Quarterly Economic Review: Us/China Trade Dispute Weighs Heavily on Outlook

The broader, global view…

• The ongoing and often vicious trade dispute between the US and China has led to a material slowdown in global trade during the first half of 2019;
• Major Central banks, in particular the US Federal Reserve (FED) and the European Central Bank (ECB) have indicated that they will probably provide additional stimulus during the second half of the year to help offset some of the weaknesses caused by the slowdown in global trade;
• South Africa has not been immune to the negative effects of the trade disputes and export performance in 2019 has been adversely affected by the slowdown

Let’s take a closer look:

The United States

• In 2018 the US economy grew by 2.9%, up from a five year average of 2.4%.   This was largely attributed to President Trump’s fiscal stimulus package, which included a combination of tax cuts and increased government spending. This growth continued into the first quarter of 2019.
• However, a fairly wide range of US forward-looking economic indicators have softened in recent months. This may mean that the US economy will not be as strong over the next 18 months as it was over the past 18 months – and supports the view that the US Federal Reserve is likely to cut rates during the second half of 2019 in an effort to support economic growth.

The Euro Zone

• During the first half of 2019 the Euro-area GDP rose by 1.6% quarter-on-quarter.  
• During 2018 as a whole, the Euro-area grew by 1.9%, and has struggled to keep its growth above 2% in recent years.
• The current economic data does not suggest that the Euro-area is automatically heading into an outright recession but it does highlight that the Euro-area’s economic performance has been disappointing in recent quarters…and is likely to remain weak into 2020. 
• The ECB indicated earlier this year that interest rates are unlikely to rise until at least the middle of 2020.

China

• China’s economy grew by 5.7% quarter-on-quarter in the first quarter of 2019. 
• In 2018, the Chinese economy grew by 6.6%.
• Chinese GDP during the first three months of 2019 was mainly driven by government’s fiscal and monetary policy stimulus. Government’s decision to cut taxes and increase spending on infrastructure projects has spurred growth in both retail sales and fixed asset investment. 
• While China’s economic performance has proved resilient in recent years, it continues to face a number of domestic and global challenges, probably the biggest of which is the ongoing trade dispute with the US.

And now, back home…

• In the first quarter of 2019, the South African economy declined by 3.2% quarter-on-quarter compared with a growth of 1.4% quarter-on-quarter in the final three months of 2018 and 0.8% for 2018 as a whole.  Over the past five years, SA has achieved an average annual growth rate of 1.1% – which is below the population growth of around 1.5%.
• The economic weakness in the first quarter of 2019 was broad based. The latest fall-off in South Africa’s economic activity suggests that the return of electricity outages in May 2019, together with the intense focus on politics in the months ahead of the National Election in the same month, negatively impacted the economy.  
• Encouragingly, there appears to be a broad acceptance that the revitalisation of Eskom and its ability to meet the electricity demands of the country is critical to ensuring further economic development.
• The Rand strengthened by 1.9% against the USD in the first six months of 2019, after depreciating by -13.9% during 2018…and remains extremely volatile. 

Despite recent Rand exchange rate volatility and the sharp changes in the domestic fuel price, South Africa’s inflation remains under control. Furthermore, there is very little evidence of any build-up of inflation pressure in the short-term.

Source: Kevin Lings, Chief Economist at Stanlib