US Markets - Minutes of the Federal Reserve's last policy meeting say officials want more evidence of a jobs market recovery before winding up stimulus measures. The minutes show that "about half" of the Fed's board felt the USD 85bn-a-month stimulus programme could be phased out by the end of 2013. Speculation that the Fed might halt quantitative easing within a couple of months had unnerved Wall Street. But the news that there would be no immediate exit sent US markets higher.
Africa’s Economy “seeing fastest growth” - Africa's economy is growing faster than any other continent, according to the African Development Bank (AfDB). A new report from the AfDB said one-third of Africa's countries have GDP growth rates of more than 6%.
The costs of starting a business have fallen by more than two-thirds over the past seven years, while delays for starting a business have been halved. The continent's middle class is growing rapidly - around 350 million Africans now earn between USD 2 and USD 20 a day. The share of the population living below the poverty line in Africa has fallen from 51% in 2005 to 39% in 2012. Africa's collective gross domestic product (GDP) per capita reached USD 953 last year, while the number of middle income countries on the continent rose to 26, out of a total of 54.
The AfDB's Annual Development Effectiveness Report said the growth was largely driven by the private sector, thanks to improved economic governance and a better business climate on the continent. "This progress has brought increased levels of trade and investment, with the annual rate of foreign investment increasing fivefold since 2000. For the future, improvements in such areas as access to finance and quality of infrastructure should help improve Africa's global competitiveness," the report said.
The AfDB points to the increase in regional economic co-operation and intra-African trade as being the drivers of growth in the future. However, the AfDB said inadequate infrastructure development remained a "major constraint" to the continent's economic growth. "Africa currently invests just 4% of its collective GDP in infrastructure, compared with China's 14%," the bank's report said. "While sustainable infrastructure entails significant up-front investments, it will prove cost-effective in the longer term."
Despite the improving picture overall, the AfDB cautioned that substantial differences in incomes remained. "The challenge will be to address continuing inequality so that all Africans, including those living in isolated rural communities, deprived neighbourhoods, and fragile states are able to benefit from this economic growth," it said.
US Borrowing - Americans are once again spending more on credit, increasing their borrowing by USD 19.6 billion in May, according to the US Federal Reserve. It is the biggest increase in borrowing in more than a year and reflects renewed confidence among US consumers. More debt could help increase consumer spending, which accounts for more than 70% of US economic activity.
The total amount of borrowing reached a record USD 2.84 trillion, with student loans reaching USD 1 trillion.Borrowing in the category that includes credit cards was at its highest level since 2010. Economists say that is significant as credit card debt is often quickly translated into economic activity.
Gold Mining Shares - Shares in gold mining companies have fallen 64% since their peak in August 2011 and are trading below their net asset value for the first time since 1980, potentially reaching a point where investors will find them attractive once more, according to Hargreaves Lansdown’s senior investment manager Adrian Lowcock.
The metal itself has fallen 35% from its peak of USD 1,900 in September 2011 to USD 1,235 as at 8 July, and both of these declines compare with a rise of 35% for the MSCI World Index from August 2011 to June this year. Trying to call the bottom of the gold market is a bit like trying to catch a falling knife. However, all investments have a price at which point they become very attractive to investors. Momentum remains very much against gold mining shares and as Sir John Templeton once said ‘if a particular industry or type of security becomes popular with investors the popularity will always prove temporary and, when lost, may not return for many years’.
“There may be further to fall before we reach the bottom, however, investors who are willing to accept the risks might find some attractive long-term opportunities by investing in gold mining shares,” said Lowcock. He explained that analysis of the World Datastream Gold Mining Index showed the price to book of gold miners is 0.95 having been at 1.61 a year ago.This implies that gold mining companies’ current market price is lower than the value of their assets. Many of the miners have appointed new management, which Lowcock said could lead to further write downs of the valuations of many projects. “They are likely to write down the valuations to the lowest possible level as they can attribute the overvaluation to the previous management – throw out everything including the kitchen sink. “Book values are likely to fall further still, however, with gold shares having fallen 64% they are already pricing significant further falls in the book values of gold mining companies,” Lowcock concluded.
Spotlight on: the Prospects for the Chinese Economy
Napoleon Bonaparte said “Let China sleep, for when she awakes, she will shake the world”. In the following two centuries, the country has indeed spent much of the time in a fairly dormant state. Alongside Japan and the rest of East Asia, China accounted for over half of global activity and 60% of world industrial production in 1820; by 1875 their overall share had fallen below 20% - similar to that of the United Kingdom.
Through a combination of wars, occupations, revolution and political upheaval, China remained in this state until well into the 20th Century. But since “waking up”, following a series of reforms in 1979 and entry into the World Trade Organisation in 2001, the global impact has been profound. China’s share of world exports rose five-fold during this period, to just over 5% of global GDP, as its economy has consistently expanded at 8-9% annual rates. The impact of this major new trading partner has been felt both in global goods and commodity markets, with substantial weakening of price pressures in the former and rising prices a feature of the latter.
More recently, however, China’s growth rate has slowed; interbank lending rates have risen to record highs; and worries have begun to emerge about a “hard landing” for the economy. Are these concerns justified?
One worry has been the fact that rapid credit growth in China has not translated into stronger economic activity. In 2013 Q1, credit expanded at an annual pace of over 20%, more than twice the rate of nominal GDP growth. This “gap” has been widening since early 2012. It could be that there is just a natural lag between borrowing and investment, implying a pick-up in investment growth in 2013. However, there is little sign of this in the latest data: fixed-asset investment decelerated to a below-expectations annual growth rate of 20.6% in the first four months of the year from 20.9% in the first quarter. One concern is that, rather than financing productive investment, new credit is being used by corporates and local government to refinance old debt – creating potential risks for both the official banking sector and the burgeoning ‘shadow’ financial system of wealth management companies, insurance companies and trust loans.
Precursors to a ‘hard landing’ for China, which could reduce annual GDP growth to a 3% annual pace at its height, could therefore include an acceleration in ‘shadow’ borrowing, at increasingly short maturities and higher rates; reports of financial problems in local government or companies; and developments that increase the risk of a policy error.
China’s demographics have also been causing concern. An exceptionally rapid transition from high to low birth and death rates, thanks in part to the “one-child policy”, means that China’s population is ageing faster than that of most other countries. As a result, the size of the working-age population is set to shrink rapidly, which could drag down China’s ability to grow.
But it would be wrong to get overly gloomy. While the growth of China’s shadow banking sector is a concern, the government is showing an increasing appetite to regulate its more “frothy” aspects. The authorities’ urbanisation strategy should also provide some offset to the effects of population ageing through efficiency gains from population concentration and infrastructure development. Using US experience as a benchmark, Chinese cities arguably have the potential to add a full percentage point to cumulative GDP growth over the next ten years.
China may not achieve double-digit growth rates in the decade ahead, but a 7% annual pace – in line with the government’s target – remains plausible, if dependent on a relatively smooth reform process. Challenges lie ahead for China, but we’re some way from being sleepy yet.
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