Economic Growth and Impacting Factors

Jacques de Villiers
November 27, 2017

The UK: Budget and Forecasts Slashed

It was revealed in Philip Hammond’s budget speech on Wednesday 22 November, that the UK has given way to France its place on the list of the world’s five largest economies. This means that US, China, Japan, Germany and France are now top of the list. London, however, remains the number one financial services centre.
On a separate note, the Treasury’s official forecasting has slashed its growth predictions for this year and next year for the UK, and in the process delivered its worst forecast for economic expansion for the UK in history. The Office for Budget Responsibility (OBR) originally said in March of this year that it expected the economy to grow by 7.5% in the next five years, but they have now revised and decreased this figure to 5.7% for the same period.
In addition, the OBR stated that it now sees the economy grow by just 1.5% this year and 1.4% next; down from their previous estimate of 2% percent and 1.6% respectively.
On top of the aforementioned forecasts, the thorny issue of productivity staying well below the pre-crisis levels we have seen historically are expected to remain so for the next five years.

Zimbabwe under New Leadership

Turning our guise to the southern hemisphere where Robert Mugabe has been unseated, what awaits the country now after 37 years under his rule?
This all comes after severe power struggles inside the ruling Zanu-PF party. But is Mugabe’s overthrow going to bring change in Zimbabwe that the West would so dearly like to see? One must remember that the former Vice President Emmerson Mnangagwa has a long history with Mugabe, and at second glance might not seem the total anti-Mugabe campaigner some western media sources wanted him to be. It is true that he fell out with the Mugabes’ faction and especially Grace Mugabe, who was very ambitious herself and who wanted Emmerson Mnangagwa (also known as “The Crocodile”) out of her way.
The former president Robert Mugabe had Vice President Emmerson Mnangagwa fired, and in doing so, provoked his allies in the army to seize power and strip Mugabe of the party’s leadership and threatened impeachment proceedings. These eventually saw Mugabe pave the way for a new leader by signalling defeat and final resignation.
This is certainly a new era for Zimbabwe. One thing to remember is that the Zimbabwean Army is loyal to Zanu-PF, so this coup is must be read in conjunction with a caveat that it is now the turn of the new Zanu-PF frontman to lead the orchestra, and out with the old man!
In South Africa, Fitch kept the country’s credit ratings unchanged at BB+ with a stable outlook for both local and foreign currency credit ratings; one notch below investment grade. In April, SA was downgraded after the firing of Pravin Gordhan.
Moody’s and S&P Global Ratings are due to announce their decisions late on the 24th November.

The Federal Reserve in the USA and an Expected Interest Rate Rise in the Near Term

In their discussion of monetary policy for the period ahead, the members of the Federal Open Market Committee FOMC judged that information received since the Committee met in September indicated that the labour market had continued to strengthen and that economic activity had been rising at a solid rate despite hurricane-related disruptions.
Although the hurricanes depressed payroll employment in September, the unemployment rate declined further, and household spending had been expanding at a moderate rate. Growth in business-fixed investment had picked up in recent quarters, even though gasoline/petrol prices rose in the aftermath of the hurricanes, which boosted overall inflation in September. However, inflation for items other than food and energy remained soft. On an annual basis, both inflation measures had declined this year and were running below 2%. Market-based measures of inflation compensation remained low, whilst survey-based measures of longer-term inflation expectations changed little, on balance.

Policymakers agreed that the timing and size of future adjustments to the target range for the federal funds rate would depend on their assessments of realised and expected economic conditions relative to the Committee’s objectives of maximum employment and 2% inflation. They noted that their assessments would take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Members reaffirmed their expectation that economic conditions would evolve in a manner that would warrant gradual increases in the federal funds rate, and that the federal funds rate was likely to remain, for some time, below levels that are expected to arise in the longer run. Nonetheless, they reiterated that the actual path of the federal funds rate would depend on the economic outlook as informed by incoming data.

In particular, members noted that they would carefully monitor actual and expected inflation developments relative to the Committee’s symmetric inflation goal, with some policymakers expressing concerns about the outlook for inflation expectations and inflation. They emphasised that, in considering the timing of further adjustments in the deferral funds rate, they would be evaluating incoming information to assess the likelihood that recent low readings on inflation were transitory, and that inflation was on a trajectory consistent with achieving the Committee’s 2% objective over the medium term.

Several other members, however, were reasonably confident that the economy and inflation would evolve in coming months such that an additional firming would likely be appropriate in the near term. In their comments regarding financial markets, participants generally judged that financial conditions remained accommodative despite the recent increases in the exchange value of the dollar and Treasury yields.

In light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential build-up of financial imbalances. They worried that a sharp reversal in asset prices could have damaging effects on the economy. It was also noted that elevated asset prices could be partly explained by a low neutral rate of interest.

Policymakers also observed that regulatory changes had contributed to an appreciable strengthening of capital and liquidity positions in the financial sector over recent years, increasing the resilience of the financial system to potential reversals in valuations.

The balance sheet normalisation program initiated in October 2017 is proceeding so far at a gradual pace with no negative market reaction.

Turning to the Eurozone

The Eurozone’s booming economy is powering ahead in November, with employment growth as well as new manufacturing orders reaching 17-year high, despite a stronger euro. The strong performance data obtained from IHS Markit from the eurozone purchasing managers’ index, released on Thursday, reinforced the view that the strength of the eurozone economy would continue into the new year. The PMI surveys are seen as reliable indicators of economic growth and the latest reading point to a further pick-up in GDP growth after a strong third quarter.

UniCredit said these figures suggest growth at an annualised 3% in the fourth quarter. It is suggested that solid foreign demand is offsetting any euro strength related drag amid a wider global upturn. Other data from France’s official measure of business confidence hit its highest level in nearly 10 years, and according to Insee, the French statistics agency, conditions in France (the eurozone’s second largest economy) had finally recovered to pre-crisis levels in several sectors.

Such robust performance is likely to strengthen the view of the ECB’s more hawkish policymakers that it should give more clarity on the end-date for its bond buying.

Continue reading