ARTICLE WRITTEN BY Kevin Lings
At this stage these are the key economic debates/questions for 2017. I have no doubt much of this will have changed within a few months, leading to a whole set of new questions
1. Will there be a meaningful pick-up in developed market fixed investment activity, led by the United States? (This is possibly the most important topic at the start of the year)
2. Are low bond yields on their way-out? Could global inflation surprise on the upside? Will the oil price continue to rise, pushing inflation higher? (The monetary policy approach in US and Europe will diverge further in 2017, but European bond yields are on the rise). Will fiscal stimulus replace monetary stimulus?
3. How risky is the US – China relationship? Will the growth in global trade slow even further? (This theme is strongly linked the “rise of protectionism” argument). The US accounts for 20% of China’s exports -about 10% of China’s GDP in value-added terms. Thus, a 20% fall in China’s exports to the US would likely lower China’s GDP growth by 0.4 percentage points.
4. Will 2017 signal the end for the EU? What is the likely outcome of the French election? Elections in France will be the defining moment of the year. We have a 35% probability of a Le Pen victory, which would lead to a referendum on participation in the euro and possibly even the EU itself. We are less concerned about elections in the Netherlands and Germany.
5. Impact of Brexit? Brexit negotiations will get underway when Article 50 is triggered in March 2017, and no major progress or results should be expected until the deadline in Q3/2018. For the UK, the effects of a weaker GBP and increased uncertainty about the long-term arrangement are likely to weigh on economic performance, but from the view of political risk, 2017 is the eye of the storm.
6. Will Dollar strength keep emerging economies under pressure? Total global debt across all sectors now stands at a record high 325% of GDP—up from just 220% of GDP in 2000. The emerging market corporate sector has now taken on debt equivalent to more than 100% of GDP (South Africa is an exception). In a world of subdued corporate profitability and growth, a stronger USD and higher bond yields represent significant challenges for EM corporate borrowers, many of whom also face higher hedging costs and declining creditworthiness. Most at risk is Turkey, Chile, Brazil and Mexico.
7. Can China continue to use debt to sustain the expansion of its large SOE sector? Private-sector estimates suggest that nonperforming loans could be over 20% of total loans. Reducing corporate indebtedness will thus largely depend on the implementation of structural reforms in the SOE sector—a very challenging task.
8. Will the US lift sanctions in Russia? President Trump has criticized US sanctions against Russia saying they are disproportionate. He has publicly defended Russia against allegations of election tampering and has talked about his interest in a better US - Russia relationship. Any decision by the US to relax sanctions would certainly undermine continued European support for EU sanctions. In this regard, the role of NATO will be important.
9. Will emerging markets rise to global challenges? The EM growth model has generally worked well. However, this model is now under threat. World trade and investment flows are likely to slow further in an era of "economic nationalism" and changing global demand patterns that are more focused on services and intangibles. As a result EM potential growth rates have been revised down significantly. Many EMs, therefore, must restructure and rebalance their economies to move away from reliance on manufacturing and exports towards domestic consumption and services.
10. Can South Africa continue to avoid a credit rating downgrade? SA has avoided a credit rating downgrade to “junk” status by government adhering to its expenditure ceiling. However, without a pick-up in economic growth the risk of further rating downgrades remains high.