Updated: May 25
Bond yields continued their upward surge, but at a slower pace as fears of “ultra-high” inflation subsided. At the same time, higher yields also predict much higher economic growth than previously anticipated. Economic growth estimates for almost all the major regions are revised upward on the back of major stimulus programmes in especially the United States. Equities gained more wind from vaccinations against COVID-19 gaining pace, albeit slow, as well as from US President Joe Biden’s proposal to invest $2 trillion in jobs and infrastructure. However, Europe’s outlook received a setback from more restrictions to counter new waves of the SARS-CoV-2 virus that causes COVID-19.
In the US, the emergence of a new wave of COVID-19 infections were overshadowed by the news that 15% of Americans are now fully vaccinated against COVID-19, as well as the fiscal stimulus of $1.9 trillion and Biden’s “The American Jobs Plan” and the “Made in America Tax Plan”. The Jobs Plan, if approved by the US Congress in current form, aims to create jobs through investing about 1% of gross domestic product per year over eight years in: the upgrade of US infrastructure; the revitalisation of manufacturing and power generation; research and development; and shoring up supply chains. The Tax plan, which among others propose to increase corporate taxes and reduce tax avoidance, will – if approved - assist repaying the Jobs Plan within the next 15 years and reduce deficits in the years after. In the meantime, Federal Reserve Chairman Joe Powell said there is at this stage no plans to increase interest rates before 2023, notwithstanding rising bond yields.
The Eurozone also aims to grow the economy via more investment. Initial plans are to invest around €150 billion to develop capacity for the production of semiconductors (currently there is a huge global shortage of semiconductors) as the region wants to increase its share to 20% of global capacity. However, in the short-term the region must again deal with new waves of COVID-19. Germany and France, respectively the largest and second largest economies, are experiencing increasing infections and have imposed restrictions to prevent a large wave. The Eurozone’s vaccination programme is also not running as smooth and fast as it can.
In the UK conditions for a strong consumer-led recovery remain in place, mainly because of strong fiscal and monetary policy support. However, the extent of the disruption stemming from Brexit is becoming clear as British exports to the EU fell 40.7% in January while exports to the rest of the world increased.
Chances are good that Japan’s economy contracted in Q1 2021 due lockdowns instituted in some regions to limit the spread of COVID-19. Coupled with a slow pace of vaccinations, it will hurt the economy’s growth prospects over the first half of the year. A new fiscal stimulus package may soon be announced to support economic growth.
China’s new economic plan suggests a shift in priorities from high economic growth (the target is now above 6% opposed to 7% to 8%) to financial stability, meaning reducing credit defaults and credit growth. However, strong industrial and export growth during the first two months contributed to analysts raising their economic growth forecasts for China to between 8% and 9% for 2021.
In South Africa chances increased for the fiscal deficit to be lower than what was announced by Mr. Tito Mboweni, minister of finance, in the budget last month. Tax collections are running ahead of estimates and spending was below target in February. However, the economy will sacrifice growth due to load shedding, which increased in March. Still, the South African Reserve Bank estimates an economic growth of 3.8% in 2021, but that gross domestic product will contract by 0.2% in Q1 2021. The central bank’s Monetary Policy Committee unanimously decided to keep the repo rate unchanged (at the January-meeting two members still voted for a reduction of 25 basis points). Although consumer price inflation is expected to increase over the next quarter due to an increasing oil price and higher administered prices, it is expected to remain stable next year. This, however, makes bonds a less attractive option, while higher expected profits should support equities.
Courtesy: Multivest Economic Division