Week in Review

January 21, 2019

Global Roundup

Tariff clock keeps ticking after U.S.-China trade talks. Onlookers have applauded positive signals from the United States and China after the conclusion of trade talks this week, but time is running out to reach a deal on crucial issues before the hard deadline of Mar. 2, when the tariff increase moratorium ends. (Global Trade Review)

China to cut taxes, hike spending to counter slowdown. China plans to slash taxes, step up spending and provide ample financing to private and small enterprises to help counter the country’s worst slowdown since the global financial crisis and the impact of a bruising trade war with the U.S. (Business Mirror)

Brexit: Theresa May offers to talk to lawmakers but doesn’t give much ground. After a humiliating defeat Jan. 15 in the House of Commons, where members of Theresa May’s own party contributed to a landslide rejection of her plan for Britain’s withdrawal from the European Union, the prime minister managed to survive a no-confidence vote Jan. 16. (Washington Post)

EU gets ready to retaliate if U.S. adopts fresh car tariffs. The European Commission adopted on Jan. 18 negotiating mandates to eliminate tariffs in all industrial goods, including cars, with the U.S., but also warned that the preparations to retaliate are “very well advanced” if Washington decides to slap fresh duties on European automobiles. (EurActiv)

Farm losses surge in Mexico as fuel crunch likely to hit economy. Agriculture losses caused by Mexico’s ongoing fuel shortage are estimated at nearly $300 million, a sector leader said on Jan. 14, and overall economic growth is also likely to be hit as the government struggles to stabilize gasoline distribution. (Reuters)

Jordan: Economic impact of the Syrian war’s next stage. The Syrian Civil war is nearing its end game. This article, part two of a five-part series on the regional impact of this news, examines the current economic obstacles and opportunities for Jordan. (Global Risk Insights)

Brazil, Argentina step up pressure on Venezuela's Maduro. Brazil’s far-right President Jair Bolsonaro and Argentina’s President Mauricio Macri said after their first meeting on Jan. 16 that they agreed on opposing Venezuela’s authoritarian government, with Macri calling Venezuelan President Nicolas Maduro a “dictator.” (Reuters)

U.S., EU set conflicting goals for looming trade talks. The U.S. and European Union are staking out sharply different goals for coming trade negotiations, raising the prospect for renewed trans-Atlantic commercial tensions. (HSN)

Argentina says 2018 inflation hit 47.6%. Argentina’s consumer prices rose 47.6% in 2018, the official statistics agency announced on Jan. 14. The annual inflation rate is the highest since 1991 and one of the world’s highest. (Business Mirror)

EU-Swiss talks hit impasse, causing Brexit confusion. Talks between Brussels and Berne have been running since 2014 in a bid to formalise the 120 separate accords that have been negotiated between the EU and Switzerland since a 1992 referendum in the Alpine state rejected joining the European Economic Area. (EurActiv)

U.K. government's EU deal defeat heightens Brexit uncertainty. The U.K. government's defeat over the EU withdrawal agreement heightens uncertainty over the eventual outcome of Brexit, Fitch Ratings says. Downside risks of a disruptive exit are reflected in the Negative Outlook on the U.K.'s 'AA' sovereign rating. (Fitch)

OECD Anticipates Slower Global Growth

Chris Kuehl, Ph.D.

There is no expectation of another worldwide recession, but the Organization for Economic Cooperation and Development (OECD) is not expecting the run of good economic news to continue in 2019—at least not at the pace that many had become accustomed to.

The news from the major economies has been mixed so not everything has been gloom and doom, but some of the positive factors that made last year successful are losing their impact. The U.S. is expected to see a decline, but a slow one and not one that will take the U.S. economy back to the recession of 2008-2009. The Chinese have been seeing a steady decline, but that has slowed dramatically. It appears that they are starting to stabilize. The greatest concerns revolve around Europe and specifically with the U.K. It looks more and more likely there will be a hard exit from the EU. That has long been seen as the worst-case scenario for the British as well as for the Europeans.

The OECD report contrasts the activity that marked 2018 with what is expected in 2019. One of the primary differences is there is unlikely to be the same level of stimulation in the coming year as was the case last year.

The U.S. is not planning another tax cut, and there is no appetite for increased spending. If the drama over the border wall and the shutdown are any indication, this will be the most fractious government the U.S. has experienced in years; nothing will happen that boosts the economy in any way.

The Chinese have continued to push stimulus measures to bolster their growth, but these have been less and less effective as the real issue for their economy has been a drop in the level of exports. Some of that decline has been due to the U.S. trade and tariff policy, but much of the problem stems from the fact that many of China’s consumer nations have been struggling with their own growth these past months. Then, there is the fact that China is facing a lot more competition from states like Vietnam, India and many others.

The European situation concerns the OECD most of all. German economic growth has flattened. That always ricochets through the entirety of Europe. The German consumer has been pretty confident throughout the last year, but the business and investment community has been nervous about the political struggles that have weakened Angela Merkel. The Brexit issue will also affect Germany as the British were once solid trade partners. The OECD worry goes beyond slowdown in Germany as it seems that growth is also stalling in France where the Macron reform efforts trigger reactions all over the labor and corporate community. Italy is a solid mess and it seems like Spain is regressing. Britain is now facing the worst of the Brexit scenarios. This promises actual recession in the U.K. and slowdown in the rest of Europe.

Japan has not weakened much, but neither has it been able to escape the doldrums that have plagued it for years. Part of what has been affecting Japan has been the slowdown in China, but more importantly, there has been less activity in their entire export sector as the U.S. has erected barriers and the Europeans are just having money struggles of their own.

Another Year of Rising Insolvencies Expected

In 2018, global insolvencies confirmed the upward trend that started in 2017 after seven consecutive years of sizable declines, says trade credit insurer Euler Hermes.

The firm’s Global Insolvency Index, which covers 43 countries totaling 83% of global GDP, is to post a 10% year-on-year (y/y) increase for 2018. Overall, Euler Hermes expects 20 of the countries to see more insolvencies for 2018 than in 2017.

Three factors were cited for this outcome:

• A weaker macroeconomic context for some countries;
• The implementation of new types of insolvency procedures and the cleaning of business registers through the official insolvency procedures in a few other countries;
• More significantly, the stronger willingness to use the insolvency framework in China.

Although Euler Hermes expects the upside trend in insolvencies to continue in 2019 (6% y/y), it cites a more universal reason: the soft landing of the global economy to a slower pace of growth at 3% in 2019 from 3.1% in 2018 and 3.2% in 2017. The firm also expects real GDP growth to soften in the U.S. (from 2.9% in 2018 to 2.5% in 2019), the eurozone (from 1.9% to 1.6%) and Asia (from 5.1% to 4.8%).

De facto, this lowering demand is increasing the vulnerability of companies with high fixed costs and firms with larger inventories or issues in their working capital requirements, the firm noted. At the same time, the end of easy financing is increasing the vulnerability of debt intensive sectors and more globally, the vulnerability of the most indebted companies.

In fact, most economies, notably the developed ones, are expected to revert to and even cross their respective tempo of GDP growth, which has historically proved to be necessary to stabilize the level of insolvencies. “In other words, we expect economic growth to become gradually insufficient for a higher number of companies in a higher number of countries with regard to their production costs, (re)financing costs and structural challenges,” Euler Hermes reported.

The firm foresees two out of three countries will post an increase in business insolvencies in 2019 (compared to two out of five in 2018) and one out of two countries to register more insolvencies in 2019 than observed in average over 2003-2007, before the financial crisis of 2008. 

Euler Hermes warned that the outlook for startups looked worse. Countries that exhibited dynamic business creation over the past years will face an extra volume of insolvencies due to young companies being too weak to survive, it warned.

The surge in insolvencies in China will keep driving up the regional (and global) insolvency figures. Indeed, in 2018, business insolvencies continued on a huge double-digit growth (estimated at 60%) according to the available non-official data, thus confirming the official pickup posted in 2017 (74% to 6,257 cases according to the Supreme People’s Court of China). 

“We expect another double-digit increase of insolvencies in 2019 (20%),” Euler Hermes said. Firstly, because of the ongoing softening and adjustments of the Chinese economy, notably with regard to credit growth, Belt and Road Initiative and international trade issues. Secondly, and most importantly, Chinese authorities have decided to clean out its “zombie” state-owned enterprises (exceeding 20,000 cases according to some studies).

Weakened International Cooperation Damaging Collective Will to Tackle Global Risks

The world’s ability to foster collective action in the face of urgent major crises has reached crisis levels, with worsening international relations hindering action across a growing array of serious challenges. Meanwhile, a darkening economic outlook, in part caused by geopolitical tensions, looks set to further reduce the potential for international cooperation in 2019. These are the findings of the World Economic Forum’s Global Risks Report 2019 published last week.

The Global Risks Report incorporates the results of the annual Global Risks Perception Survey of about 1,000 experts and decision-makers and points to a deterioration in economic and geopolitical conditions. Trade disputes worsened rapidly in 2018, and the report warns that growth in 2019 will be held back by continuing geo-economic tensions, with 88% of respondents expecting further erosion of multilateral trading rules and agreements.

If economic headwinds pose a threat to international cooperation, rising geopolitical tensions among major powers further disrupt efforts in 2019, according to the report. About 85% of respondents to this year’s survey said they expect 2019 to involve increased risks of “political confrontations between major powers.” The report discusses the risks associated with what the forum describes as a “multiconceptual” world order—one in which geopolitical instabilities reflect not only changing power balances but also the increasing salience of differences on fundamental values.

“With global trade and economic growth at risk in 2019, there is a more urgent need than ever to renew the architecture of international cooperation,” said Børge Brende, president of the World Economic Forum. “We simply do not have the gunpowder to deal with the kind of slowdown that current dynamics might lead us towards. What we need now is coordinated, concerted action to sustain growth and to tackle the grave threats facing our world today.”

In the survey’s 10-year outlook, cyber risks sustained the jump in prominence they registered in 2018, but environmental risks continue to dominate respondents’ concerns beyond the short term. All five of the environmental risks the report tracks are again in the high-impact, high-likelihood category: biodiversity loss; extreme weather events; failure of climate-change mitigation and adaptation; man-made disasters; and natural disasters.

Environmental risks also pose problems for urban infrastructure and its development. With sea levels rising, many cities face hugely expensive solutions to problems that range from clean groundwater extraction to superstorm barriers. Shortfalls of investment in critical infrastructure such as transport can lead to system-wide breakdowns as well as exacerbate associated social, environmental and health-related risks.

“Persistent underfunding of critical infrastructure worldwide is hampering economic progress, leaving businesses and communities more vulnerable both to cyberattacks and natural catastrophes, and failing to make the most of technological innovation,” John Drzik, president of global risk and digital, Marsh.

At an individual level, declining psychological and emotional well-being is both a cause and consequence within the wider global risks landscape, impacting, for example, social cohesion and political cooperation. The Global Risks Report 2019 focuses explicitly on this human side of global risks, looking in particular at the role played by complex global transformations that are under way: societal, technological and work-related. A common theme is that psychological stress relates to a feeling of lack of control in the face of uncertainty.

This year’s report revives the Future Shocks series, which recognizes that the growing complexity and interconnectedness of global systems can lead to feedback loops, threshold effects and cascading disruptions. These “what if” scenarios are food for thought as world leaders assess potential shocks that might rapidly and radically disrupt the world. This year’s sudden and dramatic breakdowns include vignettes on the use of weather manipulation to stoke geopolitical tensions, quantum and affective computing, and space debris.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations