Progressive recovery: Mixed patterns and prospects

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2 Macroeconomic and Market Outlook1 Quarter 2, 2017 Progressive recovery: Mixed patterns and prospects Highlights The global economy is gradually improving, following a slowdown in Global growth is expected to edge up to 3.5% in 2017, on the back of improving activity in advanced economies, especially the US, and strengthening momentum in developing and emerging market economies. The recovery pattern is quite variegated. The rebalancing of the Chinese economy is proceeding as expected, but concerns about the housing market are stoking fears of a hard landing of the economy in Growth in Sub-Saharan Africa is rebounding modestly, helped by improving external demand, recovery in oil and other commodity prices, easing of domestic constraints experienced in 2016 and policy support. Oil prices are expected to average $55 per barrel in 2017 and $57 per barrel in 2018, up from an average of $44 per barrel in 2016, in response to the agreement by OPEC and several other exporters to oil cut production. Other commodity prices are expected to strengthen moderately, as global demand improves and markets find a balance. Accommodative monetary policies and renewed fiscal support will support global growth and help to stabilize financial markets. Growth of global trade is expected pick up in 2017, despite the rising risks of protectionism in the US. The outlook is positive, but subject to downside risks stemming from the rise of protectionism in the US, the pace of US interest rate hikes, a downshift in the Chinese housing market, uncertainties surrounding the Brexit process, geopolitical disturbances, political and security risks. 1 Prepared by Seedwell Hove, with contributions from Jeremy Wakeford. Quantum Global Research Lab AG Bahnhofstrasse Zug Switzerland Phone Fax

3 Global Economic Outlook Global economic activity is gradually picking up, as heralded by improving leading economic indicators in advanced and emerging market economies. This follows a tepid 3 percent growth in 2016, as weak commodity prices, subdued global trade and financial market turbulence which interacted with political and geopolitical risks to weaken global growth. High-income countries expanded by 1.6 percent, while developing and emerging economies grew at 3.4 percent in Global growth is projected by the IMF to strengthen to 3.5 percent in 2017, edging up to 3.6 percent in 2018, but will remain below the pre-crisis pace2. The World Bank is more bearish, seeing global growth at 2.7 percent in 2017, inching up to 2.9 percent in Global growth will be stimulated by continued recovery in the high-income countries and easing of conditions in developing and emerging economies. Developed economies are anticipated to continue to gain traction with growth of 2 percent in 2017, led by stronger recovery in the US and Canada and moderate expansion in Japan. Developed economies growth will be boosted by continued accommodative monetary policy in some countries and renewed fiscal boosts in others, which will provide some further tailwinds to the upturn in manufacturing. In emerging and developing countries, easing of slowdowns and recessions helped by recovering commodity prices and improving external environment will raise recovery momentum to see growth at 4.5 percent in For instance, China s economic activity is expected to grow at 6.6 percent in 2017, while the recovery in Brazil and Russia is gradually picking steam, with signs that these countries will return to positive growth in In our view, global growth will pick-up to a range between 2.5-3% percent in 2017, given some visible risks lingering especially in high-income countries. The biggest risks relate to protectionism, political and geopolitical risks, while possible disorderly unwinding of China s housing and heavy industrial sectors could also be a source of drag. The triggering of Article 50 by the UK will continue to elevate uncertainties in the UK and Europe, compounded by the snap UK elections in June. The wave of political risks in Europe continue to raise concerns. Although election outcomes in Netherlands were favorable for Europe, polls in France and Germany present uncertainties about the future of the European Union, amid rising tide of populism and forced deglobalisation. Despite promises of fiscal stimulus in the US, Trump s protectionist sentiments and tight immigration policies are likely to hold back global economic recovery momentum. 2 IMF, World Economic Outlook, April World Bank Global Economic Prospects, January

4 Annual percentage change Figure 1: Global economic growth and projections World Euro area Sub-Saharan Africa Advanced economies Emerging market and developing economies Source: IMF and World Bank Monetary conditions have remained loose, especially in developed countries, in an effort to stimulate economic activity. As global economic activity is picking up, sentiment in the financial markets is improving, and the markets have enjoyed relative tranquility in the first quarter. Oil prices are anticipated stabilize at around $55 per barrel in 2017, as the agreed cut in oil production by OPEC and other oil exporters takes shape. Other commodity prices are also expected to recover moderately, helping to boost economic recovery in commodity exporting countries. Global inflation is expected to continue trending upwards in 2017 and average 3.5 percent, reflecting a pick-up in commodity prices, rise in import prices and increased domestic demand pressures. Monetary policies of major central banks will continue to diverge, following the hike in US policy interest rates in March. Further monetary policy tightening in the US is likely to put pressure on emerging market currencies, causing their central banks to hold interest rates cuts to prevent capital outflows. Overall, we expect monetary policies to remain largely accommodative in Global trade is expected to expand by 3.8 percent in 2017, following a sluggish 2 percent growth in 2016, stimulated by a gradual recovery in the global economy supporting import demand, and decent upturn in commodity prices. However, the recovery in global trade could face potential headwinds from rising protectionism, especially in the US and Europe. Protectionism is anticipated to increase under Trump administration indicated by a series of executive orders in the first weeks into office, including the cancelation US s membership to the Trans- Pacific Partnership agreement. Also, the border adjustment tax (BAT) aimed at taxing all imports into the U.S is being hotly debated within the Republican Party, 3

5 which if implemented could affect trade flows between the US and trading partners. The implementation of protectionist policies could also spark retaliation and trade wars from countries such as China, Germany and others, and disrupt global economic linkages, further dampening global trade. Outlook for Advanced Economies Growth in advanced economies is anticipated to edge up to 2 percent in , from 1.7 percent in Stronger momentum will come from stronger activity in the US and moderate gains in Japan. Weak productivity growth and mounting demographic challenges will continue to constrain medium to long-term growth prospects of some of these countries. However, protectionism and political risks are likely to saddle further growth momentum. Advanced countries inflation is expected to increase to 1.9 percent in 2017 from about 1.5 percent in 2016, lifted by an upturn in energy prices and import prices. The U.S. economy is anticipated to expand by 2.3 percent in 2017 and solidify further to 2.5 percent in 2018, bolstered by an expected fiscal stimulus including personal and corporate tax cuts, increased infrastructure spending (about US$1 trillion) and increase in defense spending under the Trump administration. Personal disposable income and household spending have remained strong throughout 2016, largely boosted by positive wage growth and strong consumer confidence. We believe that economic activity will expand at a moderate pace, while labor market conditions will gain further steam in the short to medium term. The solidifying labour market will help to sustain income gains and boost consumption. Leading economic indicators point to firming of activity: Manufacturing production index expanded by 3 percent to 57.7 points in February, accompanied by positive gains in retail sales and employment growth. In fact, February marked another month of strong growth in employment, with non-farm jobs growing by 235,000 jobs, reducing overall unemployment to 4.7 percent. However, PMI marginally slowed by 1 percent to 55 points, but remained above the 50 point mark which separates expansion from contraction (Figure 2). 4

6 Figure 2: US PMI, Inflation and Unemployment Source: Bloomberg US Manufacturing PMI (left) Inflation (right) Unemployment (right) Inflation accelerated further to 2.7% in February from 2.5% in January, hitting the highest level since February 2012, driven by wage growth and rising import prices. It is expected to average about 2 percent in 2017, in line with Fed target4. The U.S. Fed hiked its policy interest rates for the third time since the financial crisis by 0.25 percentage points to a percent range on 15 March 2017, as expected by the markets. With positive inflationary impulses and positive developments in the employment front 2017, the Fed is likely to have 2 more interest rate hikes in 2017, in addition to the one in March. This is positive for the bond market. The US dollar is likely to remain strong in 2017, supported by expected increases in interest rates and expansionary fiscal In the Euro Area, recovery continued to gather momentum at the end of 2016, with GDP expanding at 0.4% in Q4 (quarter on policy under Trump administration. The key risks to the US outlook relate to possible protectionist trade policies and stricter immigration policies. Protectionist trade policies may force trade partners to retaliate and together with a stronger dollar could weigh on US exports, while raising import prices. Stricter immigration policies could restrict the labor force and dampen economic activity. The recent failure to repeal of the Obamacare bill could also affect the rest of Trump s economic agenda, as Congress may not approve some of the plans, which may lead to further correction of the Trump trade in the equity markets. Nonetheless, the continuation of the Obama care is a positive catalyst for the U.S. health care sector. quarter seasonally adjusted) and much broad based, reflecting remarkable resilience to political, geopolitical 4 US Federal Reserve Bank Statement, 15 March

7 disturbances and structural issues. Euro Area growth is projected to remain flat at 1.8 percent in 2017 and 1.7 percent in 2018,5 helped by continued loose monetary policy, global economic recovery and continued improvement in the labor market. Leading economic indicators point to resilient activity in the first half of 2017: The composite PMI rose to a 6 year high in February, while economic sentiment continues to improve. Unemployment, which averaged 10 percent in 2016, is projected to edge down to 9.5 percent in Inflation jumped to 2 percent in February from 1.8 percent in January, the highest increase since February 2013, lifted by increase in oil prices, other import prices and wages increases. However, further rapid increase in inflation in the coming months accompanied by continued weakness of the Euro could erode purchasing power and affect consumer spending. We expect Euro Area inflation to average 1.7 percent in 2017, which could possibly prompt the ECB to taper the bond buying programme. The outlook for the Euro Area is overshadowed by a number of risks: Brexit negotiation process, elections in Germany and France and other structural issues. The Brexit uncertainty will also continue to undermine investor confidence, trade and jeopardize the recovery momentum following the triggering of Article 50 by the UK in March. The heavy elections calendar in 2017 raise some concerns. The elections in the Netherlands, were welcome by the markets and in Europe, with the victory of Mark Rutte s over Geert Wilder providing political stabilization against the rise of populism in Europe. Investor attention has now shifted to the decisive polls in France and Germany where some centrifugal forces are advocating for the pullout from the European Union. In France, elections will be held in April/May. Marine Le Pen of the National Front (FN) party and Emanuel Macron of the En Marche currently lead the opinion polls, but none of them are expected to secure an absolute majority of the vote, suggesting that they may face each other in the second round. A victory by far right and anti EU candidate Le Pen could undermine European political cohesion, destabilize the zone, possibly imposing a risk premium on eurodenominated assets and ignite some short term volatility in the financial markets. A victory by Macron could signal diminishing political risk in Europe, as the French and German leadership will continue to support the European Union project. In Germany polls, markets might prefer a Merkel win, but could also be comfortable with Shultz who is also pro-eu. A negative shift in sentiment stemming from these upcoming elections could disrupt Europe s nascent recovery. In addition, the legacy of high debt ratios and banking sector vulnerabilities is also another drag to recovery in some economies. The UK s GDP growth in 2016 moderated to an estimated 2 percent, underpinned by strong consumption growth, as stimulus from the Bank of England is keeping consumer and business confidence at reasonable levels. The economy started 5 ECB staff macroeconomic projections for the euro area, March

8 2017 on a positive note, defying earlier expectations of slower growth in the context of Brexit. The manufacturing sector expanded strongly in January, while unemployment rate inched down to 4.7% in January. However, the consumer confidence indicator inched down in February, reflecting consumer s pessimism, amid rising inflation from 1.8% in January to 2.3% in February. Growth is projected to remain at 2 percent in The Bank of England left interest rates unchanged at 0.25% in March and expects inflation to average 2.7% in 2017, well above its 2 percent target6. The triggering of Article 50 end of March marks the beginning of Brexit negotiation process- raising uncertainties as this is an unchartered territory. The Bank of England see UK growth 1.6 percent in 2018, but in our perspective, UK growth could be less than 1.5 percent, as Brexit uncertainty is further complicated by the hasty snap elections in June, which could dampen consumer and investor confidence, stifle investment, weaken trade, while moderating household income growth could dampen private consumption, which will all work to drag down growth. Japan continued with moderate growth of 1 percent in 2016, as a weak yen and strong global demand supported export growth. However, declining workforce, tepid wage growth and a rising burden of aging populations amid tight immigration controls will continue to weigh on growth in the medium term. The Bank of Japan (BoJ) maintained its Quantitative and Qualitative Monetary Easing with Yield Curve Control program in March, and published further details of the program to enhance transparency. Despite fiscal stimulus in 2016, private consumption has remained sluggish possibly due to weak wage growth. The Japanese economy is expected to pick up to 1.2 percent growth in 20177, supported by policy stimulus and accommodative monetary policy. Inflation is expected to increase gradually. However, increased protectionism in the US under Trump is casting a shadow on Japan s outlook, while the possible faster tightening cycle by the Federal Reserve Bank could heighten volatility in the financial and foreign exchange markets. Outlook for Emerging and Developing Economies The outlook for emerging market and developing economies is generally improving, despite some downside risks. The IMF projects growth to accelerate moderately to 4.5 percent in 2017, from 4.1 percent in The World Bank is less optimistic, seeing 2017 growth at 4.2 percent growth in In our view, emerging and developing economies are on course to realize about 4.5 percent growth or more, considering that some of the drags seen in 2016 in some large economies is visibly subsiding, while expected increases in commodity prices 6 Bank of England Inflation Report, February IMF World Economic Outlook, April IMF, World Economic Outlook, April World Bank Global Economic Prospects, January

9 and policy interventions implemented in various countries will further provide a fillip to recovery. Also, the cyclical rebound in investment, and export growth are further providing impetus to growth in these economies. However, risks related to the rise in protectionism, political risks and geopolitical tensions could weigh on the recovery momentum in this group of countries. China s rebalancing process is proceeding, with growth slowing to 6.7 percent in 2016 in line with expectations. China s PMI inched up to 52.6 points in February, and the economy expanded by 6.9 percent in the first quarter of 2017, slightly faster than expected, reflecting past policy support. However, the momentum is expected to slow down later in the year as earlier fiscal stimulus starts to fade and monetary policy tightens. Inflation slowed down to 0.8 percent in February from 2.5 percent in January, the lowest reading since January Figure 3: China s housing market price index and economic activity. 2015, well below the central bank target goal 3 percent. Growth is anticipated to slow down to 6.5 percent in 2017 and further down to 6.3 percent over ,10 as monetary policy tightens and fiscal policy becomes less supportive than in The main downside risks to the outlook relate to a downturn in the housing market in 2017, as monetary policy possibly tightens, possible protectionist policies from the US and escalation of territorial disputes with the US relating to Taiwan and in the South China Sea. Housing prices in major cities have started to cool off towards the end of 2016, which could result in a pullback in real estate investment later in the year (Figure 3). We expect Chinese investment and construction to slow down in 2017, which will put downward pressure on global commodity prices and possibly generate some volatility in the financial markets. Managing imbalances and risks, while keeping growth on a reasonable path will be a policy challenge for China in China PMI (left) Li Keqiang Index of Economic Activity (right) House Price Index (YoY) (right) Source: Bloomberg 10 World Bank Global Economic Prospects, January

10 Brazil s GDP is poised to return to growth of 0.2 percent this year11, gaining more speed in 2018 with 1.5 percent growth, thanks to improved commodity prices, strengthening confidence, loosening monetary policy and gradual dissipation of the effects of past shocks. The pace of GDP contraction continued to ease, from -2.9 percent in Q3 to -2.5 percent in Q4 (year on year), suggesting that recession has bottomed out. Overall, the economy contracted by an estimated 3.5 percent in 2016, less severe than initially envisaged.12leading economic indicators point to continued steady gains: consumer confidence, business confidence and manufacturing PMI both improved in February. The Manufacturing PMI rose to the highest level of 46.9 points in February from 44 points in January.13 Inflation continues to trend downwards, dropping to an over six-year low of 4.8 percent in February, and falling within the central bank inflation target range of percent. This gave the Central Bank the leverage to ease monetary policy further to support economic recovery. In a bid to restore business confidence and stimulate the economy, the government launched an infrastructure concession program for building and operating roads, port terminals, railways and power transmission lines in March.14 However, recovery momentum is likely to be hampered by high unemployment, austerity measures which could dampen 14 Also, there are risks on the governance front, related to the unearthing of number of corruption scandals, accompanied by resignations and suspensions of some top officials from government will also hold back reform momentum. Russia continues to recover gradually with visible indications of exiting recession in The economy leaped out of recession with 0.3% growth in Q4, 2016, the first expansion since Overall GDP growth for 2016 averaged -0.2 percent,15 as the economy managed to successfully absorbed the dual shocks of lower oil prices and the continuation of sanctions. The economic turnaround seems to be gathering momentum: industrial production expanded in January and services sectors continued to show expansion. However, the PMI fell to 52.5 in February from 54.7 in January but remained above the 50-threshold that separates expansion from contraction in the sector, suggesting that the manufacturing activity expanded, but at a slower pace. Inflation declined to 4.6% in February from 5.0% in January, supported by the appreciation of the Ruble and favorable agricultural market conditions. This has prompted the central bank to cut its policy interest rate by 25 basis points in March. The broad based nature of the inflation decline suggests that it is possible to achieve the inflation target of 4 percent in Economic growth is expected to 11 IMF, World Economic Outlook, April Central Bank of Brazil, Economic Indicators 13 Bloomberg, March 2017 announces-another-55-projects-in-concessionprogram 15 Russia Federal Service for State Statistics (Rosstat) 9

11 edge up to 1.4 percent in 2017, supported by higher oil prices and policy interventions16. However, some downside risks related to geopolitical disturbances in Syria, and internal structural factors could saddle the outlook. The outlook for other emerging market and developing economies is mixed, but generally positive. In East and South Asia, growth is fairly strong, led by robust economic activity in Bangladesh, Cambodia, Indonesia, India and Nepal, benefiting from productivity gains. India s growth is set to pick up this year to above 7 percent in 2017, from a slide to 6.6 percent in 2016, supported by buoyant household consumption on the back of improved wage incomes, economic reforms and good monsoonal season and fading of headwinds from demonetization programme. In Latin America (e.g. Mexico, Venezuela, Haiti, and Ecuador), economic activity could remain difficult due to partial recovery of commodity prices and threats of protectionism. In Eastern Europe, activity will be modest in Poland, Albania and Uzbekistan, while Turkey is destabilized by domestic political disturbances and geopolitical instabilities. In Sub-Saharan Africa, the outlook for 2017 is brightening, with an expected rebound of growth, while optimism is rising in the Middle East and North Africa (e.g. Iran, Qatar and Algeria) in 2017 due to expectations of higher oil prices. However, deepening geopolitical tensions and civil conflicts in some countries could scupper further growth potential. Macroeconomic outlook for Africa Economic activity in Sub-Saharan Africa (SSA) is regaining momentum, with growth anticipated to rebound to about 2.9 percent in 2017, following a sluggish 1.5 percent in The headwinds experienced last year including low commodity prices, the slowdown in China, and less supportive external environment are easing. Growth in 2017 will be supported by an improving global economy, modest recovery in commodity prices, and policy interventions. Oil prices are expected to average $55 per barrel in 2017, while other commodity prices will firm modestly. The region s large economies (Nigeria, South Africa and Angola) which have dragged down SSA growth in 2016 seem to have bottomed out and are on a recovery path. Excluding Nigeria and South Africa, SSA growth will even be stronger at around 5% in Growth rates will be variegated among countries in the region. Oil-importing countries will lead the recovery with 4.2 percent growth, while oil-exporting countries will grow at 0.9 percent in Some frontier market economies such as Cote d Ivoire, Senegal, Kenya and Ghana and low income countries (Ethiopia, Tanzania and Rwanda) will continue to grow at robust paces, well above 5% in 2017, sustained by strong infrastructure investments, improved business environment, and dynamic private sectors. The Sub-Saharan African outlook for 2018 is expected to strengthen further: growth is 16 IMF, World Economic Outlook, April

12 Annual percentage change projected to accelerate to 3.6 percent. Growth will be supported by the improving momentum of the world economy and gradual stabilization of commodity prices as markets rebalances and terms of trade improve. Figure 4: Growth estimates and forecasts for selected African countries, 2016 and Sources: World Bank, IMF Table 1: Selected Macroeconomic Indicators for Sub-Saharan Africa Real GDP Growth (percent) Real Per Capita GDP growth (percent) Inflation (percent, yoy ave.) Net FDI (percent of GDP) Fiscal Balance Total Public Debt (percent of GDP) CA Balance Reserves (Months of imports) Broad Money Supply growth (%) Private sector credit (% of GDP) Sources: IMF, World Bank 11

13 Inflation in Sub-Saharan Africa is slowly moderating, largely reflecting the stabilization in exchange rates and easing of some past inflation drivers. Although still in double digit ranges, inflation in Angola, Ghana and Nigeria is turning down (Figure 5). The gradual recovery of commodity prices improving foreign exchange is helping to stabilise exchange rates which in turn act to diminish inflationary pressures in these countries. Inflationary pressures have remained muted in the CFA franc zone countries in West and Central Africa, benefiting from the stable peg to the Euro. We expect inflation in the region to recede to levels below 10% in 2017, helping to boost consumption, and allowing central banks to loosen monetary policies. Figure 5: Inflation rates of selected African countries (%) Sources: Central Banks and Trading Economics. Inflation rates are the latest available readings. Stabilising commodity prices and an improving external environment will help to narrow the fiscal deficits for the region to about 4% of GDP from 5.4% in Fiscal adjustments and consolidations will also help a number of commodity exporters to reduce fiscal deficits. However, public debt ratios are likely to remain elevated, with more than 70% of Sub-Saharan countries expected to retain debt levels above 40% of GDP in 2017, raising concerns about debt sustainability. The current account deficit for the SSA region is projected to narrow to 3.8% in 2017 from above 4 % of GDP in 2016, supported by stabilizing commodity prices. Current account deficits will remain high, above 10% of GDP in oil importing countries (e.g. Mozambique, Sierra Leone Rwanda and Guinea) compared with oil exporting countries ((Figure 6). Mozambique is still adjusting from debt 12

14 distress, following the revelation of undisclosed borrowing exceeding US$1.4 billion (10% of GDP). Figure 6: Current Account Balances for selected Sub-Saharan African Countries, 2017 Bostwana Nigeria Zimbabwe Cameron Zambia South Africa Sub-Saharan Africa DRC Angola Cote D Ivoire Chad Congo Republic Kenya Ghana Tanzania Senegal Gabon Ethiopia Equatorial Gunea Rwanda Guinea Sierra Leone Mozambique Source: IMF Improvements in external positions is helping to stabilise a number of currencies in the region. The pace of depreciation of Nigerian naira and Angolan kwanza have decelerated, with the exchange rate gap between the official and parallel markets narrowing (Figure 7). This has helped reduce inflationary pressures. The Naira depreciated by 5 percent between January and March and is expected to stabilise further in 2017, as the foreign exchange market gradually rebalances. The Mozambican metical appreciated by some 4.5 between January and March The Leone in Sierra Leone remains under pressure, depreciating by 37 percent in the first quarter, due to a decline in exports to China and lasting economic impact from the Ebola crisis. Despite the appreciation of the South African rand in the first quarter, the gains were erased following the firing of the respected Finance Minister on 30 March and credit rating downgrade by S&P and Fitch in April. The Rand has lost 4 percent between 30 March and 12 April. The Congolese Franc (DRC) has also succumbed to political instability and loss of foreign exchange reserves, deprecated by 25.7 percent in the first quarter. The balancing of the foreign exchange markets in some countries (Nigeria and Angola) will help to reduce the 13

15 pace of drawdown of foreign exchange reserves. Figure 7: Changes of selected African currencies against the US$ (January March 2017) Mozambiquan Metical South African Rand Guinea Franc Botswana Pula Congo Republic CA Franc Cameroon CA Franc Senegal CFA Franc Cote D Ivoire Franc Malawian Kwacha Zambian Kwacha Angolan Kwanza Ugandan Shilling Egypt Pound Ghanaian Cedi Kenyan Shilling Rwandan Franc Ethiopian Birr Tanzanian Shilling Nigerian Naira DRC Congolese Franc Sierra Leone Leone Source: Bloomberg Prospects for individual African countries The outlook for individual countries is quite variegated. Nigeria is anticipated to exit recession in 2017, as headwinds experienced in 2016 subside somewhat. The economy contracted by 1.3% in Q4, 2016 which is an improvement from previous quarters, suggesting that the recession has bottomed out. The oil sector contacted by 12.4 percent, while the nonoil sector contracted by 0.3% in Q4 to see overall GDP growth at -1.5% in Growth is projected at about 1 percent in 2017, edging up to 2 percent in 2018, supported by improving oil prices, implementation of large infrastructure programme (about $30 billion) and improving external demand. The pace of recovery will depend on the extent of recovery in oil prices, successful implementation of proposed large infrastructure projects amid financing challenges, reforms in the public sector, the pace of rebalancing of the foreign exchange markets and resolutions to stop disruption of oil infrastructure in the Delta region. Some green shoots of recovery are emerging: The PMI rose from 51.9 in January to 52.2 in February, reflecting improving demand and growth conditions. Oil production in Q4 rose increased by 8.1 percent to 1.90 (mb/d) from Q3 s 1.63 mb/d, marking the first increase in output after successive declines in 2016, as the government strike a deal with militant 14

16 groups to stop attacks on oil infrastructure. The foreign exchange market is gradually rebalancing, with the official and parallel market exchange rates showing signs of convergence following the increase in sales of foreign exchange into the interbank market by the central bank. This is helping to stabilize foreign currency reserves currently at USD 30.3 billion. Inflation which peaked at 18.7 percent in January has turned down to 17.8 percent in February, likely supported by the higher oil prices bringing in more foreign exchange inflows and helping to reduce pressure on the exchange rate. We expect the inflation rate to drop further and stabilize around 15 percent in Nigeria issued a $1 billion Eurobond in February 2017, which was 8 times oversubscribed, with a favorable yield of 8 percent, reflecting improved market sentiment on the economy. The banking sector remains weak, with nonperforming loans at 12.8 percent as at Q4, The South African economy contracted by 0.3 percent in Q417 (quarter on quarter, seasonally adjusted), with overall 2016 growth is estimated at 0.3 percent, reflecting poor performance of the mining and manufacturing sectors, subdued investment due to political and institutional uncertainties and still weak external demand. Political tensions have continued to rise, with President Zuma sacking the respected finance minister, Pravin Gordan, further dividing the ruling ANC party. The opposition have increased calls for Zuma s resignation and are planning to call for a vote of no confidence in parliament. The political infighting has 17 Statistics South Africa. weakened the rand, which has lost 4% of its value between March 30 and April 12. SA s credit rating was downgraded by S & P and Fitch BB+ (junk investment status), citing political instability and threat to growth. The downgrade is likely to increase the cost of borrowing, induce capital outflows and exert downward pressure on the rand. Inflation edged down to 6.3 percent in February from 6.6 percent in January, remaining above the Central Bank s target range of 3-6 percent. We expect inflation to moderate further in the coming months helped by continuing tight monetary policy and dissipation of food inflationary pressures. The 2017 budget presented in February targets growth of 1.3 percent and 2 percent in 2017 and 2018 respectively, helped by improvement in agriculture and recovery of commodity prices. In our view, South Africa growth will be less than 1 percent this year, and may not exceed 1.5 percent in 2018, as ongoing policy turmoil will further weaken consumer and business confidence and together with lackluster labour market drag down growth momentum. Leading economic indicators signals sluggish economic activity: the Standard bank PMI inched down by 1 point to 50.5 in February from January. The outlook for Angola is brightening, after a sluggish 0.4 percent growth in Growth is projected by the IMF to edge up to 1.3 percent in 2017, boosted by improving oil prices supporting recovery in oil sectors, increased public investment spending, improving terms of trade and relenting drags on non-oil sectors. Oil production has increased by 6 percent to 1.7 mb/d between January and March 15

17 2017, which saw Angola overtaking Nigeria (with 1.3mb/d) as the largest oil producer in Sub Saharan Africa. The Kwanza official exchange rate remained relatively stable in the first quarter, with the gap with the parallel market exchange rate narrowing somewhat. Foreign exchange reserves, which have declined by 17% to US$20 billion between January- December 2016, have remained relatively stable in the first quarter. Inflation has turned down, slowing for the second straight time to 39.4% in February, after peaking at 42% in December 2016, reflecting improved foreign exchange inflows due to higher oil prices at the end of We expect inflation to moderate further in 2017 to around 30%, but monetary policy is likely to remain tight. The main risks to the outlook relates to elections in August, still disequilibrium in the foreign exchange market and still elevated inflation. The rebalacing of the foreign exchange market will depend on the durability of current oil price uptrend. Zambia s economic outlook is strengthening. GDP growth is expected to accelerate to 4 percent in 2017, following a modest 3 percent growth in Economic reforms, recent rise in copper prices and improving electricity supplies will provide some fillip to growth. The fiscal deficit is expected to narrow to 8 percent in 2017 from 8.9 percent in The USD1.2 billion loan expected from the IMF in 2017, will be a game changer to the Zambian economy, helping to stabilize the budget and shift the economy to a higher gear. The government has also signed a US$ 2.3 billion contract to build a railway line linking the country to Malawi. The expected issuance of Eurobonds in 2017 will help to close the financing gap for capital projects. However, credit constraints and high lending rates will remain key drags to the economy. Inflation has fallen considerably from 20 percent in July 2016 to 6.7 percent in February 2017, well below the target range of 9 percent, on the back of appreciating kwacha and dissipating drought effects. This has allowed the Bank of Zambia to lower its policy interest rates by 150 basis points to 14% and reduced the statutory reserve ratio by 250 basis points to 15.5 percent18. The outlook for some frontier economies (Cote d Ivoire, Ghana, Senegal and Kenya,) remain bullish in Cote d Ivoire s economy is projected to expand by 8%, buoyed by a strong infrastructure programme, robust domestic demand, extensive international financial support and stable inflation (1.7 percent in 2017). Ghana s economy is poised to grow at a healthy pace of about 6 percent in 2017, following a modest 3.3% growth in Growth will be supported by a gradual increase in commodity prices, increased oil production from the new Tweneboa- Enyenra-Ntomme (TEN) oil fields, which will boost oil production by 50%, and reforms from the new government, improving terms of trade and expected increase in private sector lending. Ghana s new finance minister announced his maiden budget in March, which focused on reducing the fiscal deficit (-4% in 2016) 18 Bank of Zambia, Monetary Policy Committee statement, 22 February IMF, World Economic Outlook, April

18 through drastic expenditure cuts, coupled with fiscal policy rules and increasing fiscal revenues. The new government is expected to continue with the fiscal consolidation programme agreed by the IMF under the Extended Credit Facility arrangement, which attempts to reduce the fiscal deficit and public debt (66 percent of GDP in 2016). Inflation continues to trend downwards, reaching 13.2 percent in February, but remains above the central bank target of 8 percent. Easing inflationary risks prompted the central bank cut its policy rate by 200 basis points to 23.5 percent in March, which will provide further tailwinds to the economy. The Cedi remains relatively stable in the first quarter. The Kenya s GDP growth is expected to moderate to 5.3 percent in 2017 from 6 percent in 2016, weighed down by a drop in lending to private sector (4%), following the capping of interest rates last September. This will dampen investment and consumption which have driven growth in the previous years. The government has even postponed several bond issuances as investors drove interest rates above the cap. The government is considering to reassess the policy in light of the negative repercussions. The PMI fell from 52 in January to 50 in February, reflecting that business that business activity has stagnated. Political uncertainty around August s general elections and elevated twin deficits of fiscal and current account deficit of 6.4% and 6.1%, respectively and high debt levels (52% of GDP) could also saddle economic activity in Meanwhile, Kenya s inflation has jumped to 10.3 percent in March from 9 percent in February, the highest recording since May 2012 largely driven by food prices. Senegal will maintain solid GDP growth rate of 6.8% in 2017, sustained by robust growth in agriculture, a dynamic private sector and policy reforms (e.g. the Plan for an Emerging Senegal). The agriculture sector is benefiting from a good rainfall season and government support programmes. Rapidly growing exports will help to reduce the current account deficit from nearly 9% in 2014 to 8% in Also, higher revenues will help fiscal authorities to progressively close the fiscal gap, from a deficit of 5% of GDP in 2014 to 3.7% in Debt ratio is trending downwards, and expected at 56% of GDP, while inflation is stable at 2% Some low-income countries (Rwanda, Tanzania and Ethiopia) will maintain their robust growth paces in 2017, buoyed by infrastructure development, mining expansion and dynamic consumer spending. Rwanda is expected to maintain its healthy growth pace above 6 percent over , boosted by strong policy reforms, improving business regulatory environment and infrastructure investment. Tanzania s economy will expand at 6.8 percent in 2017, largely supported by government-backed infrastructure projects and robust household consumption. The large infrastructure programme include coal and iron ore mines, a liquefied natural gas terminal, an oil pipeline connecting with Uganda, a railway line connecting neighboring landlocked countries, a new port in Bagamoyo and rural household 17

19 electrification. Further boost is provided by the Central bank which has cut interest rates to 12% from 16% in March. However, the financing of a large infrastructure programme is likely to be challenging and could result in a sizeable fiscal deficit about 5 percent of GDP. Ethiopia s GDP growth will remain resilient in 2017, with growth above 7 percent, sustained by government s investment programme under the ambitious Growth and Transformation Plan II (GTP II) focusing on energy, transport facilities, healthcare and education, despite drought affecting agriculture production. The country secured over US$ 200 million of loans from China earlier this year and has started constructing the first of 17 industrial parks expected to bolster the manufacturing sector. However, ongoing social unrests are likely to deter investment. Growth in some Southern and East African countries, such as Zambia, Malawi, Zimbabwe, Lesotho which were affected by El Nino driven drought in 2016 is expected to improve somewhat in Agriculture output and hydroelectric generation in these countries is set to increase in 2017, following above normal rainfall received. Some of the countries will need additional financing to rehabilitate infrastructure destroyed by La Nina driven floods. However, Mozambique s growth outlook remains bearish, with low international financial support, amid the debt distress situation. Growth could slowdown to less than 4.5 percent in 2017, as high inflation above 20% is keeping monetary and fiscal policy in tightening mode. The government defaulted on a US$60 million coupon payment due to creditors earlier this year and the government is working on plans to restructure its debt. A public debt audit requested by the IMF is expected to be released in the coming weeks. However, in the Horn of Africa, including Somalia, Ethiopia, South Sudan, Kenya and northern Uganda, drought in 2017 will dampen agricultural production and causing food shortages to some 16 to 20 million people. Financial Markets As the global economic expansion gathers momentum, financial market sentiment continues to strengthen. Global equities have continued register gains in the first quarter of 2017, reflecting improving consumer confidence and positive macroeconomic data. The S&P-500 increased by 5 percent, while the Eurostoxx50 gained 5 percent between January and March, large reflecting the Trump induced rally and improved confidence. The MSCI global index edged up by 5.4 percent in the first quarter, with MSCI emerging market index delivering a solid positive reading of 12.6 percent. The Shanghai Stock Exchange picked up by 2.4 percent. The Nigerian stock market however slided by 4.1 percent, reflecting domestic challenges, while the Johannesburg Stock Exchange was recorded little change. However, the Trump trade rally in the equities market could fade soon, as investors seems to be concerned about higher levels of the 18

20 indices, amid rising market volatility. The global stock/bond (S/B) ratio is still overbought compared to stocks (Figure 8), which suggests that a correction/consolidation phase may prevail in the near term. Figure 8: Global Stocks to Bond Ratios Source: MRB Partners Investor appetite for emerging markets assets has been rising, with capital inflows to emerging and developing countries, especially bond and equity mutual funds and international debt issuances firming in the first quarter. Recent bond issuances by the Arab Republic of Egypt, Nigeria, Oman, and Kuwait attracted strong demand, reflecting improved market sentiment20. However, the appetite could wane in the near term, as the Fed continues to tighten its monetary policy, in the context of a stronger dollar. The impact of such outflows could be magnified if FDI inflows into emerging markets are also reduced by fears of rising trade protectionism. The upleg of the U.S. dollar seen in the last months is likely to moderate in the short term, despite favorable interest rate differentials, as Trump has expressed concerns that the dollar is overvalued. Several emerging market currencies depreciated substantially in recent months, most notably the Turkish lira, the Mexican peso and Malaysian ringgit, while for other commodity exporters, notably the Russian rubble and Brazil real have appreciated. Monetary policies of major central banks continue to diverge. The US Fed has hiked its interest rate in March, reflecting positive economic performance and 20 World Bank, Africa s Pulse, April

21 favorable inflation outlook. Two more interest rates hikes are likely in 2017, given the strength of recent inflation impulses. The Bank of England has kept its benchmark interest rates at 0.25 percent and its quantitative easing program since August, while the ECB has kept its monetary policy stance. Going forward, the BoE will probably wait to see whether the recent softness in consumer spending persists and how investment responds to Brexit negotiations before any monetary policy change. In light of rising inflation (2% in February) above the danger zone level of 1% the ECB is likely to raise its interest rates in 2017 and start to taper its bond buying programme. The Bank of Japan is likely to maintain negative interest rates in Elsewhere in emerging markets, a number of central banks have cut their policy interest rates in order to stimulate economic activity. Brazil, Russia, Chile, Colombia have cut their policy interest rates by between basis points in the first quarter, which could provide some tailwinds for equities. However, Mexico, Kuwait and United Arab Emirates have all hiked their interest rates by 25 basis points in March to support their currencies and tame inflationary pressures. In Africa, Ghana, Rwanda and Uganda have cut their interest rates, while other central banks have kept their interest rates unchanged, despite easing constraints in a number of these countries. Developed economies 10-year government bonds have been moving sideways on average, since the shift upside in July This reflects long term inflation expectations and prospects for faster normalization of monetary policy. Bond yields starting to turn down especially in the UK, US and Germany (Figure 9). 10-year US Treasuries declined by 27 basis points between 14 March and 4 April 2017, while 10 year German Bunds shed 19 basis points and UK 10 year bonds lost 13 basis points. Japanese bonds were largely flat, while in France bond yields have edged up at the beginning of April, reflecting rising political uncertainty ahead of elections end of April/May (Figure 9).21 German and French bond yields are decoupling, reflecting varied risks perceptions in the two countries. 21Bloomberg, March

22 Figure 9: Bond yields (10 Year Bonds) of selected high income countries Source: Bloomberg US France Germany UK Japan Bond spreads have narrowed across the world since the beginning of 2016, reflecting improving market sentiment. From January to March 2017, African and emerging market bond spreads have fallen by approximately 200 and 320 basis points respectively. However, African bond spreads notably in Angola, Ghana and Zambia have remained elevated above the emerging markets spreads, ending the first quarter at 320, 318 and 258 basis points above emerging market averages respectively. The good news is that they continue to be on a declining trend, reflecting falling risk perceptions. Figure 10: African Sovereign Bond Spreads EME Africa Ghana Namibia Nigeria South Africa Zambia Angola Kenya Source: Bloomberg 21

23 Credit ratings have been relatively stable, with few credit risk downgrades in African countries so far in the year. Following some months of scrutiny by rating agencies, South Africa s credit rating was downgraded by S&P and Fitch to BB+ (junk investment status) in March and April, on concerns about rising political risks and threat to growth. Mozambique s credit rating remains in selective default (SD) and restrictive default (RD) by S&P and Fitch amid continued debt distress situation and unfavorable external condition. Table 2 shows credit ratings of selected African countries as at 15 April Table 2: Credit Ratings of Selected African Countries S & P Moody s Fitch Country Credit Rating Outlook Credit Rating Outlook Credit Rating Outlook Angola B Negative B1 Negative B Negative CoteD Ivoire B Not Rated Ba3 Stable B+ Stable Congo Republic B- Stable B3 Negative CCC Not Rated DRC B- Negative B3 Stable B+ Not Rated Ethiopia B Stable B1 Stable B Stable Gabon Not Rated Not Rated B1 Negative B Negative Ghana B- Stable B3 Stable B Negative Kenya B+ Stable B1 Stable B+ Negative Mozambique SD Negative CAA3 Negative Restrictive Default Not Rated Namibia Not Rated Not Rated Baa3 Negative BBB- Negative Nigeria B Stable B1 Stable B+ Negative Rwanda B Stable B2 Stable B+ Stable Senegal B+ Stable Ba3 Positive Not Rated Not Rated South Africa BB+ Negative Baa2 Negative BB+ Stable Zambia B Negative B3 Negative B Negative Source: Bloomberg. Going forward, financial markets will continue to grapple with a number of issues, including U.S. trade and immigration policy uncertainties, political risk in Europe and the impact of a looming slowdown in Chinese housing market or heavy industries and global economic prospects and monetary and fiscal policy conditions. While financial markets appear to be betting on a fiscal stimulus in the US economy, Trump s protectionist trade sentiments and tight immigration policies poses a potential threat to global growth and financial markets stability. The Brexit process and elections in France and Germany will also continue raise anxiety in the markets. Commodity Markets Commodity prices have been relatively stable in the first quarter of Energy prices eased slightly while non-energy indices have marginally firmed up, on the back of stronger market sentiment. The IMF s All Commodities Price Index barely moved in the first quarter, despite the 37% gain since the low tipping point in January Energy prices (oil, natural gas and coal) fell by 2.6% in the first quarter, following a 12% rally between November and December 2016, largely driven by oil 22

24 Price Indices (2005=100) prices, while the non-energy price index rose by 2.9 % in Q1. Figure 11: Commodity Price Indices All Commodity Price Index Food and Beverage Price Index Agricultural Raw Materials Index Metals Price Index Energy Price Index Source: IMF Primary Commodity System Oil prices have remained range-bound around $55/barrel in January and February as OPEC and some non-opec oil producers implemented their agreed production cuts. However, growing shale oil production and swelling oil stocks in the US slowed down oil prices to average $52/bbl in March. The EIA forecast Brent crude oil price to average about $55/b in 2017, up from an average of $44/b in 2016 and possibly edge up to $57/b in Global oil demand is projected by the US Energy Information Administration (EIA) to grow by 1.5 mb/d in 2017, supported by stronger global economic growth. On the other hand, global oil supplies rose by 260 kb/d in February to reach mb/d, which is 170 kb/d less than a year ago. OPEC s output declined compared to a year earlier for the second month in a row, but increased in February by 170kb/d to 32 mb/d. It appears as though OPEC members are sticking to their agreed output cuts, with compliance rate estimated by IEA at 98%, and some countries such as Saudi Arabia over complying, while non-opec countries have reached 37% compliance so far. However, the US has increased oil production in response to higher prices with expectations of 9.2 mb/d and 9.7 million b/d increase in 2017 and 2018 respectively. A relatively balanced oil market is anticipated in 2017 and 2018, especially if OPEC maintains its production at current rates which could support prices at or above their current levels. The outlook for the oil market also depends on whether OPEC and other oil producers agrees to extend their output cuts for another six months from July. 23

25 US$/ounce US$/ounce US$ per barrel Figure 12: World Oil Demand/Supply Balance and Oil Prices. 140 Crude Oil Prices Sources: EIA and QGRL Staff Estimates WTI WTI Forecast (EIA) Brent Brent Forecast (QGRL) Precious metal prices were relatively stable in the first quarter. Gold and silver inched up slightly (0.2 percent and 1.7 percent) since January, ending at $1,231 and $17.6 per ounce, respectively, while platinum reversed its February gains to average $963 Figure 13: Precious metal prices per ounce in March. Looking ahead to the coming quarters, fundamentals for precious metals seems to be more solid, but prospects of further interest rate hikes by the US Fed is a potential downside risk Gold Platinum Silver Source: Bloomberg 24