Encouraging signs of broad-based growth

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On the last day of February, newly elected USA President Donald Trump gave his first address to the US Congress. This was a much-awaited occasion as his first few weeks in power were very controversial and characterised by a number of hard-hitting executive orders that polarised opinion across the globe. Mr Trump took a “conciliatory tone” in his address according to a report by Reuters. The report suggests that Mr Trump came across as part deal-maker, part salesman, asking for unity and trying to repackage his populist message in more palatable terms. Five weeks ago at his inauguration Mr Trump slammed Washington’s politicians as out-of-touch elitists. On the Tuesday night of his address, his message was different: I need you, Republicans and Democrats alike.

He laid out plenty of promises. A huge infrastructure and public works programme, tax cuts for the middle class, immigration reform, a healthcare overhaul and an education bill. All of this will require congressional action, probably by different coalitions of conservatives, moderates and Democrats. “This is our vision. This is our mission,” Trump said. “But we can only get there together.” The new president, who has taunted Democrats over his election victory, did not criticise them this time. Repeatedly, he asked for their help, arguing that the country’s problems called for bipartisan solutions. “It was a softer tone and he gave a speech and not a tweet,” said Democratic Representative Peter Welch. “The challenges are going to be the details on his policies.”

The address appeared to show some recognition by the White House that Trump’s bombastic go-it-alone style has its limits. After the parade of executive orders, Trump must now turn his attention to the big-ticket items on his agenda requiring legislative action. “He’s done all he can unilaterally,” said Bradley Blakeman, a former aide to past-president George W Bush. “Now he needs to pass bills.” Even though Republicans controlled Congress, Blakeman said Trump needs Democrats to build a majority that would allow conservative Republicans to oppose some of his more centrist proposals, such as hefty infrastructure spending and talks on Immigration reform. “The president is as transactional a person as we’ve ever seen,” Blakeman said. “He understands that you might not like this deal, but I need you for three other deals.”

Reuters goes on to suggest that Congressional Democrats liked Trump’s infrastructure programme, his child-care tax credit, his call to reduce the prices of prescription drugs and his vow to preserve some key elements of former president Barack Obama’s health insurance law. But Democrats remain troubled by Trump’s desire to slash domestic programmes in order to increase military spending, his plans to reduce taxes for the wealthy and for corporations, and his aggressive policy on illegal immigrants. To be sure, the more foreboding elements of Trump’s campaign rhetoric were still present, albeit slightly dialled-down. As he did during the campaign, he portrayed a country in ruinous economic shape and plagued by terrorism, drugs, gangs and illegal immigrants.

Equity markets in the USA have been buoyant since the November 2016 election victory for Mr Trump. The Dow Jones Industrial Average (an index of the 30 largest publicly owned companies in the USA) finally broke through the 20,000 barrier on the morning of Wednesday 25 January – a historic high for the leading stock market index and one it had been close to breaching since Christmas. Then, on the day after Mr Trump’s first address to Congress, the Dow moved up to a new historically high level. The Dow Jones Industrial Average zoomed past the 21,000 mark for the first time on Wednesday 1 March as stocks resumed their record-setting rally. Stocks gained as the more measured tone in President Donald Trump’s speech reassured investors, while bank stocks gained on higher chances of an interest rate hike this month. His comments, though lacking in detail, helped underscore his pro-growth stance that has pushed Wall Street to record highs in a post-election rally. However, the markets were more focused on comments (the day before) from a handful of Federal Reserve (Fed) officials, including the influential New York Fed President William Dudley, who said the case for tightening monetary policy had become “a lot more compelling”. The increased prospect of a rate hike at the upcoming meeting of the US Fed also spurred the US Dollar to its biggest gain in six weeks. “US Dollar strength reflects a surge in betting on a March rate hike that we suspect is unparalleled in recent history …,” said Shaun Osborne of Scotiabank.

The London Financial Times reports that a number of factors have combined to increase the chances that the Fed delivers on policymaker’s December median forecast for three rises this year. The critical issue is an economic recovery that appears to be not only continuing but entering full force. John Williams of the San Francisco Fed said that after seven years of expansion, the US is at full employment, with joblessness at 4.8%. Confidence is rising among policymakers that core inflation will finally hit the Fed’s target.

Optimism is rising however that more widespread economic growth can now be expected.

Beginning-of-the-month data in March showed a global economy in growing health. The latest round of ISM surveys of manufacturing show virtually everywhere stronger than a year ago (Greece, Turkey and India are the lone exceptions). Richard Turnhill, global chief investment strategist at Blackrock, writes that reflation surprises are already evident in growth and inflation. Inflation, these days seen as a US-only phenomenon, has popped up in Europe and in Japan. Deflation risks have peaked in these economies, and there have been recent signs of inflationary pressures. And in China, producer price inflation has turned sharply positive after five years of deflation.

Positive economic signals, again first evident in the US, are also surfacing throughout Asia and in Europe.

Many European, Asian and Emerging Market companies are global enterprises that stand to benefit from the cyclical upswing in economic growth prospects.

In addition, sentiment towards Europe, Japan and Emerging Markets is rising – with more room to run. The opposite is true for the US, which was a popular overweight during the second half of 2016. Economic and political shocks in Europe have kept investors overly cautious. Italian politics warrant close attention, but political risks priced into markets around forthcoming French and German elections may be overstated. On balance, this has left European equity valuations at attractive levels, says Mr Turnhill. He then concludes by suggesting that as global reflation gains acceptance as the new market regime, fundamentals, valuations and sentiment will lead non-US markets to seal their position as promising prospects.

Domestic events have also focused the minds of local investors this year. The State of the Nation address by President, Jacob Zuma, early in February was a vibrant affair as opposition parties delayed his address by over an hour as they took the ruling party in general, and the president in particular, to pieces. The EFF was then manhandled out of the chamber. Later in the month Finance Minister, Pravin Gordhan, delivered his budget speech. In summary, his main challenges were significant as he tried to create a credible budget that reflects South Africa’s real economic predicament. He also had to position the debate on “radical economic transformation” so that it becomes not a statement of angry rhetoric but an encompassing invitation to participate in broad social wellbeing. By starting from the non-negotiable of the modest deficit of 3.1% and sticking to that target, Mr Gordhan was able to deliver something that the ratings agencies can likely live with and what South Africans need in the long term. The price that he has to pay for this target is an expenditure that increases very slightly above inflation and the requirement that he imposes a set of new taxes that will hurt in a weak economy. Local bond yields and the currency were reasonably well-behaved during the first two month of this year, with the Rand now stronger against the US Dollar by around -4% since the end of December last year.
The question on our minds for 2017 though is whether or not South Africa will participate to any meaningful extent in the recovery in the more widespread economic growth expectations.

Source: APS Monthly Economic Commentary