IMF and IIF Annual Meetings in Washington October 2016 - key themes discussed

Attached are the charts used in today’s morning meeting to discuss the 8 key themes identified at this year’s IMF and IIF Annual Meetings in Washington. In summary, the 8 themes are:

  • World growth remains below its long-term average and appears unlikely to accelerate meaningfully in the short- to medium-term. This applies to both developed as well as emerging markets. Fortunately, the risk of a return to recession conditions is still relatively low in most regions of the world.
  • The rise in right-wing politics in many parts of the world has contributed to increased trade protectionism. This systematic increase in trade restrictions has, in-turn, led to a sharp slowdown in global trade. Unfortunately, there is a reasonably strong relationship between the slowdown in global trade and the lackluster global growth.
  • Levels of fixed investment activity remain relatively depressed in most parts of the world, despite the extremely low cost of capital. In other words, despite the low interest rates, most businesses are not willing to expand their business capacity, while many governments have curtailed infrastructure investment despite promising the opposite. India is an important exception.
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  • The low level of investment activity appears to be negatively impacting productivity growth, especially in the US. In fact, US productivity growth is the lowest it has been in decades. Linked to this is an intriguing discussion/argument that suggests the world economy has slowed the pace innovation in areas that could improve productivity. (See recent book by Robert Gordon: The rise and fall of American growth).
  • Brexit has re-taken centre stage as a key global economic concern. This is partly because the UK government has announced that they will trigger article 50 at the end of March 2017, but also because a fuller understanding of what the Brexit negiotitaion will involve is slowly starting to emerge, including vast complexity and time scale required to reach a workable agreement.
  • Global debt it at its highest level ever recorded, both in value terms and as a percentage of global GDP. In particular there is a serious concern about China’s ability to manage its debt, which is currently equivalent to 250% of GDP. In addition, the BIS recently flagged high corporate debt levels in emerging economies. (SA is a key exception). Under these circumstances, a significant rise in interest rates would be problematic for most major economies.
  • Growth in Sub-Saharan Africa has slowed to a mere 1.4% in 2016, which is well below the recent annual average growth of around 4.5%. The fall-off in growth has been heavily impacted by the lower commodity prices, but also a general lack of political and economic reform. In recent years. South Africa was able to significantly expand its trade with the rest of Africa, which helped to offset a sluggish export performance into Europe. This vital source of export growth for SA is now, clearly, at risk of slowing.
  • In the aftermath of the global financial market crisis, central banks played the dominant role in stabilizing economies as well as trying to lift economic growth. This was primarily done through the use of low interest rates and the extensive use of QE. It is now eight years since the peak of the global financial crisis and yet monetary policy is still highly accommodative and world growth remains disappointing. Consequently, it has become increasingly evident that interest rates are not the panacea to growth and that there needs to be an increased focus on other key policy measures, including fiscal, trade, competition, and labour policy.      
  • Most these themes will be included in this week’s asset allocation discussions.

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