Global Economy Overview
- The recovery in the global economy, which began in H2 2016, looks set to strengthen in 2017-18, as growth quickens in developed markets, and as EM and FM shake off recent weaknesses.
- However, a protectionist approach under President Donald Trump will undermine growth prospects for global trade.
- Assuming that the US president delivers on his fiscal stimulus campaign rhetoric and adopts new infrastructure spending, this will bode well for the global commodity market, mainly metals.
- However, commodity prices will remain vulnerable to geopolitical risks, USD strengthening and President Trump’s trade policy.
- Although the US is set to continue on its path of monetary tightening, which will likely increase capital outflows from EM and FM, interest rates are likely to remain below trend levels as underlying inflation remains subdued. As a result, demand for EM and FM risk assets is likely to remain strong, underpinning portfolio flows to their currency and capital markets.
- African currencies will remain weak, particularly given the region’s heavy import dependence.
- Rising tensions in the EU will affect EM and FM, especially Francophone Africa, which has strong trade and financial links with the region. This increases currency volatility and concern over possible CFA franc devaluation in the short- to medium term.
- While an improved outlook for China should help boost investment and trade in SSA, this is likely to be short-lived- growing debt in China risk triggering the third leg of a long global crisis, following the impact of the US crash in 2007-08 and the eurozone economic turmoil in 2010.
- Key sectors of growth in the region include ICT and internet infrastructure, logistics, energy (in some markets, notably Ghana), construction and FMCG.
- Key investment & business hotspots in 2017 include Senegal, Cote d’Ivoire, Ethiopia and Ghana.
The economic recovery seen in the global economy in 2016 (following the 2014-15 global crisis) is likely to strengthen in 2017 driven by both developed and emerging economies; this is evident by the IMF’s upward revisions to global growth numbers, following an outperformance in H1 2017, as well as improving investor sentiment following the performance of global equity indices. The IMF expects global growth to accelerate to 3.6% in 2017 (up from 3.2% in 2016, its weakest growth rate since 2009) and to 3.7% in 2018, from earlier projections of 3.5% and 3.6% in 2017 and 2018 respectively. At the same time, MSCI World, EM and FM indices have broadly been on an upward trajectory since early 2017 indicating renewed investor risk appetite for EM and FM assets.
Growth will be driven partly by advanced countries, specifically the US, which is likely to grow at a faster pace this year, from 1.5% in 2016 to 2.2% in 2017. However, there is a risk that growth may be undermined by uncertainty over US President Donald Trump’s ability to deliver on his election campaign to expand fiscal policy and promote growth, particularly given his administration’s failure to repeal current healthcare bill as initially anticipated. Nonetheless, the economy will continue to show signs of bright spots particularly in the areas of consumer and corporate spending and housing activity. These factors have seen unemployment remain below the 5% target since May 2016 indicating improving economic activity. Consumer confidence remains high reflecting consumer’s optimism about prospects for the economy, in particular the labour market and their incomes. Similarly, inventory levels are down, reflecting rising momentum in economic activity, while the Economic Confidence Index has remained in positive territory since early 2017 (albeit dipping to around zero in mid-July). We expect this trend to continue in 2018, although indications of growing challenges in passing Trump’s tax reform agenda and increasing the Federal government’s debt ceiling by end Q4 2017 will undermine prospect of the index reaching recent highs seen in April 2017.
With the Federal Reserve ending its QE programme in October 2014, and with the US economy expected to strengthen in the outlook period, the US Federal Reserve Bank is likely to maintain its hawkish stance over the short term. However, recent indication that US expansion is failing to transmit into higher inflation (above the US Federal Reserve’s 2% annual target) should curb expectation of an aggressive policy tightening. In view of this, an improved price outlook for US Treasuries appears limited given market expectations of 10-year yields rising.
The eurozone will continue on its recovery trajectory, supported by improved household consumption, investment and exports. So far, y/y growth has rebounded strongly in recent quarters (growing by 2.3% y/y in Q2 2017, compared with 2.0% in previous quarter and from 1.9% in Q4 2016, and we expect this trend to continue over the short term; however, growth will continue to be undermined by legacy issues since the 2008-09 global crisis, specifically, its large fiscal deficits, high debt stocks and widespread unemployment. Increased political tensions in Spain over Catalan’s secession demand could also undermine prospects for the eurozone and the EUR. Meanwhile, improved domestic demand, along with the rebound in energy prices since April 2016 have helped to boost inflation above 1%; nonetheless, core inflation, which the ECB assesses to make policy decisions, remains subdued warranting continuation of the ECB’s QE/asset buying programme, until at least September 2018. This move will continue to support inflation (in addition to further recovery in commodity prices and base effects), but ongoing slack in the eurozone should limit growth in wages and hence inflation. However, as inflation rises further, we expect the ECB to come under increasing pressure to raise interest rates in an effort also to limit the growing divergence between its main financing rate and the US Federal Funds rate.
Emerging Markets are likely to experience mixed results over the short term. Continued US expansion will boost commodity exports, although prices will remain vulnerable to geopolitical risks, USD performance and President Trump’s trade policy. The risk of reflation stemming from higher commodity prices also suggests that the scope for policy easing by central banks in EM will be low; as a result, we expect monetary policy to remain tight or even be hiked over the period. Our viewpoint is supported also by our expectation of further US interest rate hikes, which will attract flows from EM, prompting EM policymakers to pursue tight policies and make their economies more attractive. At the same time, prolonged strengthening of the US dollar will depress prospects for importers and revenues.
China remains a concern to world growth, and other EM and FM in particular given, that growth has remained weak. Although the official manufacturing PMI has been steadily above the 50-point benchmark (which separates economic expansion from contraction) since September 2016, China’s economy remains structurally weak. Growth has been spurred by stimulus measures (credit-fuelled investments) which are likely to be unsustainable, instead resulting in higher debt burden which will eventually translate to slower economic growth. We expect stimulus measures to fade away in H2 2017 and into 2018, resulting in lower growth rate in China, which will bode ill for other EM and FM countries. This will continue to undermine the outlook for many economies that have come to rely on increased levels of Chinese funded projects and/or capital/investment inflows along with greater levels of trade.
- The US dollar strengthened in H1 2017 in line with tightened US monetary policy and negative sentiment over the populist threat in Europe. However, with the likelihood of populist threat now virtually diminished (following the victory of pro-EU candidates in polls in France and the Netherlands in H1 2017 and in Germany in September 2017), the EUR:USD trend has reversed, with the USD weakening by 2.6% since end-June against the EUR and the DXY (the USD index) weakening by 1.9% during the same period. Over the short term, the USD will be undermined by improving eurozone fundamentals (which is EUR positive), ongoing political turmoil in the US, and perennial debt ceiling issue (both of which are USD negative). However, our expectation of one more rate hike at end-2017 and at least two more in 2018 should help to moderate USD weakening over the short term.
- Eurozone fundamentals have improved, helping to boost the EUR; the currency has strengthened by about 10% YTD, thanks to improving business confidence in the eurozone and ongoing US political issues, which continue to undermine the USD. However, ongoing tensions in Spain over Catalan secession and recent extension of ECB’s QE programme (despite tapering from EUR60bn to EUR30bn per month commencing in 2018), will temper recent strengthening of the EUR, as will expectation of US policy rate hikes in the coming months.
Growth in Sub-Saharan Africa (SSA) fell to its lowest level since 1994 reflecting the effect of the commodity price slump that began in 2014. While most countries will continue to reel from the effect of the commodity price shock, we expect economic activity to recover over the forecast period supported by an improving commodity price outlook. This will help to drive growth in key commodity-rich countries, creating multiplier effects in the non-commodities sector. This is specifically in Nigeria, South Africa and Angola, which together account for around 57% of total nominal GDP in SSA. Increased drive by African governments to boost public investment spending and strengthen the productive capacities of their countries will also underpin growth, although financing challenges and capacity problems are likely to persist resulting in slow progress. Nonetheless, we expect economic activity in sectors such as transport, energy, construction, ICT and trade-related services to expand, presenting new business opportunities. Strong population growth and rising urbanisation rates will also offer opportunities for investors, and in turn support exports and help underpin increased flows of FDI over the coming years.
Economic growth in Sub-Sahara Africa is expected to strengthen: from an estimated 1.3% in 2016 to an average of around 3.0% in 2017-18, reflecting improved prospects in a large number of countries, including key oil exporters. However, growth rates will remain uneven across the region, with the region’s economic giants, Nigeria, South Africa and Angola posting weaker growth rates compared with other minerals and agricultural producers such as Ghana and Cote d’Ivoire. The former countries will continue to adjust to the commodity price shock, despite our expectation of higher commodity prices in 2017-18. The commodity price shock led to significant economic imbalances in such economies, evidenced by larger budget deficits, increased FX liquidity risk and higher inflation resulting from pass-through effect from currency weakness; as a result, it will take some time before we see such economies post growth at pre-crisis levels. While the improved commodity outlook will go some way towards boosting growth in these countries, it will be crucial for political leaders to adopt bold policies that will effectively address structural imbalances and send positive signals to investors to restore confidence.
Inflation is likely to remain elevated in 2017-18 on a combination of higher oil prices, exchange rate pressures and possible drought-related shocks, especially in east and southern Africa. However, price increases are likely to be limited by an expected improvement in harvests, which will help moderate food prices (the largest component of the CPI basket in most countries) and greater infrastructure development, which will help to reduce supply bottlenecks and hence inflationary stresses. Inflation in Francophone Africa, which has currency pegs to the euro, will soften on the back of general EUR strengthening since H2 2017 and will remain lower than rates in Anglophone Africa. Despite this, increased uncertainty in the global economy and further hikes in US interest rates suggests that the scope for monetary policy easing will be limited; as such, monetary authorities are likely to adopt a broadly tight policy stance in 2017-18, sustaining high T-Bill yields.
Current account deficits look to remain elevated owing to the ongoing high level of infrastructure investment, FDI-related imports, and imports of food and consumer goods. As most countries in sub-Saharan Africa are oil importers, the rebound in global oil prices will also increase external sector pressures despite somewhat higher demand for exports from key export markets. This will continue to sustain high demand for FX in African countries.
Capital flows into SSA looks set to recover as improving commodity prices and ongoing interest rate differentials stoke investor appetite. This was evident in the rebound in Eurobond issuances in H1 2017 where despite US rate hikes, subscription levels remained robust. Furthermore, yields on SSA debt have declined since the start of the year. Nonetheless, while FDI flows into Africa will be boosted by a recovery in global commodity prices, such gains will undermined by the tightening of developed economy monetary policies. The loosening of developed economies’ monetary policies following the 2008-09 global crisis led to large portfolio capital inflows into sub-Saharan Africa’s largest markets. As monetary policies are “normalised” in many developed economies, particularly the US’ tightening since mid-December 2015 (with further hikes expected), SSA economies remain vulnerable to sudden portfolio flow reversals and higher financing conditions.
Sub-Saharan Africa FX Outlook: African currencies will continue to face downside pressures. Further US rate hikes will be supportive of the USD, but negative for African currencies. This is in addition to domestic challenges in the region, the high import dependency of countries and rising political risks; these factors will undermine anticipated gains in FX inflows. Although official intervention alongside an improved fundamental picture with a positive external balance will provide some respite for the NGN, the multi-tiered exchange rate regime leaves the exchange rate susceptible to downside risks in the event of sudden shocks to oil prices and oil production. GHS is likely to weaken at a moderate pace, although rising commodity prices and production (mainly oil) should provide some support. Resilient gold prices will also support the GHS, especially in the wake of growing tensions over US-North Korea relations, uncertainty over US-China trade relations, rising political tensions in the EU and uncertainty over President Donald Trump’s policies. However, as Ghana is a net oil importer, gains in export receipts will be undermined by higher oil import costs, sustaining high demand for FX. KES is also set to weaken on the back of Brexit-related concerns in one of its key export market, the UK, political uncertainties and high corporate demand for FX. XOF/XAF will continue to mirror developments in the EUR, given their currency peg to the EUR. Recent EUR strengthening and hence XOF/XAF strengthening will continue to be supported by improving sentiment in the eurozone; however, such gains will be tempered by downside risks associated with Catalan’s secession and longer-than-expected tapering. Nonetheless, improved EUR performance has raised concerns about a XOF/XAF devaluation; we are more bias towards a XAF devaluation as CEMAC is yet to adjust to the oil price collapse.
The overall positive scenario for SSA Africa in 2017-18 is beset by numerous risks. External factors continue to pose the largest threats to the region as a whole, but domestic risks are more significant in some countries. African countries continue to be blighted by power constraints; undermining Africa’s growth potential, and sustaining high costs for doing business in the region. The short term outlook for power provision is positive, but progress will be limited given the huge investment required against the backdrop of weak commodity receipts (albeit improving) and tighter global financing conditions. Other risks include security threats associated with terrorism, political instability and high currency risk.
Despite a number of challenges facing the African region, it still offers new areas of growth. Although Africa’s energy sector has been exposed to oil price shocks, the sector remains a major lucrative area in the region (mainly coal, oil and natural gas). However, oil price volatility poses major risks. Infrastructure-related business areas including power, construction, ICT and internet infrastructure have emerged as major areas of growth and investment in the region:
Emerging hotspots include Senegal, Ghana, Cote’d’Ivoire and Ethiopia. These economies have seen a rise in greenfield investments in recent years, thanks to improving economic fundamentals and to some extent, stable political environments. Côte d’Ivoire is another major hotspot although rising political tensions and security issues pose some downside risks to the country’s prospects. Ghana’s investment profile has also improved.