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Strategic Global Intelligence Brief for January 22, 2020

By Chris Kuehl, Ph.D., NACM Economist—

Short Items of Interest—U.S. Economy

The Chore Gap

There has been quite a lot of attention devoted to some of the gender gap issues—everything from pay differences to promotions. Relatively little attention has been paid to the "chore gap," but some studies reveal this issue has a direct impact on some of the bigger economic concerns. The average woman spends eight hours a day on household chores and the average man spends about three. These are the day-to-day activities such as cooking, cleaning and maintenance. The difference is substantial enough that it affects productivity. Women report more fatigue and less motivation to take on new tasks at work as a result. The biggest gap is with Boomers, but Millennials are a close second, while GenXers are the most equally distributed.

Keep Them or Not

There has been a shift in the usual pattern of employment when it comes to older workers, and adjustment has not been easy for employers or employees. The old pattern was simple enough as it was based on the expectation workers would retire at age 65. The worker had no desire to stay on longer and the employer started to prepare for their departure a few years before their exit. Today, the majority of Boomers indicate they want or need to keep working well into their 70s and beyond. The employer now faces a decision: Keep them or replace them with younger workers. This decision has been made more complex by the fact younger workers intend to move on to a new job every five years or so.

No Change in Balance of Trade

As the U.S. and China try to determine what has and what has not changed as a result of the "phase one" deal, there is one sticky fact that has been hard to dismiss. There has been no real change as far as the U.S. trade deficit, despite the tariffs and other trade war elements. In 2011, the trade balance as a percentage of GDP was -4.3 and today, that trade balance percentage is -4.2. The best year for the trade balance was 2016 when the percentage briefly hit -3.9% and it has worsened every year since. The fact is tariff and trade wars do not work as a means by which to alter trade patterns.

Short Items of Interest—Global Economy

Oil Production in Libya Collapses

There has been yet another event in the oil world that should have had widespread implications but has not. The emerging civil war in Libya has essentially halted oil output from a nation that was still in the top tier of oil producers. This means that oil production from Iraq, Iran, Libya, Algeria and Saudi Arabia have all been in decline, either due to conflict or deliberate choice. The fact this has not reverberated through the world is yet another signal the U.S. now dominates the oil sector as well as oil pricing.

Refugee Crisis in Venezuela Intensifies

The miserable conditions in Nicolás Maduro's Venezuela has led to an exodus of Syria and other war-torn nations in the Middle East. There are now serious doubts that economic conditions in Venezuela will be able to improve in less than a decade, even if and when Maduro is driven from office. Millions have fled to Colombia and other neighboring states, and the middle class of the country has abandoned the nation altogether.

Aging Crisis in Europe

The oldest population in the world is in Europe, where the median age is now 43—12 years older than the rest of the world. The vast majority of the working population will be in retirement in less than a decade. The U.S. is not far behind with a median age of 40. The youngest population is now in Africa, with Latin America a close second. The day is rapidly coming when there will be more people retired in Europe and the U.S. than there will be people working, which is unsustainable at many levels.

Trade Targets Shift

If anyone was laboring under the impression that U.S. President Donald Trump had softened his position on global trade after making a deal with the Chinese and presiding over the passage of the USMCA, his speech at the World Economic Forum should disabuse one of that impression. At the moment, it is hard to tell an enemy from an ally when it comes to trade relations. The Chinese have won a tariff reprieve on the basis of another round of pious promises to buy from the U.S., despite the fact China has broken these same promises multiple times in the last few decades. Thus far, there has been little for the U.S. to show for this "phase one" deal, but it is early days as China may come through later in the year.

Meanwhile, Trump arrived in Davos full of threats and attacks aimed at ostensible allies such as France, Germany, Great Britain and others in Europe. These threats range from additional tariffs on vehicles and parts; tariffs on French wine and other foodstuffs; tariffs on machinery, cultural exports, consumer goods and so on. The issued prompting this latest round of threats and attacks vary. The car market has been a target for the last couple of years, but the focus on France is more recent and tied to the proposed "digital tax" that France and the U.K. want to impose on the likes of Google and its parent company Alphabet. The French President just announced this tax will be delayed for a year, while there are negotiations over how it might be implemented. Neither the British nor Italians have indicated if they plan to follow suit as yet.

Analysis: The U.S. wants a comprehensive trade deal but so far, the demands are far more favorable to the U.S. than to the Europeans. There is little enthusiasm for what is now on the table. The U.S. wants the deficit with Europe reduced—the same motivation that has driven the talks with China. The issue this time is that there is far more interaction between U.S. and European businesses. The trade with China is simple in comparison, as it generally involves U.S. imports of consumer goods. The trade with Europe is often inter-company trade with many corporations maintaining significant facilities in both the U.S. and Europe. The trade relations go back many decades and separation will likely do as much damage to the U.S. company as to the European.

Then, there are the non-economic ties. The U.S. relies on China for nothing when it comes to global politics as the relationship is hostile in almost every respect. The U.S. has relied on Europe extensively in every conflict the U.S. has engaged in. This has often been through NATO, but there have been many other engagements involving troops from all over the EU. The relationship between the U.S. and Europe has been severely strained since Trump took office, and it is now doubtful that any European nation would assist the U.S. in any substantial geopolitical strategy.

Not All Gloom and Doom from the IMF

As the World Economic Forum got underway, the IMF released one of its updates regarding growth this year, calling for a small reduction. As the discussions continued, the IMF released its larger and more comprehensive study, which concluded there will likely be improved economic performance in 2020 compared to 2019. They hasten to point out that this progress will only occur if some of the recent developments play out as expected or planned.

Analysis: The slowdown in overall global growth was attributed to big issues such as the trade war between the U.S. and China as well as issues of slow progress in economic development in some of the emerging markets, especially Latin America. The hope is that the trade truce between the U.S. and China holds up, allowing the rest of the world to return to previous patterns. The slowdown in the Chinese economy has affected every nation that sells to China, including most of Europe and Latin America as well as other states in Asia. If the U.S. decides that China is not living up to its agreement and Trump reimposes tariffs, global expansion will halt and the optimistic assessments will end.

Disease and the Markets

There are many issues that affect the market, some are more obvious than others. The state of the global economy is certainly at the top of the list, but geopolitics, natural disasters and other disruptions have an impact. The latest scare is coming as China struggles to contain a virus that causes pneumonia like symptoms and is deadly. It is not yet at the level of the SARS outbreak from a few years ago but has that potential. It spreads from people to people and has been reported all over China and now in the U.S.

Analysis: It appears the Chinese have acted quickly to contain the spread, unlike their actions with SARS. They denied it was spreading and delayed response to the point it became an epidemic. This time, the response has been swift, but it is a reminder of how quickly these diseases can move. The impact is immediate as business travel all but stops. The tourism business is crushed when there is a hint of an outbreak and it often takes years before people are willing to travel to an area again. The Zika virus torpedoed the Brazilian economy a few years ago and even a nasty strain of the flu has been enough to interfere with economic expansion. This is not counting the direct cost of handling the outbreak. There is lost productivity and heavy medical expense many nations have a very hard time handling.

Latin America is in for a Rocky Year

It is hard to remember it was only a few years ago many asserted the time had come for Latin America to come into its own economically. Brazil was the "B" in the BRIC nations; Mexico was cruising along on 3% growth as it integrated into the U.S. economy; Argentina had shed the corrupt Peronist government; Colombia had left the bad old days of drug cartels and leftist insurgency behind; Chile and Peru were riding the wave of high commodity prices; and even some of the basket case nations like Venezuela and Ecuador seemed to be stabilizing. This optimism has come crashing down in the last year or two.

Brazil is back to being "the country of the future and always will be," as they have lurched from a leftist regime engulfed in corruption scandals to a right-wing populist that labels himself "Tropical Trump." Argentina was tired of the Mauricio Macri government's attempt to control the debt and deficit and returned power to the Peronists that got them in the mess in the first place. Mexico lurched to the left as well and now faces a recession and growing hostility with the U.S. The commodity boom ended and decked the economies of Peru, Chile, Bolivia and Ecuador. Colombia has been overwhelmed by the refugees from Venezuela, a nation facing utter collapse. There are an estimated four million refugees living in surrounding nations, with 80% of the population living in poverty.

Analysis: As bad as 2019 has been for the Latin states, the prospects for 2020 are even worse. There are no signs commodity prices will be recovering this year, continuing to hamper development in Peru, Chile and others. These nations were running a budget surplus just a few years ago and now, they are facing austerity efforts that have triggered angry protests. These have only added to the malaise as they inhibit the investment activity that is so badly needed. Argentina has been hit by this commodity issue as well as the reaction of the financial community to the return of the old regime. Within days of taking power, the new government asserted that it would likely default on its obligations again. Nevermind that the last time this tactic was employed, the country became an international financial pariah and plunged into recession.

The most precipitous fall has been in Mexico. This is the issue that will have the most impact on the U.S. The regime of Andrés Manuel López Obrador has been odd from the start. It has been simultaneously frugal and spendthrift. The decision was made to radically boost spending on a wide variety of social programs, but AMLO was not interested in expanding the debt and deficit. Therefore, he ordered radical cuts in other programs, many of which were aimed at economic development. The economy has slipped into decline and the worsening relations with the U.S. has only accelerated that decline.

If there is a bright spot on the horizon, it might be in Brazil. There has been some growth of late, but it has been highly dependent on expanded sales of farm output to China. The deal between the U.S. and China demands that more U.S. output be purchased by Beijing, meaning less purchased from Brazil.

Italian Government Falling Apart…Again

There is one thing that can be counted upon when it comes to the Italian government. No matter who is in control, it will not last long. No nation in Europe has had as many governments in place since the end of WWII as the Italians. The current coalition seemed doomed from the start and analysts are only surprised it has lasted this long. The original coalition between the Five Star Movement and the Northern League was a marriage of convenience, soon split. The current partner for Five Star is the Democratic Party—a center left party once the target of Five Star criticism. There were vows that under no circumstances would there be cooperation with them. That was before the split with the League.

Analysis: The leader of the Five Star Movement, Luigi Di Maio, made the practical decision to tie up with the former ruling party in order to form a ruling coalition, but the rank and file for both parties have roundly rejected the decision. Now, Di Maio has been forced to resign. This latest political crisis comes right before regional elections. It now looks as if the League will be the big winners. Much of the rationale for the coalition was to keep Matteo Salvini from becoming the next prime minister. The League remains committed to an aggressive anti-immigration policy and has been intent on attacking the social systems in the country. They have not been fiscally conservative—they just want money spent to support the business community in the north as opposed to the population in the poor southern regions of the country. The Five Star Movement continues to fail miserably as a ruling entity and is also swamped in corruption accusations.

Raining Cats and Dogs is One Thing, But Falling Iguanas?

Falling iguanas in Florida is quite another. The warnings in Florida beg the question: What is one to do about these falling iguanas? Are there special reinforced umbrellas available? Have hard hats become the headgear of choice? Does one endeavor to put the iguana back where it came from? This is certainly an issue rarely encountered here in the Midwest, but I have my own animal issues to contend with in cold weather.

First, there are the resident Canadian geese. I know this will cause howls of outrage from the goose haters, but I feed them. There is a little lake in my backyard, where we get some that are congregate. There is a loyal group of about a dozen that see me and make a beeline to accept the corn handout, practically standing on my feet in the process. Yes, they are messy, but it is my yard and I don't mind. In addition to the geese, there are the squirrels that like corn too. My group tend to look a little plumper than others I see around town. I am sure I will get comments from the squirrel haters as well, but I like watching their antics.

When it snows, I am made aware of the other visitors that wander through. I see the tracks of deer, raccoon, chipmunks and the neighborhood pooch. There are also mystery tracks that could well belong to a Yeti. As I am not sure if Yetis eat corn, I don't know what treats to put out for them. My indoor collection of feline friends seem especially smug this time of year as they gaze out the window while sitting on the heat vent. I have to admit I join them as I look out my office window at the neighbors trying to navigate the hill. My sense of superiority will vanish tomorrow as I head to the uncertainty of the airport.

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Wednesday, 26 February 2020