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By Cees Bruggemans
We are mid-decade, and many years down-range from the double ground zero of 2008 to 2009 when the West was shaken by two massive existential shocks, first in the US and then in Europe, too.
The repair and recuperation may have been uneven, at times subject to ridicule (in Europe), but Western policy did not budge. It stayed persistently on course. The payoff is only now gradually coming into view.
This is perhaps a strange moment to take such a quietly upbeat attitude, with the US GDP data for 1Q2015 only showing 0.2% growth. Effectively at a standstill!
But that isn’t the underlying reality.
Winter did, again, beat back America’s first quarter of the year, as it has in recent years, but this isn’t a good reading of the inherent forward momentum already achieved by the US economy. Steady new job growth of 200 000 monthly is more reflective of a 2.5% growth economy longer term.
The nearly 3% rise in the US Employment Cost Index is also signaling steady take-up in labour slack. The US may be closer to effective full employment than allowed, even if not approaching this condition at full gallop. There remains scope for policy caution, either way.
As to that recent US growth weakness, the 1Q15 was held up by ports congestion (labour strikes), the oil and gas price halving caused heavy trimming in energy exploration in some parts, and the strong Dollar impacted net trade.
Some of these negatives, such as port congestion and the energy sector adjustment (oil rig count), are by and large absorbed and will not hold back future quarters.
Thus the overall sense is a US economy steadily progressing, even if keeping the Fed and markets cautious, neither seeing little reason for overreaction, either with regard to likely growth or inflation developments.
The Fed, along with markets, is likely to be emboldened by better spring and summer growth data, freeing up the first tentative rate hike in September, thereafter through 2017 looking for a gradual, if limited, restoration of real interest rate premiums.
It will make for a strong Dollar for the duration.
The laggard of recent years has been Europe, mainly due to a challenging political backdrop in achieving agreement about the way forward. In the end, this turned out to be a variation of German tough love, by way of fiscal austerity and (some) social reforms, coupled in harness to a reactively responding ECB offering monetary accommodation and leadership in guiding markets.
In time, this reduced government deficits, lowered the Euro, greatly lowered bond market yields, saw energy costs fall, saw some reforms, especially in the peripherals. And started changing expectations.
Together, this ended the drift towards deflation and renewed recession, instead this year seeing evidence of slightly reviving growth even in the larger European economies. Perhaps excruciatingly slow, measured at the decimal point level, but still evidence of a mild pick-up.
This in turn has provided reason to bond markets to reconsider the relentless downward drift in government bond yields. Partly warranted by the poor macro backdrop and activist ECB bond buying, the bond yield decline in Europe has reached exceptional proportions.
Technically, the European markets had overreached.
With European growth and inflation expectations even only changing in minor ways, the prospect takes on a different hue. Yields need to be higher rather than lower. The tide may have turned, despite the ECB being far from finished with its QE bond buying.
Thus the two main Western horses may be back in harness, if with the US the stronger of the two, and more advanced in its resource take-up, but with Europe now probably also starting to perk up, most significantly in hardest hit parts like Spain, but also in its northern power houses such as Germany and the Low Countries.
Still, it isn’t a reason for the Fed to come out with all guns blazing or for the ECB to abruptly abort its QE programme. In both instances, expect finesse in handling market and investment sensibilities. A gentle hand on the tiller remains warranted, given the evident skittishness still present all round.
But if the West is more clearly stirring, even if only in modest ways, Asia is also doing its bit to enhance the overall global impression.
Whereas it was at first Japan leading with Abe Economics policy aggression, and China gave the impression of welcoming the cyclical lull coming over it, assisting in reducing speculative excesses in property (and commodities), this pullback has apparently progressed far enough. Time for a switchback?
At least, that is one interpretation as Chinese policy is increasingly showing fangs, cutting interest rates, with talk of a Chinese version of unconventional policy coming (after so many successful rich country versions intend on countering some of the resulting currency fallout?), and this impacting currency & asset markets, including bombed out commodities sensing a short-term reprieve.
Thus there is a global beat to what is playing here.
Something that neither Russia on Europe’s eastern flanks, or Greek governance challenges, or Middle Eastern wars or tragic people movements can shake off.
The world is on the comeback trail, though still only in its early stages, with politicians and policy makers very careful not to make missteps prematurely ending the revival at this very sensitive juncture.
For South Africa, as for other emerging and commodity producers, this tentative step-change is a net positive for the real economy as exporters will benefit over time, even as we will have to closely watch and live with the consequences in global capital markets, and their impact on us.
The key here remains whether global recuperation remains gradual and very, very controlled. Though markets can be expected to stress-test, any strains may remain within reasonable orderly bounds, given the slow pace of recuperation giving little inkling of a sudden imminent acceleration.
It does not have to imply a sinking of the Rand, or major inflation or interest rate shocks hurting us anew. Instead, easy does it, for us, too.
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