a trade shock-induced growth slowdown next year.

 

Europe and the UK – Brexit and Italian debt negotiations continue

The European Union agreed on the terms of the draft Brexit withdrawal agreement. UK Prime Minister Theresa May will now need to find support in the UK parliament. Given the number of MPs that have resigned, it remains uncertain if the deal will receive enough support. The European Central Bank (ECB) is scheduled to address the European Parliament’s committee for economic and monetary affairs on the state of the economy and the potential impact of Brexit. The Bank of England will also provide analysis of the potential withdrawal from the EU to the UK Treasury. The results of the analysis may sway the outcome if it shows negative implications in a no-deal scenario.

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Outside of Brexit negotiations, Italy’s populist government has pushed back austerity measures imposed by the European Commission in favour of loosening fiscal policy. The policy impasse continues to create uncertainty for both corporates and households, which will result in lower domestic demand and economic growth. This in turn will worsen the budget deficit as tax revenues are likely to slow down. Effectively, the pushback against fiscal consolidation by the Italian government will likely result in more austerity required in future.

 

Emerging markets – sell-off continues

With equity markets down globally, emerging markets also declined across the board. The big issue for emerging markets remain the rising US interest rates and declining liquidity, and the associated capital outflows. The MSCI Emerging Markets Index fell by 1.9% last week, reflecting declines in Russia (-5.4%), Brazil (-3.8%), Mexico (-3.7%) and South Africa (-2.7%) among others.

CDS spreads were generally up in many emerging markets with Russia rising by 10bp as oil prices plummeted to below US$60 per barrel. Across many oil importing emerging markets, inflation forecast and monetary policy decision making has been made difficult by this fall in oil prices. The rising global interest rates and falling oil prices sit at opposite extremes and makes it difficult to assess inflation risks as the short term improves due to lower fuel costs while the medium term remains with risks from potential shock emanating from higher global interest rates.

What could flip emerging markets’ fortunes as we move into 2019 is the potential for the US Fed to administer lower interest rates that are currently priced in, or to pause hiking rates. It’s more likely that fewer rates will be the outcome than pausing, especially because economic growth in Q1 2019 and perhaps even 2Q 2019 will still support fiscal stimulus and strong labour markets before waning in H2 2019.

 

South Africa – SARB, S&P and minimum wage bill

Divided SARB MPC opted to hike rates now rather than later

The six-member SARB Monetary Policy Committee (MPC) increased the repo rate by 25bps from 6.50% to 6.75%, with three members preferring to hike rates while the remaining three members preferred to keep rates unchanged. The division in the committee’s preference was also reflected in market analysts’ expectations – 11:10 in favour of a hike – in the run-up to the meeting given the improvement in the near-term inflation profile. 

The Bank’s Quarterly Projection Model (QPM) forecasts headline CPI inflation to average 4.7% this year, down from 4.8% at the September MPC meeting. Inflation is seen to gradually rise to a peak of 5.6% in Q3 2019, averaging 5.5% and 5.4% in 2019 and 2020 from previous forecasts of 5.7% and 5.4%. Core inflation is forecast to average 4.3% and 5.3% in 2018 and 2019, which are both lower than at the last MPC meeting. Looking ahead, 2020’s forecast was kept unchanged at 5.5%. Economic growth has been revised marginally lower to 0.6% in 2018 from 0.7% previously, and as a result the growth in economic activity will remain lower than the economy’s potential until after 2020.

In the end, while acknowledging the improved inflation forecast in the near term, the SARB evaluated the medium-term inflation risks to be on the upside. These include the rising interest rates, the reduction in liquidity globally and the associated potential weakness of the rand along with other emerging market currencies.

The debate was not whether to hike or not, but to hike now or later. To prevent hiking at an aggressive pace later, the SARB decided to hike by 25bp now, which will be manageable for the economy.

Minimum wage bill signed into law

President Ramaphosa signed the minimum wage bill into law, which will put a floor of R20 per hour across all sectors when it comes into effect on 1 January 2019. While the bill was largely agreed upon at the National Economic Development and Labour Council in 2015, its impact on employment creation is yet to be determined. However, it will benefit about 6 million employees that currently earn below R3700 per month.

Standard and Poor’s leaves South Africa’s credit rating unchanged

S&P Global Ratings affirmed South Africa’s long-term foreign currency rating of BB with a stable outlook and said: “The implementation of reforms, including the recently announced fiscally neutral growth package, will boost investor confidence, investment, and economic growth”. However, the rating remains constrained by the slower pace of per capita income growth as well as the rising debt levels and significant contingent liabilities.

We do not expect a credit rating downgrade from any of the rating agencies over the next 12 months. However, the risks will continue to linger if economic growth does not improve over the next few quarters.

 

The week ahead

This week we look forward to the release of the RMB/BER Business Confidence Index for 4Q 2018. In the Q3 2018 survey, 62% of business executives were dissatisfied with prevailing business conditions. We expect an improvement following some enthusiasm after the Jobs Summit and the Investment Summit, all of which point to more certainty in the macroeconomic policy configuration. Moreover, the recent signing of the minimum wage bill into law could slightly boost consumer expenditure.

Apart from business confidence, we also expect the FNB/BER Consumer Confidence, private sector credit extension and the monthly trade and budget balances for October. We expect trade and budget balances to print wider deficits, which will likely push the currency weaker and bond yields higher from levels we saw post the interest rate hike.

Globally, the focus will be on inflation prints for October, especially with oil prices in sub-US$50 per barrel, economic growth from Italy and the Brexit summit discussions. While the G20 discussions are topical, they will be overshadowed by trade talks between the US and China.  

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Alexander Forbes Investments

Alexander Forbes Investments

Alexander Forbes Investments was established in 1997. We are a forward-thinking and trusted global investment provider, with roots in Africa. In pursuit of certainty we set out to understand our retail and institutional clients’ circumstances and risk tolerance to set clear goals. Our adaptive investment approach, called Living*Investing allows us to maximise opportunity and minimise risk at every stage of the investment cycle.

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