United States:There are signs of the economy tracking in a late cycle phase, with 2020 growth likely to print below trend. Previous monetary easing and only a limited fallout from the virus outbreak should prevent a hard landing. While services and consumer spending have remained resilient, rising wage growth has curbed corporate profitability. A pullback in hiring in 2020 and a rolling over in wage growth could soften consumption. In our view, contained inflation and slowing growth leaves space for an additional cut in interest rates.
Eurozone:Growth has slowed in tune with downbeat confidence and a worsening in the global backdrop. Distinctive factors in some countries (notably Brexit and political troubles) add downside risks. Although services output remains solid, potential spillovers from weakness in industrial activity and the risk of trade disputes with the United States (US) remain concerning. Slower growth in jobs, wages and investment point to a smaller growth contribution from domestic demand in 2020.
China:The coronavirus outbreak has exacerbated the slowdown in growth already underway in China, which had been initially triggered by a trade war with the United States (US). While a faster ramp up in activity in the second half of the year should help to partly offset lost output from the first half of the year, the overall effect on full-year growth will still likely be negative. Chinese authorities have responded to the crisis by easing monetary and fiscal policy, issuing bonds and implementing measures to support small and medium enterprises which are struggling to meet payments and remunerate workers. Government has also provided support to the real estate and agricultural goods sectors to alleviate the negative effect of the outbreak on growth.
South Africa:Electricity supply issues are exacerbating the country’s longest economic downturn in history and fractious politics are stymying the pace of reform. Growth is likely to muddle along at moribund levels and will remain reliant on positive global factors to provide interim growth boosts. While it is yet to be seen whether government will successfully negotiate with labour to achieve its proposed cuts to the wage bill, Moody’s could give the country the benefit of the doubt in the near term. This, together with little demand-pull inflation pressure provides space for additional interest rate easing in our view.
Economies at a glance: US
• The Federal Reserve left interest rates unchanged at its January 2020 monetary policy meeting although inflation breached the 2% target since November 2019. Medical and transport price increases have added upward pressure to inflation. The International Monetary Fund (IMF) however expects inflation to only rise to 2.3% in 2020 underpinned by muted core inflation.
• The rate of household savings slowed further while consumer spending remained robust in recent quarters.
• Slightly above trend inflation is likely to persist in the near term as signaled by a mild uptick in inflation expectations in twelve months.
Economies at a glance: Eurozone
• Economic indicators continue to show signs of waning activity. Softer growth activity is further revealed by a slowdown in the growth rate of money supply. Despite negative interest rates, the momentum in savings has risen and growth in consumption spending has slowed.
• The negative credit-to-gross domestic product (GDP) gap has widened further due to an ease in the household credit ratio in most of the Eurozone’s constituent countries.
• Debt-services costs have also receded and appear to have stabilised. Similarly, the credit impulse has been weak and has not provided additional growth support.
Economies at a glance: China
• The ongoing rise in confirmed coronavirus cases has terrorised global markets and sentiment. The Purchasing Managers’ Index (PMI) lost momentum in January 2020 and slowed below the 50 neutral mark amid the signed phase 1 trade détente.
• High-frequency economic indicators have disappointed and the expectation is for trade data to remain weak due to below-capacity manufacturing activity. The daily price of oil has slowed as demand from China has eased.
• Policy uncertainty has however dipped in January 2020 and has a high likelihood of falling further due to the intensive monetary policy intervention by the People’s Bank of China and fiscal authorities to stabilise growth.
Economies at a glance: SA
• The February 2020 national budget highlighted further downward revisions in growth, now below 1% in 2020 alongside consensus expectations. This propels a larger initial budget deficit relative to what was estimated in the Medium Term Budget Policy Statement.
• The debt profile fails to stabilise and debt-service costs remains high despite no additional funds being granted to Eskom in addition to what was previously announced and despite significant proposed cuts to the wage bill.
• Living standards have continued to deteriorate as a large portion of government expenditure is skewed towards debt repayment and cannot be used to fund other social priorities. Efforts to curb the wage bill could help downtrodden confidence at the margin.