Week in Review

December 3, 2018

Global Roundup

Trade conflicts to dominate G20 agenda. U.S. President Donald Trump isn't interested in international cooperation, but the other G20 members take a different stance. A clash seems unavoidable at the group's summit. Bernd Riegert reports from Buenos Aires. (DW)

U.K. banks pass stress test and can handle no-deal Brexit, BOE says. The Bank of England may be worried about Brexit, but it’s confident about the strength of the banks it regulates to weather any storm. (HSN)

Pakistan devalues rupee fifth time this year amid IMF talks. Pakistan devalued its currency on Nov. 30 for the fifth time this year as the nation negotiates a bailout with the International Monetary Fund. (Bloomberg)

Blockchain will add US$3tn to international trade by 2030, predicts WTO. The World Trade Organization (WTO) expects blockchain technology to add no less than US$3tn to international trade by 2030. (GTR)

Key global events to watch in December. At the start of every month, the Global Observatory posts a list of key upcoming meetings and events that have implications for global affairs. (IPI Global Observatory)

Brazil's next president is looking to shake up Mercosur. Brazil's new government will try to spur economic growth by pressing the Common Market of the South (Mercosur) to lower its import tariffs and to do away with restrictions that prohibit bloc members from signing bilateral trade agreements. (Stratfor)

Another warning sign that the U.S. economy will slow next year. Juiced by President Donald Trump’s tax cuts, business investment helped deliver a robust U.S. economy in the first half of 2018, but signs have multiplied that the growth driver is faltering. (HSN)

Asia’s growth is shifting down a gear. Asia has been hit by a slew of weak gross domestic product reports for the third quarter, with global growth also sputtering at a time when rising interest rates and a U.S-China trade war threaten more pain. (HSN)

Trump says Brexit agreement bad for U.S.-British trade, May disagrees. U.S. President Donald Trump said last Nov. 26 that the agreement allowing the U.K. to leave the EU may make trade between Washington and London more difficult, but the U.K. prime minister’s office disputed his interpretation. (EurActiv)

Japan's economic outlook in five charts. Japan has had an extended period of strong economic growth. On the policy front, six years of “Abenomics” saw lower fiscal deficits, near-record unemployment and higher female labor force participation. But inflation remains stubbornly low, and macroeconomic and financial sector challenges are set to grow as demographic headwinds—the aging and shrinking of Japan’s population—intensify. (IMF)

U.S.-China trade war direct impact via supply chains limited. The impact of the U.S.-China trade war on other major economies through supply-chain linkages will be highest in Korea and Japan and reflects their sales of intermediate products to China that are ultimately bound for the U.S. market. However, these exposures are still quite small relative to total exports. (Fitch)

Egypt's state banks helping to support currency. Egypt’s central bank has enlisted the help of state-owned commercial banks to keep the Egyptian pound from weakening against the dollar by getting them to supply any extra hard currency the market may need, bankers and economists say. (Reuters)

Trump cancels G20 meeting with Putin over Russia-Ukraine crisis. Donald Trump has cancelled his scheduled meeting with Russian president Vladimir Putin on the sidelines of the G20 summit over the recent naval confrontation between Moscow and Ukraine. (Independent)

Six steps to success for exporting during Chinese New Year. Chinese New Year has a significant impact on exporters because Chinese factories, ports and many other businesses in China actually close down during the holiday. For companies that depend on exporting to China, it’s something to plan for. (Shipping Solutions)

European Version of PMI Creates Concern

Chris Kuehl, Ph.D.

The Purchasing Managers’ Index (PMI) has been a very useful tool for analysts for years because it has the virtue of being extremely current and fundamentally unbiased. The purchasing manager is simply stating what he or she did that month in the way of buying.

One can assume that buying more steel signals expanded production and buying less signals a pullback. The index also has a simple diffusion index that states anything more than 50 is expansion and anything less than 50 equals contraction. The U.S. is currently enjoying a period of robust PMI activity with numbers consistently in the mid to high 50s. Not so with Europe.

The numbers have not yet tumbled into the 40s, but they are as low as they have been in four years and have been dropping like a stone. As recently as October of last year, the Germans were in the 60s and France was in the high 50s. They have both been tumbling and now stand at around 51.

The whole of the eurozone has likewise fallen. The sense is most of the engines that had been driving development have been fading as consumers and investors are both starting to fade. The other issue is that Europe has been experiencing the fallout from issues such as Brexit, aggressive U.S. trade policies and the slowdown in China.

The impact on Europe is not good and will likely keep the European Central Bank (ECB) from hiking rates any time soon. That affects the U.S. and the Federal Reserve because it creates an even wider gap between the central banks and further bolsters the dollar at the expense of the euro. If it was the aim of the Trump White House to build a bigger export base for the U.S., the policies pursued have been an utter failure and have actually made the deficit far worse than it might have been.

Trade War? Not Really—Or Not Yet?

Global trade of goods and services remained relatively resilient this year despite U.S. protectionist rhetoric with 3.8% growth, according to trade credit insurer Euler Hermes. Volume of merchandise trade continued to rise above the average performance of 2012-16 in a range of 2% to 4% supported by a solid growth in global demand, it noted.

In 2019, trade momentum is set to soften in line with slowing GDP growth. Volume of global trade of goods and services is expected to decelerate to reach 3.6% in 2019 (from 3.8% in 2018) and value growth is set to slow to 6.3% (from 7.2%). In USD terms, trade is expected to increase by +USD1.3tn in 2019 (from +USD1.7 in 2018).

The economic assumptions behind Euler Hermes’ forecast are as follows:

• Global economic growth will decelerate slightly in 2019 (3.1% from 3.2% in 2018).
• Tighter monetary policy in the U.S. is expected to lead to slower investment growth and less momentum—especially in emerging markets.
• Brent oil prices are expected to lower to USD69/bbl in 2019 on average, but resilient currencies and stronger inflation is expected to support trade growth in value terms.

Protectionism has had a very limited impact so far, Euler Hermes noted. Yet sentiment, as reflected by the decline of major economies manufacturing PMIs, has been affected by trade threats.

Even if President Trump’s September 23 announcements bumped the average U.S. average tariffs by 1.7pp to an estimated 5.2% (which corresponds to the level of tariffs of the 1980s), protectionism should stay under control globally, it explained.

Euler Hermes outlined three reasons why a trade war should be avoided: pragmatism in America, the Chinese trade safety net and protectionism fatigue. The trade credit insurer expects a more constructive approach on trade from the United States and China’s retaliation to U.S. rivalry is not breaking global trade. On the other hand, trade facilitation reforms and new free trade agreements are partially compensating for the U.S.-China quarrel, it said.

If push came to shove, further escalation to a trade feud (average U.S. tariffs above 6%) could cost half a point of GDP in growth in the U.S., while a trade war (average U.S. tariffs above 12%) would cost two points of GDP in the U.S. and would trigger a global recession.

“Trade facilitation reforms and new free trade agreements are partially compensating for the U.S.-China quarrel. Out of the U.S., countries tend to favor free trade initiatives. The last edition of the World Bank Doing Business (Doing Business 2019) points to a positive trend: trading across borders sub-score have increased in almost all major economies especially in emerging markets” said Wilfried Verstraete, chairman of the Euler Hermes board of management.

Businesses should prepare for higher cost of trade, trade diversion and rising political risk beyond protectionism, Euler Hermes warned.

First, the trade financing gap (USD1.5tn) will rise as monetary and financial conditions in dollar terms tighten, and currency, political and nonpayment risks increase, it explained. Second, trade diversion could create winners and losers: Asian trade pivots should benefit the most. And third, Euler Hermes expects 400 new protectionist measures globally (from 560 in 2017) but sophistication, as well as confiscation and expropriation risks could increase as the economy experiences a soft landing.

IMF Economic Health Check on Japan

The Japanese economy is growing above its estimated potential, according to the International Monetary Fund (IMF). After a temporary soft patch early in the year, domestic demand recovered in the second quarter.

With external demand expected to remain supportive, and despite recent natural disasters, real GDP growth is projected to remain above trend in 2018 at 1.1%. Headline and core inflation have gained momentum in recent months on the back of higher energy prices but remain well below Bank of Japan’s (BoJ) 2% inflation target.

The current account surplus increased marginally in 2017, due to a stronger income balance, but is expected to shrink by the end of 2018 due to smaller goods trade and income balances. The real effective exchange rate appreciated slightly in the first nine months of 2018 relative to end-2017. As with the 2017 external sector assessment, the projected 2018 current account balance is preliminarily assessed as in line with the current account level consistent with fundamentals and desirable policies.

Underlying growth is expected to remain solid, notwithstanding the scheduled increase in the consumption tax rate in October 2019. However, absent mitigating fiscal measures, the consumption tax increase could lead to volatility in private consumption and investment. Meanwhile, monetary policy is expected to remain accommodative and support favorable financial conditions. Over the medium term, growth is projected to moderate and the output gap close. Following a consumption tax-induced spike in 2020, inflation will rise over the medium term, but likely remain below the BoJ’s target.

Although the IMF welcomed Japan’s economic growth performance, especially in per capita terms, and the prospect of continued above-potential growth in the near term, it noted that inflation remains below target and that downside risks have risen, notably from the upcoming consumption tax rate increase and deteriorating global conditions. Moreover, intensifying demographic headwinds continue to pose challenges. The IMF emphasized the need to reinvigorate the policies of “Abenomics” to achieve sustained high growth, durable reflation and public debt sustainability.

It underscored the importance of maintaining a neutral fiscal stance to support near-term growth and reflation and welcomed the authorities’ plan to implement temporary measures to alleviate the adverse impact of the scheduled increase in the consumption tax rate, accompanied by clear communication to the public. For the medium term, the IMF saw merit in developing a well-specified fiscal framework, based on realistic assumptions, to reduce policy uncertainty and anchor a gradual consolidation path toward debt sustainability while addressing demographic challenges.

The IMF encouraged the authorities to further deregulate product and services markets, facilitate entry and exit of firms, promote small- and medium-sized enterprises, and deepen corporate governance reform. It agreed that monetary policy should remain accommodative, possibly for an extended period to successfully reflate the economy, while carefully monitoring and mitigating side effects and stressed that effective communication and forward guidance would help reduce market volatility and guide inflation expectations.

The IMF highlighted the importance of enhancing risk management, financial oversight and the macroprudential framework. It welcomed the authorities’ close engagement with regional financial institutions to help adapt their business models to demographic trends and also saw priority in facilitating financial institutions’ use of fintech and strengthening crypto-asset oversight.

The IMF also noted that advancing multilateralism would help mitigate inward spillovers from heightened trade tensions.

FCIB’s December International Credit & Collections Survey is assessing payment behavior in Japan as well as the following Asian countries: China, India and South Korea. The monthly FCIB International Credit & Collections Survey is open to all credit and risk management professionals who can share their real-time business experiences, and both members and nonmembers will receive the results of the survey in which they participate. Members, however, have full access to reviewing historical benchmarks in the survey archives.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations