“OPEC Meeting…..”

OPEC Meeting

OPEC and its allies have been since last year taking part in a pact to cut output by 1.8 million barrels per day.  For the past 18 months the price of oil has increased from a level at $27 in 2016 to around $74 per barrel.  However, supply has been effected by outages happening in Venezuela, Libya and Angola that have brought about supply cuts to around 2.8 million barrels per day in recent months.   On Friday the Organisation of the Petroleum Exporting Countries will gather in Vienna and seek agreement to raise oil production amid calls from the United States, China and India to cool down the price of crude and prevent supply shortage that could hurt the global economy.  Meanwhile, Iran has been the main barrier to a deal as the country faces export US sanctions.  The country called on OPEC to reject pressure from US President Donald Trump to pump more oil.    OPEC’s de facto leader Saudi Arabia and non-OPEC Russia have said a production increase of about 1 million barrels per day or around 1 percent of global supply had become a near consensus proposal for the group and its allies.  Trump in May imposed fresh sanctions on Tehran and Iran’s output which is expected to drop by a third by the end of 2018.  Iran will not gain from any deal of increases in supply.   The Saudi energy minister Khalid al-Falih has warned that the world could face a supply deficit of up to 1.8 million bpd in the second half 2018 and that it was OPEC’s responsibility to address consumer’s worries.

US Growth And The Imposition Of Tariffs

The US economy is about to enter its 10^th year of expansion whilst growth for this quarter is booming as tax cuts have increased the propensity of consumers and businesses to spend more.    However, there are also risks that this momentum will short live.  Due to supply constraints and soaring property values, the housing market is struggling to build on its progress.  Furthermore, manufacturing is facing lengthening order backlogs and accelerating input prices, in particular due to oil and tariffs on metals.  In addition, the move by Donald Trump has brought the US on the verge of a trade war with China that could result in levies on hundreds of billions of dollars in goods.  On Friday the US pledged to  push ahead with the tariffs on $50 billion of Chinese imports.  On Monday, Trump further asked the administration to identify $200 billion in Chinese products for additional tariffs of 10 percent plus another $200 billion.

German Chancellor Angela Merkel

German Chancellor Angela Merkel is under pressure from the Christian Social Union (CSU) party over immigration policy.  The CSU will give the chancellor two weeks to overhaul the country’s asylum system, according to reports from the local media, as Merkel is trying to find a wider EU solution to the issue.    Merkel is seeking the help of France to forge common proposals to tighten asylum rules before taking the plans to a summit of EU leaders on June 28-29.

German Automakers

With the global trade war triggered between China and the US, there is another victim, Germany’s automakers.   Daimler and BMW have joined American farmers and Chinese solar panel and steel makers in what seems to be a bitter trade war on a global scale of a kind that has not been seen since the 1930s. On Wednesday Daimler cut its 2018 profit projections while BMW is looking at strategic options because of the threatened trade war.  The first test as to whether a tariff war will actually take place starts on 6 July, the date when Trump threatened to enact the first portion of duties on planned $50 billion of imports from China.  Financial markets have been hit hard with the increased threats and car makers have felt the impact on Thursday, even though some companies such as General Motors (GM) and Ford Motor have recovered from earlier stock price lows.  GM lost almost 2 percent on Thursday whilst Ford lost 1.3 percent and Tesla plunged 4.1 percent.

Merkel and Macron’s Agreement

German Chancellor Angela Merkel and French President Emmanuel Macron have come to an agreement on how to move on forward with the strengthening the euro area, citing a common regional budget, a more robust European Stability Mechanism and a shared approach to immigration.  They want to make it easier to restructure sovereign debt, whilst putting pressure on banks to tackle bad debt problems.  There has to be consensus with other euro members.

Mario Draghi At The ECB Policy Forum

As stated by European Central Bank President Mario Draghi, the European Central Bank will be patient in tightening policy further, and added that market pricings for its first post-crisis rate hike were consistent with its aim to move gradually.  Draghi mentioned the downside risks that include the threat of increased global protectionism, rising oil prices and the possibility of persistent heightened financial market volatility.  Questioning the traditional relationship between prices and earnings, Draghi further added that while wages are on the rise this would not automatically translate into higher inflation.

Bank of England Holds Rates

The Bank of England has kept the interest rates on hold.  Markets are seeing a 45 percent chance that the BOE’s Monetary Policy will raise rates at its next meeting scheduled for August and a 95 percent chance of one more rate hike by the end of 2018.    The BOE Monetary Policy Committee voted 6-3 to keep rates at 0.5 percent.   As a result on Thursday the pound rose against the dollar and the euro.  Against the dollar the pound rose off a seven month low to hit $1.3228 from $1.3139 before the announcement while strengthening against the euro, rising 0.6 percent to 87.26 pence, a four-day high.  Some market watchers are of the opinion that uncertainty over the economy and Britain’s exit from the European Union next year can still deter the BOE from raising rates this year.

Theresa May’s Win Of Brexit Vote

On Wednesday Theresa May won a crucial Brexit vote in Parliament  keeping the government’s plans to end more than 40 years of British partnership with the European Union on track.  However, there is uncertainty amongst traders as to whether her victory will boost her chances of securing a more favourable Brexit deal with the European Union in view that the road to end negotiations is still far off.  May needed the lower House of Commons to pass her EU withdrawal bill – legislation that will prepare Britain for a Brexit next March.  In a statement May said that the passage of the bill was an important step in delivering Brexit and more details of the proposed future links with the EU would be published in the coming weeks.  May still has to pass other bills through parliament to prepare Britain’s exit from the EU.

Italy

After the Italian government appointed two euro sceptics to head key finance committees, Italy’s bond yields and its stock fell while the euro weakened on Thursday.  The appointments renewed market jitters about the government’s commitment to the Euro, after investors a few days ago were reassured by Giovanni Tria that investors had no intention of leaving the euro.  The yield on the 10 year government bond rose 14 basis points to a one-week high of 2.72 percent while the two year borrowing costs rose 25 bps to 0.84 percent.  The gap between the Italian 10 year bond yield and the German bond was at its widest in a week at around 236 basis points.

Greece And Its Debt Relief

Greece has been living on money borrowed from three bailouts from governments in the EU.  The country has gone through a ballooning budget deficit, huge public debt and an inefficient and welfare economy.   On Friday Eurozone finance ministers have extended the maturities of the loans and deferred the interest of a major part of their loans outstanding with Greece.  Furthermore a cash injection was provided to ensure that Greece can handle servicing of its debt in the future.  The main element of the debt relief is an extension of maturities and grace periods on 96.9 billion euros of loans.  It will also get a 15 billion euro new loan, which will take the total cash buffer with which it will leave the bailout on 20 August to 24.1 billion.  This will give it independence from market borrowing for some 22 months, said the euro zone ministers in a statement.  Next year Athens has to pay around 7 percent of its output, the first after its third bailout ends in August.  The move also acts as an incentive for future governments in Athens to continue with the hard won reforms implemented under the bailouts.   Eurozone ministers agreed to offer Greece cash payments of 600 million euros every six months until 2022 if the country sticks to the course agreed with creditors.  The money will come from profits made by euro zone central banks on their holdings of Greek bonds that will gradually mature over the next four years.  The International Monetary Fund welcomed the deal achieved and said it will improve Greek debt sustainability in the medium term.

Eurozone Business Growth

Eurozone business growth recovered in June bolstered by services firms, however, manufacturing growth was the weakest in 18 months on trade worries according to a survey.  The IHS Markit’s Euro Zone Composite Flash Purchasing Manager’s Index (PMI) which is seen as a guide to economic health climbed in June to 54.8 from 54.1 in the previous month.  Any figure above 50 indicates growth.  The composite output price index climbed to a four-month high of 53.8 from 53.2 which followed inflation news that increased to 1.9 percent in May, close to the ECB’s target of 2 percent.

EU To Impose Duties On US imports

The European Union will begin charging duties of 25 percent on a range of US products on Friday, in response to the tariffs imposed by the US on EU steel and aluminium early this month, as stated by the European Commission on Wednesday.  The Commission formally adopted a law putting in place duties on 2.8 billion euros worth of US goods, including steel and aluminium products, farm produce such as sweetcorn and peanuts, bourbon, jeans and motor-bikes.  EU Trade Commissioner Cecilia Malmstrom called the EU response proportionate and in line with World Trade Organization rules.  She also said that they would be removed if Washington removed its metal tariffs.  The EU has in reserve potential tariffs of 10 percent to 50 percent that it could impose on a further 3.6 billion euros of US imports in three years’ time.

Turkey

On Sunday, Turkey will go to the polls.  President Recep Tayyip Erdogan is a clear frontrunner in the presidential election.   Erdogan requires at least 50 percent of the vote to win in the first round presidential vote on 24 June, otherwise he will be pushed into an 8 July runoff with the most popular opposition candidate, Muharrem Ince of the secular Republican People’s Party or CHP.    Even if Erdogan wins there is a chance that the ruling AK or Justice and Development, party alliance will lose its parliamentary majority, dragging the country into prolonged political deadlock.  For Turkish markets to calm down, investors want clarification as to how the government will spur the $880 billion economy will move Turkey from the brink of a currency crisis.

Outlook For The Maltese Economy 2018-2020

In its latest projections on Malta’s economic growth, the Central Bank of Malta foresees the upcoming three years to remain strong, however, lower than that of 2017.  These projections feature a downward revision in growth for 2018 when compared to the previous set of forecasts, reflecting a lower than anticipated growth in 2017.  In contrast, GDP growth in 2019 and 2020 was revised up, as selected large investment projects are expected to be delayed to these years.  The factors that will support potential output are the continued impact of the energy reforms, new investment projects and increased labour market participation.  Domestic demand will be the primary driver supporting economic expansion over the next three years.   In view of the fast economic growth, the labour market is projected to remain tight, with the unemployment rate expected to remain below 4% by 2020.  Annual inflation based on the Harmonised Index of Consumer Prices (HICP) is projected to increase up to 1.9% by 2020, reflecting a pick-up in domestic cost pressures.  With regards to government finances, they are expected to remain in surplus over the coming years.  Meanwhile the debt-to-GDP ratio is projected to fall to around 40% by the end of the projection horizon.

Malta: Harmonised Index Of Consumer Prices (HICP): May 2018

In May 2018, the annual rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP – which measures monthly price changes in the cost of purchasing a representative basket of consumer goods and services) was registered at a rate of 1.7 percent up from 1.4 percent in April 2018.  The largest upward impact on annual inflation was recorded in the Restaurants and Hotels Index (0.99 percentage points), mainly reflecting higher prices of accommodation fees.  The largest downward impact was recorded in the Recreation and Culture Index (0.04 percentage points), attributed to lower prices of package holidays.

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