China has proved that it is no push-over in its ongoing negotiations with the White House. Although the trade war is having some impact on its economy, China is slowly gaining the upper hand.
While GDP growth has continued to lose momentum, slowing to its weakest rate since 1992, growth still remains above 6%. Additionally, factory output levels grew more 6% and retail sales, which reflect consumer health, grew more than 9%.
The Chinese government is also deploying even more fire power towards implementing structural reforms and boosting the economy. In acknowledgement of the challenging global environment, the 25-member Politburo led by President Xi Jinping announced during the quarter that it would be reinstating six stabilisation measures focusing on finance, employment, trade, foreign investments, other investments and exports.
China is in a different position to the United States (US) in that it cannot continue to retaliate by simply increasing tariffs, since it imports a great deal less from the US than the US does from China. Instead, the government is considering alternatives such as targeted fiscal support and the boycotting of US agricultural products – a direct hit to a key segment of Trump’s voter base.
The Chinese government has also adopted a proactive approach to fiscal spending, which should underpin both the Chinese and global economies, and has further reaffirmed that in terms of monetary policy it would be keeping liquidity at reasonable levels in order to support small- and medium-sized enterprises.
It is worth noting, however, that Vice-Premier Liu He, China’s chief trade negotiator, specifically stated in August that China remains firmly opposed to the escalation of the trade war with the US, as the conflict is not beneficial to the US, China or the interests of people around the world. China should be able to maintain growth north of 6% going into 2020.
CRUNCH TIME FOR SOUTH AFRICA
After a dismal first quarter, South Africa’s GDP rebounded strongly by 3% in the second quarter of the year. While this brings economic growth for 2019 to 0% thus far, it demonstrates that if everything falls into place – namely, if we avoid loadshedding and disruptive strikes – the economy is able to grow at around 3%.
Rebound aside, however, a number of issues have already been baked into the cake for this year. Consequently, we are unlikely to see growth of above 0.8% in 2019, and fiscal challenges remain elevated.
That said, good progress is being made on the ground, beginning with Finance Minister Tito Mboweni’s economic plan which has already been placed before cabinet after receiving feedback from various industry participants.
The South African Reserve Bank (SARB) kept the repo rate unchanged at 6.5% in September, owing to concerns over oil prices and weakness in the local currency, both of which could have a negative long-term impact on inflation. Given the weak economic environment, however, coupled with a wave of easier monetary policy around the world, if local inflation remains within target – more interest rate cuts are likely in the future.
However, as SARB Governor Lesetja Kganyago recently mentioned, now is the time to implement long-awaited structural reforms, as kickstarting economic growth cannot be accomplished with monetary policy alone. South Africa’s economy is currently experiencing its longest downward cycle since 1945.
In light of the need for urgent action, it is positive to see that Eskom’s transformation plan is in the pipeline, and should be presented before cabinet soon. Likewise, turnaround plans for South African Airways, SA Airlink and SA Express are also currently on the table and are already being discussed.
Additionally, the Saldanha Industrial Development Zone, catering specifically for the oil and gas industry, is being rolled out, with close to 60 prospective tenants expressing their interest. As one of South Africa’s new special economic zones, government has offered businesses within the area a preferential corporate tax rate of 15% as an incentive to invest further in the oil and gas industry.
These types of developments should pave the way for more sustainable economic growth in the future. Overall, there is strong evidence to suggest that Ramaphosa and government are hard at work behind the scenes to drive reforms forward.
Another key issue to note is the record outflow in portfolio investments seen in the year to date, as foreign institutions and pension funds continue to sell off South African bonds and equities, looking for safer havens for their money. However, it is worth noting that portfolio flows are quite different to foreign direct investment (FDI), which saw an extremely healthy increase in 2018 compared with the past five years. The marked increase in FDI indicates that we could potentially see stronger economic growth over the next three to five years.
Finally, if we see traction over the next 12 months around restructuring Eskom and addressing issues at other state-owned enterprises the local economy is likely to return to growth of 1.8% and, in time, possibly even 2%. This growth would then finally put the country back into a position we haven’t seen in five years; one where economic growth is greater than population growth (which is the real measure needed if we are to address notable issues such as unemployment).
Written by Maarten Ackerman, Citadel Chief Economist