Market outlook 2019: The state of Global Economy and Politics
In this section we aim to give you a short summary of the global economic and (geo) political developments.
The global economy kicked-off 2018 on an upbeat note, buoyed by a pickup in global manufacturing and trade. The rapid growth of 2017 (see graph below) was quickly reversed later in the year as investors confidence in the global economy lost steam.
It seems increasingly clear that global growth has passed its recent peak and faces escalating risks of two types: a) trade tensions and b) tightening financial conditions.
The escalation of trade tensions between US and China has been one such negative development in 2018. In US alone, it is estimated that the value of imports subject to new tariffs, imposed by the Trump’s administration, is around $500 Billion with tariff rates between 10% and 25% to various products and countries. According to International Monetary Fund Managing Director Christine Lagarde, trade disputes and tariffs are starting to dim the outlook for global growth substantially. If auto tariffs are also implemented, IMF expects that it could cut three quarters to 1% off global growth.
Tightening of financial conditions
The second risk is related to the state of the economic cycle we are currently in. It started in late 2008 with the global financial crisis and extends until today. During this period we saw central banks employing extraordinary measures to support the economies and the global financial system. In US particularly, monetary policy has been accommodative with zero rates for more than six years, the longest period historically.In addition, aggressive quantitative measures were deployed during this period with central banks buying financial assets to support the economies ($4.5Tr in US alone).
Since the beginning for 2016 the normalization process has started by the central bank with gradual increases in interest rates and reduction of its balance sheet (since Oct 2017).
(Geo) political landscape
Politics can significantly affect the economy in a multitude of ways. What makes this period particularly important is the rise of populism worldwide and the power struggle between the two superpowers, US and China.
The rise of populism globally can be attributed to many factors such as the widening wealth gap, distrust to the financial and governing system as well as high levels of debt. Given that populist governments tend to be controtentional and nationalistic it poses a significant risk on running domestic as well as foreign affairs.
The mix of populism along with the ongoing power play between US (existing power) and China (rising power) poses additional geopolitical risks.
The rise of China as superpower is remarkable in every sense. In just a period of 40 years, China has been growing with an average pace of 10% and is now regarded as the world’s largest manufacturing economy, exporter of goods and fastest-growing consumer market.
The last few years it tops the leaderboard in technology as well. The recent story regarding Supermicro, the alleged hack that China used to infiltrate US Government infrastructure and several companies, highlights China’s technological power. Another example is the Social Credit System that is currently being under pilot deployment where citizens will be ranked according to their businesses’ economic and social reputation, or ‘credit’. That could be a good script for another Netflix TV series coming soon…
Graham Allison, a Harvard scholar, thinks the world underestimates the risk of a catastrophic clash between China and the United States. When a rising power challenges an incumbent, carnage often ensues. Thucydides, an ancient historian, wrote of the Peloponnesian war of 431-404 BC that “It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.”
Over the last 500 years, there were 16 times when an emerging power developed to become comparable to an existing power, and in 12 of those times there were shooting wars, which determines which country is dominant and which one has to be submissive. All but four ended in war. Mr Allison does not say that war between China and the United States is inevitable, but he thinks it “more likely than not”.
Where Europe stands
Unfortunately Europe remains a laggard in many fronts. In technology and innovation, one can hardly find companies that stand up to the competition. EU countries invest less than 2 percent of GDP on R&D every year, which is less than Japan, U.S. and China.
On the economic front things are even more complex, the north vs the south, the never ending discussion about fiscal union and a growing populism and nationalism in several countries.