BUSINESS MAVERICK OP-ED
End of year brings Christmas cheer for the global economy
There was cause for celebration last week as two major global economic bugbears, US-China trade relations and Brexit, overcame significant hurdles. Although this does somewhat ease investor anxiety as we head towards Christmas, there are several other economic issues that need close monitoring because of their potential to upset the world economy’s delicate equilibrium.
2019 looks set to end on a tentatively joyous note compared with the sharp deterioration in sentiment in December 2018. Two of the major stumbling blocks, unresolved US-China trade relations and Brexit, have stood in the way of the world economy and financial markets in 2019.
Now they are out of the starting gates, however, introducing more clarity to the global mix and assuring a less nail-biting finish to the year than in 2018 at this time. That doesn’t mean the global economy is out of the woods yet. There are several economic challenges that call for a watching brief given their potential to upset the world’s delicate economic equilibrium.
In the meantime, it’s worth enjoying the celebrations where we can. Events last week delivered a modicum of certainty on the trade and Brexit fronts. At the 11th hour, the US and China announced a Phase 1 deal. It’s 80 pages long, but has not been available for public perusal yet and still needs to be officially signed. But it is gratifying that both parties managed to achieve a meeting of minds on their respective wish lists.
The agreement on the table sees the US cancel the December 15 tariffs that threatened to cast a pall over consumers’ festivities. The US also agreed to halve the tariffs imposed on China in September, reducing the rate to 7.5% from 15%.
China has agreed to buy US agricultural products. An official number has not been released so it is unknown whether this will be in line with the $50-billion that US President Donald Trump insisted on achieving agreement upon. The nine-chapter agreement also covers intellectual property and technology transfers — two of the US’s biggest concerns about doing business with China.
ING’s response to the deal is cautious:
“Although it seems agreement has been reached about the content of the deal, the legal text is still to be drafted, which could create problems.” It notes that the phase one deal does not include the most sensitive topics and that considerable hurdles need to be overcome before a full deal is achieved.
Trump was quick to tweet that Phase 2 trade negotiations would begin immediately. But there is widespread scepticism about whether the two countries are likely to get anywhere quickly on the big-ticket sticking points, namely Chinese subsidies on anything from low-cost loans and electricity and efforts to secure technological ascendancy. ING says both parties are poles apart on these issues.
“Moreover, Chinese officials emphasised that US actions have “severely damaged the hard-earned basis for mutual trust”.
A watching brief is thus certainly called for on the progress of a Phase 2 deal. Negotiations will be far more structurally significant than the stopgap measures included in the Phase 1 deal cobbled together under pressure to reach an agreement and, in so doing, avert an end-of-the-year crisis.
After three years of protracted and damaging uncertainty, the pound sterling and UK stock market celebrated the decisive outcome of the British elections. The Conservative Party’s resounding win puts paid to the possibility of a hard Brexit, which, most agree, would be economically damaging. However, in whatever form it is brought to bear, Brexit remains a highly contentious decision. The outcome of the elections does at least provide investors and businesses with some certainty about the way forward for the country.
Emerging markets benefited from the two hard-won milestones achieved last week, as diminished uncertainty saw investor risk appetite return. Barring any setbacks, emerging market assets could well remain supported into the New Year, as investors look forward to an investment environment that is less subsumed by the day-to-day uncertainty of trade negotiations and the potential Brexit outcome.
The South African rand was swept up in the broader rally in emerging market currencies, shrugging off the surprise introduction of economically damaging Stage 6 load shedding. The domestic currency, which was trading at about R14.50 to the dollar at the start of this week, was also helped along by the highest portfolio inflows in a year in the third quarter, at R40.2-billion, as a result of the country’s largest Euro bond issue.
After a year of surprise monetary policy accommodation, with disappointing results, it must be said, central banks will remain under the spotlight going into 2020. Last week’s two key central bank announcements offered little cause for celebration. The US Federal Reserve kept interest rates unchanged, indicating it wouldn’t be moving rates for some time, while incoming European Central Bank President Christine Lagarde also held firm and indicated that the bank would be reviewing its monetary policy approach.
Much more interesting will be the outcome of Sweden’s Riksbank interest decision this week. The central bank is widely expected to raise its official interest rate for the first time. The decision is significant in that it will broadcast the central bank’s intention to return rates to positive territory for the first time since February 2015. The Riksbank was the first central bank to send rates into negative territory and, as a first-mover, its experience of reversing the direction of interest rates will be helpful for other central banks, like the ECB, which also face the prospect of returning to positive rates again at some stage.
Global and local inflation is also likely to be a closely watched indicator. There are mixed views on whether consumer inflation will remain benign or whether it could stand to pose an underestimated economic threat during 2020. Blackrock last week positioned consumer inflation as the biggest, most underappreciated risk facing the global economy in 2020, while other economists are convinced global inflation will remain benign. The eventual inflation outcome is likely to be primarily dependent on the trajectory of food prices globally and locally.
Old Mutual Investment Group economist Johann Els says global inflation is low and “almost non-existent”. Locally, he says there is also very little inflation and, if you take quality improvements into account, consumer inflation is actually probably below 3%. But he does believe inflation is at a low point in its cycle and foresees the inflation rate rising in 2020, primarily as a result of base effects.
Els notes that food prices, which, he admits, pose a high forecast risk, will largely determine the inflation outcome in 2020. Els expects inflation to average 4.1% in 2019 and 4.5% in 2020, reaching a high of 4.7% late in the year. However, if food prices are significantly weaker, overall consumer inflation will be lower than that.
As we kick back and relax after a testing 2019, it’s clear that the global and local economy offer a mixed bag of prospects ahead of the New Year. Last week’s trade deal and Brexit outcomes are likely to provide temporary relief through to the New Year, but they by no means spell the end of the anxiety and volatility that have predominated in the global and local economic environment in 2019. BM