Week in Review
January 13, 2020
Iran launches missile attacks on military bases housing U.S. troops in Iraq. Iran has launched more than a dozen ballistic missiles against U.S. military and coalition forces, targeting at least two military bases in Iraq, the U.S. Defense Department announced late Dec. 31. (NPR)
Iran crash: Ukraine Boeing with 176 onboard comes down near Tehran. A passenger plane bound for the Ukrainian capital, Kyiv, crashed a few minutes after taking off from Tehran’s main international airport, killing 176 people. (Guardian)
U.S. imposes sanctions on Iranian steel and other metals. The Trump administration is imposing new sanctions on Iran following attacks on U.S. and allied troops earlier this week, Secretary Steven Mnuchin announced Jan. 3. (CNN)
Iran’s next move. Analysis: Iranian retaliatory missile strikes following the killing of Qassem Soleimani were likely a way for Iran to bide its time as it plans to take revenge in a way that better serves its interests. (Brookings)
Trump says China trade deal may be signed shortly after January 15. U.S. President Donald Trump, who announced last month that the Phase 1 trade deal with China would be signed on Jan. 15, said on Jan. 2 the agreement could be signed “shortly thereafter.” (HSN)
Macron defies French unions over retirement age in pension reform. France’s government defied trade unions on Jan. 3 by including a contested clause on raising the retirement age by two years in its draft legislation, amid signs that weeks of street protests and strikes may be losing momentum. (Reuters)
Risky corporate debt is piling up, out of sight from global regulators. Companies around the world have racked up an immense amount of debt. One worry is that these borrowers could default on some part of the $3 trillion in risky borrowing, setting off a wave of losses for banks and investors. The other worry is that officials aren’t sure who exactly owns a sizable swath of this debt. (HSN)
The economy is expanding. Why are economists so glum? At an annual gathering of the profession, researchers presented evidence and talks that amounted to warnings on the state of the record-long expansion. (NY Times)
World Bank warns of global debt crisis amid borrowing buildup. Current debt wave is largest, fastest and most broad-based since 1970s, say economists. (Guardian)
Main figures in Spain's new government. Spain has released most details of its new cabinet, tasked with leading the first coalition government since the return to democracy. (Reuters)
Cross-border transactions face EU anti-money laundering overhaul. Incoming EU-level reforms to anti-money laundering laws are set to take legal effect on Jan. 10, introducing new requirements for banks handling transactions linked to high-risk countries. (Global Trade Review)
Fiscal pressures raise LatAm vulnerability in next downturn. Growth in public debt burdens and fiscal deficits in many Latin American countries over the past decade will undermine the ability of governments to respond to shocks and a sharper than expected global slowdown in 2020. (Fitch)
Here’s how your business can prepare for Chinese New Year shutdowns. Countries including Korea and Vietnam are also expected to participate in the Lunar New Year celebrations around the same time as Chinese New Year, requiring other global businesses to consider what preparations need to be made in advance to ensure operations aren’t put to a halt. (Global Trade Magazine)
Incoterms 2020 CFR: Spotlight on Cost and Freight. Incoterms 2020 rules outline whether the seller or the buyer is responsible for, and must assume the cost of, specific standard tasks that are part of the international transport of goods. This week, Shipping Solutions discusses Incoterm CFR. (Shipping Solutions)
- Insights (COVID-19, Suriname)
- Covid-19 to increase firms’ liquidity needs to a record USD8tn as payment delays and inventories surge
- July 31
- Onward, Upward for the Eurozone Economy and Currency
- July Monthly Outlook 2020
- July Monthly Macro 2020
- Other News (IMF)
Annual Economic Outlooks:
- View Outlooks (Euler Hermes)
Middle East Decoupling
Chris Kuehl, Ph.D., NACM Economist
The U.S. was once one of the most important players in the Middle East, but those days seem thoroughly in the past. The U.S. hostility towards Iran has been in place for a long time, but there were plenty of other nations the U.S. could count as allies in one form or another. Today, that is not the case.
President Donald Trump has threatened highly punitive tariffs and other restrictions on Iran—a nation the U.S. has been actively engaged with for the last two decades. The U.S. is desperately unpopular with Syria, Lebanon, Libya and several of the Gulf oil states. Relations with Saudi Arabia and Egypt are strained, and Turkey is clearly more rival than ally these days. The U.S. has lost almost all credibility in the region and has only force to rely on. Does this matter?
It can be argued the only reason the U.S. has continued a relationship with the tumultuous region is oil. This has certainly been the driver for decades—especially when the U.S. depended on the oil exports from this region. As the U.S. has developed into the world’s largest oil producer, the connection to the Middle East has lost some of its importance. There are other reasons to stay engaged, however.
At the top of the list is the need to protect and defend Israel. The U.S. remains the most important ally Israel has. It has been U.S. influence over some of the states in the region that has kept them from attacking Israel. An isolated U.S. means an even more isolated Israel.
The U.S. may not need the oil from the region as was once the case, but the rest of the world does. Many of the most dependent are key U.S. allies. The U.S. needs to keep that oil flowing to Europe and Asia (especially Japan).
Then there is the thorny issue of terrorism. The U.S. needs support from the governments in the area if it intends to thwart terrorism. It is overlooked that the U.S. worked with Iran and General Qasem Soleimani to fight ISIS just a year ago. Without the intelligence and military support provided by allies in the region, the U.S. would be far more vulnerable to the threats posed by Islamic terrorism.
Beyond all this, there is the commercial aspect. There is a great deal of economic development in the area, and many U.S. companies wish to maintain their share of that market.
Euler Hermes: Insolvencies to Rise in Four out of Five Countries in 2020
The upward trend in business insolvencies continued in 2019 for the third time in a row, according to the latest Global Insolvency Report by Euler Hermes.
The report finds insolvencies increased by 9% last year, mainly due to a prolonged surge in China (20%) and to a lesser extent by a trend reversal in Western Europe (2%) and North America (3%). Euler Hermes expects business failures to rise again in 2020 by 6% year-on-year (y/y).
The trade credit insurer notes that Asia (8%) will be the key contributor to the rise in insolvencies, notably due to China (10%) and India (11%). In Western Europe, economic growth will remain below historical thresholds, which usually stabilizes the number of insolvencies, it adds. As a result, most countries will see an increase. Further, the United States and Canada have shown increases for the first time in many years in 2019, and it expects increases of 4% and 5%, respectively in 2020.
Failures of large companies—those with over EUR50mn of turnover—remain at a persistent and worrying high level, Euler Hermes said.
The firm believes this worrying trend is due to the combination of a low-for-longer pace of economic momentum, notably in advanced economies, in the industrial sector, and the lagging effects of trade disputes, political uncertainties and social tensions.
In 2020, even if monetary policies should remain supportive, it will not be enough to counterbalance softer demand, tougher price competition and an increase in production costs, notably wages, Euler Hermes states.
All in all, four out of five countries will post a rise in insolvencies in 2020, with Brazil (-3% y/y) and France (0%) as the key exceptions, the firm concluded. In 2019, the overall increase was higher, but only two out of three countries were impacted by rising insolvencies. This means that export risks are on the rise almost everywhere: There is hardly a safe haven anymore.
The number of major insolvencies from Q1 to Q3 2019 remained relatively stable year-on-year (249 major insolvencies), but their severity worsened in terms of cumulative turnover (EUR39.1bn to EUR145.2bn), which could have serious domino effects on providers along supply chains. The greater the turnover of the bankruptcy candidates, the greater the damage to individual suppliers. The hot spots were construction in Asia, energy and retail in North America, and retail and services in Western Europe.
“Overall, this insolvency outlook calls for a close monitoring of trade disputes and other political and policy-related risks, as the level of economic volatility will be very high all along 2020,” said Maxime Lemerle, head of sector and insolvency research at Euler Hermes. “More selectivity and preventive credit management actions will be needed.”
Ethiopia, House of People's Representatives, Aug. 29
New Zealand, House of Representatives, Sep. 19
Kyrgyzstan, Supreme Council, Oct. 4
Guam, Legislature, Nov. 3
Puerto Rico, Governor, Nov. 3
Burkia Faso, National Assembly, Nov. 22
Central African Republic, National Assembly, Dec. 27
Romania, Chamber of Deputies, Dec. 31
Global Growth: Modest Pickup Amid Mounting Debt and Slowing Productivity Growth
Global economic growth is forecast to edge up to 2.5% in 2020 as investment and trade gradually recover from last year’s significant weakness but downward risks persist, says the World Bank in its January 2020 Global Economic Prospects.
The organization expects growth among advanced economies to slip to 1.4% this year in part due to continued softness in manufacturing. It expects growth in emerging market and developing economies to accelerate to 4.1%. This rebound is not broad-based, however. It assumes improved performance of a small group of large economies, some of which are emerging from a period of substantial weakness. About a third of emerging market and developing economies are projected to decelerate this year due to weaker-than-expected exports and investment.
U.S. growth is forecast to slow to 1.8%, reflecting the negative impact of earlier tariff increases and elevated uncertainty. Euro area growth is projected to slip to a downwardly revised 1% in 2020 amid weak industrial activity.
Downside risks to the global outlook predominate, and their materialization could slow growth substantially, the World Bank notes. These risks include a re-escalation of trade tensions and trade policy uncertainty, a sharper-than expected downturn in major economies, and financial turmoil in emerging market and developing economies. Even if the recovery in emerging and developing economy growth takes place as expected, per capita growth would remain well below long-term averages and well below levels necessary to achieve poverty alleviation goals, it said.
Growth in the East Asia and Pacific region is projected to ease to 5.7%, reflecting a further moderate slowdown in China to 5.9% this year amid continued domestic and external headwinds, including the lingering impact of trade tensions. Regional growth excluding China is projected to slightly recover to 4.9%, as domestic demand benefits from generally supportive financial conditions amid low inflation and robust capital flows in some countries (Cambodia, the Philippines, Thailand and Vietnam), and as large public infrastructure projects come onstream (the Philippines and Thailand). Regional growth will also benefit from the reduced global trade policy uncertainty and a moderate, even if still subdued, recovery of global trade.
Regional growth in Europe and Central Asia is expected to firm to 2.6%, assuming stabilization of key commodity prices and Euro area growth and recovery in Turkey (to 3%) and Russia (to 1.6%). Economies in Central Europe are anticipated to slow to 3.4% as fiscal support wanes and as demographic pressures persist, while countries in Central Asia are projected to grow at a robust pace on the back of structural reform progress. Growth is projected to firm in the Western Balkans to 3.6%—although the aftermath of devastating earthquakes could weigh on the outlook—and decelerate in the South Caucasus to 3.1%.
Latin America and the Caribbean is expected to rise to 1.8%, as growth in the largest economies strengthens and domestic demand picks up at the regional level. In Brazil, more robust investor confidence, together with a gradual easing of lending and labor market conditions, is expected to support an acceleration in growth to 2%. Growth in Mexico is seen rising to 1.2% as less policy uncertainty contributes to a pickup in investment, while Argentina is anticipated to contract by a slower 1.3%. In Colombia, progress on infrastructure projects is forecast to help support a rise in growth to 3.6%. Growth in Central America is projected to firm to 3% thanks to easing credit conditions in Costa Rica and relief from setbacks to construction projects in Panama. Growth in the Caribbean is expected to accelerate to 5.6%, predominantly due to offshore oil production developments in Guyana.
Growth in the Middle East and North Africa region is projected to accelerate to a modest 2.4%, largely on higher investment and stronger business climates. Among oil exporters, growth is expected to pick up to 2%. Infrastructure investment and business climate reforms are seen advancing growth among the Gulf Cooperation Council economies to 2.2%. Iran’s economy is expected to stabilize after a contractionary year as the impact of U.S. sanctions tapers and oil production and exports stabilize, while Algeria’s growth is anticipated to rise to 1.9% as policy uncertainty abates and investment picks up. Growth in oil importers is expected to rise to 4.4%. Higher investment and private consumption are expected to support a rise to 5.8% in FY2020 growth in Egypt.
In South Asia, growth is expected to rise to 5.5%, assuming a modest rebound in domestic demand and as economic activity benefits from policy accommodation in India and Sri Lanka and improved business confidence and support from infrastructure investments in Afghanistan, Bangladesh and Pakistan. In India, where weakness in credit from nonbank financial companies is expected to linger, growth is projected to slow to 5% in FY 2019/20, which ends March 31 and recover to 5.8% the following fiscal year. Pakistan’s growth is expected to rise to 3% in the next fiscal year after bottoming out at 2.4% in FY2019/20, which ends June 30. In Bangladesh, growth is expected to ease to 7.2% in FY2019/2020, which ends June 30, and edge up to 7.3% the following fiscal year. Growth in Sri Lanka is forecast to rise to 3.3%.
Regional growth in Sub-Saharan Africa is expected to pick up to 2.9% in 2020, assuming investor confidence improves in some large economies, energy bottlenecks ease, a pickup in oil production contributes to recovery in oil exporters and robust growth continues among agricultural commodity exporters. The forecast is weaker than previously expected reflecting softer demand from key trading partners, lower commodity prices and adverse domestic developments in several countries. In South Africa, growth is expected to pick up to 0.9%, assuming the new administration’s reform agenda gathers pace, policy uncertainty wanes and investment gradually recovers. Growth in Nigeria expected to edge up to 2.1% as the macroeconomic framework is not conducive to confidence. Growth in Angola is anticipated to accelerate to 1.5%, assuming that ongoing reforms provide greater macroeconomic stability, improve the business environment and bolster private investment. In the West African Economic and Monetary Union, growth is expected to hold steady at 6.4%. In Kenya, growth is seen edging up to 6%.
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations