The Investment Management team round-up some of this week’s news.
BELTS AND BRACES V BELTS AND ROADS
China is approaching its 19th Communist Party Congress which will take place starting 18th October 2017. Politicians, not the citizens, will decide who will be sitting within the Standing Committee of 7-9 members. One of them will eventually be elected the President of the second largest economy in the world. Even though the decisions are made behind closed doors, it is widely anticipated that the current president, Xi Jinping, will remain the Communist Party leader.
President Xi has emerged as one of the most influential and powerful leaders globally. During his 5-year leadership, China’s GDP has grown over 41%. He is now seeking to achieve an ambitious goal – an interconnected network of trade. Unlike the US, which is looking inward, China is aiming to connect with countries from Central Asia, Europe and Africa through a project called the “Belt and Road Initiative”.
This initiative (previously known as One Belt One Road, or OBOR) is aiming to build a rail network connecting China to the Middle East and Europe, with the addition of modern deep-water ports to link shipping from China and the surrounding western Pacific to South Asia, and Africa.
The OBOR project has been a success with over 60 countries already signed or inclined to sign the Memorandum of Understanding (MOU) with China. Countries that are signing MOU account for 70% of the world’s population.
The opportunities are immense, ranging from infrastructure spending through to the requirement to innovate in areas like building a high-speed electric train network to bring costs down and improve efficiencies.
In 2014, President Xi announced plans to create a $40bn development fund and several hydropower stations have already been supported by the fund. Xi pledged to add at least $113bn of extra funding and is estimating that the program will trigger $5trn of spending across the participating countries.
The scheme will face challenges. Russia or India may perceive this as a rise in Chinese trade dominance potentially damaging their domestic production and exports. Also, it is as yet unclear when we will see the fruition of this mega project. However, it will undoubtedly benefit China and international infrastructure companies should the initiative gain momentum.
PRODUCTIVITY – THE GREASE THAT OILS THE ECONOMY
Since the financial crisis, productivity growth has slowed globally and it’s no different for the UK. The official watchdog on Britain’s government finances is the Office for Budget Responsibility (OBR). The OBR monitors the economy closely and it has expressed views suggesting productivity is not set to improve anytime soon.
Productivity is the rate of output per one unit of input, expressed as the value per worker. Improvements in productivity are extremely worthwhile because it underpins economic growth and improvements in living standards. For example, workers can be paid more and even work less, if they produce more output for every hour worked.
Following the financial crisis, the OBR had assumed a quite sizeable improvement in productivity growth – rising by 15% from 2009 to 2016. In subsequent years, as their optimism faded, forecasts have been pared. In their most recent guidance they stated that “over the past five years, growth in output per hour has averaged 0.2%. This looks set to be a better guide to productivity growth in 2017 than our March Forecast”.
With low productivity, employers find it difficult to justify awarding employees with pay rises, and at one level the OBR are intimating, with their recent forecast, that wage restraint will continue to feature for much longer than we would ideally like. However, could their new pessimism coincide with a favourable tipping point?
While economists continue to try to solve the puzzle we expect the finger of blame to be pointed at several areas ranging from sub-par bank lending, zombie companies being propped up by low interest rates through to Brexit. In truth, looking for reasons to explain why productivity growth is sluggish is different from looking for solutions. The commercial interests of our economy will be best served by supportive government policy, productive investment and managerial nouse. The UK economy does not operate in a vacuum and human ingenuity has always prevailed
Footnote: The issue of low productivity is not isolated to the UK. It is also a global phenomenon. Therefore, more solutions will be attempted. The US is currently engaged in monetary tightening, meaning higher interest rates and in the very near future they will begin to unwind quantitative easing. The move by the Federal Reserve to raise rates will put to the test the idea that low interest rates are partly to blame for low productivity. Others can learn from their experience. Furthermore, the theory that low unemployment, which has fallen below its pre-crisis levels, will eventually force business to pay or invest more is also being tested. It is stretching out further than most expected. Some liken it to an elastic band tied around a brick – either it snaps or it snaps back!