Despite fears of a sharp global economic downturn in 2019, global growth never contracted as many initially anticipated.
Advanced economy central banks spearheaded by the US Federal Reserve began easing monetary policy in anticipation of rising headwinds to growth.
Notably, the two major headwinds that were serving as large downside risks to global growth were the Brexit stalemate and the US-China trade wars. Indeed, there is a consensus now, that both these risks have somewhat abated.
Following the recent signing of phase one deal with China, concerns on the trade war escalating have reduced.
“However, we suspect that the Trump-led US administration may now turn its focus on targeting the European Union (EU) market such as the aircraft, auto and possibly technology sectors,” said Stanbic Bank in their latest report.
In the UK, while the market has celebrated a conservative-led majority which will certainly look to exit the EU by end of January, there will probably be more political induced uncertainty that could weigh on growth due to concerns that a deal with its largest trading partner will not be reached in the near future.
Most advanced economy central banks cut rates last year. In fact, by the third quarter, over half of the world’s central banks had lowered rates. However, while some central banks have been constrained by the fact that interest rates are at the zero lower bound such as the European Central Bank (ECB), other have faced challenges of their monetary policy actions doing little to fuel inflation and support growth and instead have seemed to exacerbate already overvalued global asset prices.
While most see the global economy improving this year, we think that it will continue to struggle. Monetary policy is likely to be eased further in most advanced economies even though its impact on employment and productivity may not necessarily be impactful.
“We see global growth slipping back into a 2.5-3.0 percent range in 2020 rather than the 3.4 percent that most policymakers expect. Long term yields could remain subdued as we see this ‘low growth, low interest’ global environment persisting for longer and thus Africa economies will probably continue to enjoy cheap funding rates from the Eurobond market,” added the lender
Meanwhile, we see GDP growth in the Kenyan economy recovering to 5.9 percent y/y in 2020 from the 5.6 percent y/y estimate in 2019.
Owing to the delayed long rains in the first half of 2019, agricultural productivity inevitably reduced. However, the recent rains are likely to boost tea production over the coming year and with source markets such as Pakistan and Egypt economically improving on the back of reforms being administered by their IMF programs, the tea sector could rebound in 2020 despite prices likely to remain subdued. Furthermore, the repeal of the interest capping law is another factor that we see as a net positive for GDP growth. Granted, Non-Performing Loans remain elevated and have been sticky.
‘However, we expect commercial bank lending to increase meaningfully over the near to medium term which will aide this recovery in economic activity.”
The government ought to ensure that it remains committed to clearing private sector arrears so as to ensure that any stimulus being unleashed from the repeal of the interest rate capping law is not counterbalanced by these cashflow constraints that have severely harmed the private sector, emanating from delayed payments. Admittedly, validation of these impending bills is paramount. However, adopting a risk-based approach invalidation could help speed up the clearance of the backlog.
Given the spare capacity in the economy, we expect the Monetary Policy Committee (MPC) to cut its key benchmark rate further in the first half of 2020. We see a cut to the CBR of between 50-100 bps during this period. The apex bank will certainly be emboldened by the fact that the interest rate cap repeal would reduce the risk of a perverse reaction from their policy actions.
That being said, while the MPC is unlikely to be concerned about benign inflation in 2020 that we anticipate, their biggest challenge could arise if fiscal consolidation fails to take place. To be sure, an accommodative monetary policy stance would not be that effective in boosting private sector credit growth, if fiscal policy remains expansionary.