Week in Review

April 15, 2019

Global Roundup

essDocs to integrate e-bill of lading with Voltron blockchain platform. The Voltron bank consortium will soon be piloting a new electronic bill of lading capability on its blockchain platform, having partnered with essDocs. (GTR)

IMF wants China-U.S. trade deal to address structural issues. Any trade deal between China and the United States should be a long-lasting one that is consistent with multilateralism and addresses structural factors like intellectual property, a senior International Monetary Fund official said on April 12. (Reuters)

Germany to halve 2019 growth forecast: Government source. The German government is set to halve its 2019 growth forecast for Europe’s biggest economy, a government source told Reuters on April 12, reflecting a worsening slowdown led by a recession in the manufacturing sector. (Reuters)

CRU: China stimulus 2018-19–Less positive for commodities demand than the past. The market had hoped that China would unveil a large stimulus package at the March NPC; but any expectation of a large boost to world growth and commodities demand has not come, yet. (Hellenic Shipping News)

Crude oil trade: Venezuela's pain is Brazil's gain. The big question in the market once the U.S. imposed sanctions against Venezuela earlier in 2019 has been "then who?" (IHS Market)

Blockchain is not dead, just consolidating. At the U.K.’s Association of Corporate Treasurers Working Capital conference last month there was little mention of blockchain/distributed ledger technology solutions, but don’t be fooled, things are happening worldwide as companies, suppliers and banks consolidate their efforts. (CTMfile)

International agreements: A sprinkle of optimism. Global headlines tend to focus on an increasingly free hostile trade environment and withdrawals from trade agreements. However, this article examines the lesser-known progress being made across the globe, which can foster a positive tone for international cooperation. (Global Risk Insights)

Indian elections 2019: Whose Sarkar? India is heading towards national elections asking ‘abki baar, kiski sarkar’—whose government are the people going to get? Modi or Gandhi? GRI’s acting editor-in-chief analyzes the potential outcomes of the elections. (Global Risk Insights)

Mexico, U.S. to discuss NAFTA replacement, border delays. Mexican government and business leaders meet with their U.S. counterparts for a second straight day on April 12, seeking to hasten ratification of a trade deal, resolve border delays that are hurting exporters and discuss metals tariffs. (Reuters)

Germany’s postwar prosperity is on the verge of reversal. Anniversaries can be painful for Germany, and this year is full of pivotal ones. (Bloomberg)

Aussie lawmakers want stronger recourse for SMB bank disputes. Lawmakers in Australia are pushing for legal assistance for small businesses that find themselves in disputes with banks, reports in The Sydney Morning Herald April 10. (PYMNTS)

Brexit: U.K. and EU agree delay to Oct. 31. European Union leaders have granted the U.K. a six-month extension to Brexit, after late-night talks in Brussels. (BBC)

Fitch Ratings: EU, EIB ratings are resilient to a no-deal Brexit. The European Union and the European Investment Bank's 'AAA'/Stable ratings would not be affected by a no-deal Brexit, Fitch Ratings says. (Fitch)




Global Growth Expected to Slip

Chris Kuehl, Ph.D.

The International Monetary Fund (IMF) is certainly not notorious for its upbeat forecasts. The institution began life after the Second World War as the lender of last resort—created primarily to give the shattered European nations an opportunity to rebuild their economies with borrowed money.

It worked like a charm because these were mostly modern industrial states with the know-how and ability to compete once they had an opportunity to rebuild their shattered infrastructure. As that mission was completed, the IMF turned its attention to the developing world with the same basic plan—cheap loans to build infrastructure.

The outcome was not quite so positive, however, because these states often lacked the background and skills to take advantage of this kind of support. Pretty soon, the IMF was the institution that set about correcting these bad habits through direct intervention—teams of IMF economists virtually seized control of entire economies. This essentially set the IMF as the arbiter of good and bad economic policy. Its periodic reports on the state of the world are generally seen as very accurate, but they do tend to lean in a more negative direction.

The latest edition of the World Economic Report is characteristically blunt as it outlines the factors that have been dragging the global economy to the slowest period of growth seen in the last several years—nearly as slow as seen during the recession that gripped the U.S., Europe and the world in general. The report cites an “environment of increased trade tensions and tariff hikes between the United States and China, a decline in business confidence, a tightening of financial conditions and higher policy uncertainty across many economies.” More than in past years, these are all man-made issues made more serious by political positions and the growth of populism as a political/economic motivator.

The growth expectation for trade now is for a rate of 3.4% in 2019. That is down from a previous estimate of 3.8% and way down from the nearly 5% notched in 2018. The growth spurt that was led by the U.S. in 2018 faded quickly and the corresponding surge in Europe was even more short-lived.

The tax cuts in the U.S. coupled with additional European stimulus provided an unsustainable boom, but from the start, that surge was undermined by other policy decisions. For every step forward, there was a step or two back and the global economy ultimately started to falter.

Growth estimates for the world economy are down; almost every nation is looking at dramatic reductions in their GDP. Germany is expected to be down by 0.5%, Italy is also expected to be down by 0.6% and the U.K. will fall by another 0.3%. Mexico is down by 0.6% and all of Latin America is looking at around 0.7% with big drops in Brazil and Argentina. The Middle East will see a decline of 0.9%. Even the once-high-flying U.S. economy will be coming back to earth with growth at perhaps 2.3% as compared to the 3.2% noted at the start of 2018.

Of the issues cited by the IMF, the ones that seem to be causing the most concern revolve around uncertainty. This confusion is firmly rooted in politics. The erratic nature of U.S. trade policy has been attributed to the fact that there is no real policy in place. Tariffs are imposed and then lifted. Threats are made and then are not followed up with action, but then the threat reappears at the time most assumed the issues had been resolved. The policy is directed entirely by presidential whim and the perception of how such a deal will play with his base. The agony of the Brexit process has taken everybody by surprise and has all but destroyed the British reputation in the world. It was assumed that cooler heads would prevail and an orderly and mutually acceptable deal would be thrashed out. Now the betting is the U.K. will crash out of the EU in a chaotic mess that will set their economy back by years, taking a big chunk of Europe with it. At the same time that British isolationism and populism heads the U.K. towards this train wreck, there are similar elements in Europe with Italy at the forefront of the populist crisis. The economy of Italy is in shambles; all the leadership can focus on is immigration.

The IMF is not very enthusiastic about the situation in Asia either. China has shown some signs of life of late as the manufacturing data has improved, but there are still major headwinds due to the trade fight with the U.S. and the slowing economic growth in Europe, a market that is more important to them than even the U.S. Japan remains mired in slow growth patterns and India has not been in a position to exploit the market opportunity provided by China’s struggles. Latin America is at near panic levels over the mess in Venezuela and the bombastic leadership in Brazil. The hope for Argentina has faded as old problems have come back to haunt.




Wide-Ranging Reforms Needed to Ensure Italy’s Economic Recovery

The latest economic survey of Italy says the country’s GDP is expected to fall by around 0.2% this year before growing 0.5% in 2020, according to an Organisation for Economic Co-operation and Development (OECD) report.

GDP per capita is broadly at the same level of 20 years ago, and poverty remains high, especially among the young. Low productivity growth and wide social and regional inequalities are long-standing challenges which need to be tackled vigorously. The public debt as a share of GDP remains high, at 134%, and a source of risks.

The report says Italians generally have high levels of well-being in areas such as work-life balance, social connections and health, but not in others such as environmental quality, education and skills.

To support stronger employment and productivity growth, improve well-being and help to put the debt-to-GDP ratio on a downward path, the survey proposes an ambitious reform package. According to OECD simulations, by 2030, annual GDP growth would increase from 0.6% under current policies to above 1.5% if such reforms were implemented. The report identifies strengthening the effectiveness and efficiency of the public administration and justice system among the reforms proposed that would have the biggest impact on GDP.

The government’s 2019 budget rightly aims to help the poor through the new Citizen’s Income (Reddito di cittadinanza), says the report, but it will be important not to weaken work incentives so as to avoid poverty traps. The high level of the Citizen’s Income benefit—relative to other OECD countries – might discourage people from finding jobs in the formal sector, especially in regions where wages are lower. To counter this problem the report proposes to introduce an in-work benefit system and lower the Citizen’s Income benefit.

The survey adds that the effectiveness of the Citizen’s Income will depend critically on marked improvements in job search and training programs. It welcomes the additional resources allocated to public employment services, but warns that improvements will require a detailed plan to revamp their operations through more extensive use of information and technology, and profiling tools.

The report also warns that the reduction in the retirement age to 62 with at least 38 years of contributions, though only temporary, could lower economic growth in the medium term by reducing work among older people and worsen intergenerational inequality.

The number of people in work has risen to 58% of the working age population, but Italy’s employment rate is still one of the lowest among OECD countries, especially for women. Big differences in employment rates explain much of the disparities in living standards between regions. Job quality is also relatively low. An increasing share of new jobs are temporary and the mismatch between people’s skills and the work they do is high.

Reform action taken in recent years, such as increasing autonomy and resources in schools (Buona scuola), Industry 4.0 and the Jobs Act have started to address some of the country’s challenges and it will be important not to backtrack on them. At the same time, it will be necessary to boost productivity growth by increasing competition in markets that are still protected such as local public services, enhancing administration efficiency and reducing barriers to entrepreneurship.

Presenting the report in Rome, OECD Secretary-General Angel Gurría said: “The Italian economy has many strengths. Exports, private consumption, investment flows and a dynamic manufacturing sector have driven growth in recent years while labor market reforms have helped raise the employment rate by 3 percentage points since 2015.”

“But the country continues to face important economic and social challenges,” he added. “Tackling them requires a multi-year reform package to achieve stronger, more inclusive and sustainable growth, and revive confidence in the capacity to reform.”

Without sustainable public spending and taxation policies, the room to improve infrastructure, help the poor and deliver the services people expect will inevitably narrow, the report says. Designing budgets within the EU Growth and Stability Pact, which should be implemented in a pragmatic way, would help strengthen the credibility of Italian fiscal policy and reduce its risk premium. Lower government bond yields would also help safeguard the stability of banks. The health of the banking sector has improved markedly as banks’ non-performing loans have declined and the sector is being rationalized and consolidated.

Public spending needs to become more efficient and better targeted through designing and implementing spending reviews in the budget-making process. The tax system needs to be made fairer through improved voluntary compliance, avoiding repeated amnesties and fighting evasion forcefully.

With public investment having fallen as a share of GDP in recent years, the report recommends speedier implementation of the new public procurement code, which it says is well thought out. Simplifying the most complex aspects of the new code should not weaken the power of the anti-corruption authority.

To help reduce wide regional divides across Italy, improved coordination is needed between central and local bodies—whose capacity needs to be strengthened—to ensure more effective spending of regional development and EU cohesion funds.

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China: New Investment Law Leaves Gaps

PRS Group

The recent annual convening of the so-called “two sessions” of China’s legislative bodies, the rubber-stamping NPC and the advisory CPPCC, resulted in the approval of a revised foreign investment law that will take effect in 2020. Details have not yet been published, but Premier Li Keqiang has assured that changes to intellectual property rules will provide a proper mechanism for recovering damages, and there will be welcome revisions to the negative list for foreign investment.

Provisions putting an end to forced technology transfers will be of particular interest to U.S. negotiators currently engaged in trade talks with Beijing. The speed with which the law was drafted and approved suggests that the trade dispute with the U.S. has inflicted real damage on the Chinese economy, and officials in Beijing are keen to seize the opportunity created by the pause in an escalating tariff war to address U.S. (and European) concerns about the manner in which China does business.

That said, it is not at all clear to what extent western firms will be able to obtain market access unfettered by state interference and fully protected by international law. Article 40 of the old law has been retained, granting the government the authority to take any action against foreign businesses it deems appropriate according to the principle of “perceived negative reciprocity.” Moreover, China retains the right to screen investments for “security risks,” a concept so vaguely defined as to potentially include mere competition with domestic firms. In addition, all of the fine details still require the approval of the State Council. As such, foreign investors are probably wise to contain their enthusiasm pending evidence of how the law operates in practice.

Exactly how much damage the economy has incurred is unclear, as growing signs of rising political and social tensions—including reports that hundreds of thousands of Uighurs and other Muslims are being held in detention camps, and the significant tightening of security surrounding the “two sessions” event—have contributed to speculation that the situation may be much worse than the official figures suggest. Perhaps tellingly, the government has released official documents outlining proposals for fiscal expansion, involving tax cuts and infrastructure improvements, and options for monetary policy stimulus, and supply-side structural reforms.

Officially, the pace of real GDP growth decelerated from a revised 6.8% in 2017 to just 6.6% last year, the slowest pace since 1990. By design, real growth will continue to slow as consumption replaces investment as the key driver of economic expansion. However, the broad range of proposed measures to stimulate the economy and reports of tightening credit terms and a rise in corporate bond defaults do not gibe with the government’s growth target of 6.2% in 2019. Some China-based research groups argue that the economic growth rates are closer to 2%, although such assessments may reflect methodological differences, rather than fudging of data. Whatever the truth, there is ample evidence that China is facing economic headwinds that will create political challenges for leaders in Beijing.

The analysis above is taken from the March 2019 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.


Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations