Week in Review

July 1, 2019

Global Roundup

EU says G20 summit priorities to be multilateralism and WTO reform. World leaders descended upon Osaka, Japan, June 28 and 29 with a myriad of goals for the international discussions at the 2019 G20 Summit, in the context of growing trade and geopolitical tensions. (EurActiv)

Iran, nuclear deal partners meet as accord under threat. Senior officials from Iran and the remaining signatories to its 2015 nuclear deal with world powers meet June 28 as tensions in the Persian Gulf simmer and Tehran is poised to surpass a uranium stockpile threshold, posing a threat to the accord. (AP News)

To dodge trade war, Chinese exporters shift production to low-cost nations. In recent years, some Chinese manufacturers had already started to relocate some of their capacity to countries such as Vietnam and Cambodia, due to high operating costs at home. The trade war is now pushing more to follow suit, especially makers of low-tech and low-value goods. (HSN)

Erdoğan’s tactical gamble in Istanbul proves a strategic mistake. Following a repeat mayoral election in Istanbul on June 23, Turkish strongman Recep Tayyip Erdoğan is not quite so strong anymore. If there is one thing worse than losing a close election, it must be losing the same election twice—and the second time with a much wider margin. (Brookings)

How China really sees the trade war. As Presidents Xi Jinping and Donald Trump attend the G-20 summit in Osaka on June 28 and 29 to seek a trade deal, Xi is likely to soften the customary formality of Chinese diplomacy by calling the U.S. president “my friend.” Beneath the cordial surface, however, Xi will yield nothing. (Foreign Affairs)

China's shutout of Canadian meat scrambles global pork flow. China’s decision to block imports of Canadian meat has set off a global chain reaction in pork trading, but it will do little to curb overall demand as a disease ravaging the Chinese hog herd elevates prices, industry experts say. (Reuters)

The hidden war on the Colombian-Venezuelan border. The crush of migrants trying to flee Venezuela is only part of what makes the border region so chaotic. There's also a dangerous power struggle between guerillas and criminal gangs. (Worldcrunch)

Nearly 250 arrested in Ethiopia after foiled coup. Nearly 250 people have been arrested in Ethiopia’s capital Addis Ababa and the city of Bahir Dar since a coup attempt was foiled, the state-run Ethiopian Broadcasting Corporation reported on June 27. (Reuters)

G-20 leaders meet in Japan to resolve global conflicts. Trade and geopolitical tensions, and the looming threat of climate change, were on the agenda as Chinese President Xi Jinping and other world leaders gathered in Osaka, Japan, for a summit of the Group of 20 major economies. (Business Mirror)

EU trade pact with Vietnam close to finish line. As Brussels relies on bilateral talks to increase trade relations with the ASEAN group, it is getting closer to concluding two free trade agreements with Vietnam. But the European Parliament could yet prove to be a significant obstacle. (EurActiv)

Italian fiscal policy: Anger in Brussels and Rome. On June 5, the European Union began a process of opening Excessive Deficit Procedures (EDP) against Italy, which could culminate in a multi-billion Euro financial penalty. This article outlines the internecine clashes within Italy alongside disagreements between Rome and Brussels and explains why this creates future economic risks, further burdening the Italian economy. (Global Risk Insights)

Stratfor 2019 Third-Quarter Forecast. The U.S.-China Trade War Will Drag On; Iranian Retaliation Will Raise the Risk of a Military Confrontation; A High Stakes Tech Battle Will Drive Fragmentation in the Global Tech Sector; Geopolitical Risk Will Create Significant Headwinds for the Global Economy; and more. (Stratfor)

Public support for Brazil President Bolsonaro eroding: Poll. More than half of Brazilians say they lack confidence in right-wing President Jair Bolsonaro, whose support has steadily eroded since winning a commanding victory in October’s election, according to an opinion poll released on June 27. (Reuters)

Widodo seals 2nd term as Indonesia leader after court battle. On June 27, Indonesia’s top court rejected a losing presidential candidate’s allegations of massive and systematic election fraud, sealing a second term for Joko Widodo, who in fending off the rising power of Islamists has drifted toward authoritarian tactics. (AP News)

What Can Central Banks Really Do Right Now?

Chris Kuehl, Ph.D.

For a variety of reasons, there has been a great deal of attention focused on the central banks of late. There is the obvious issue of interest rates and the other tools these institutions have at their disposal, but the attention seems to go far beyond the question of whether monetary policy is loose or tight.

The political implications of bank policy have become front and center in the U.S., Japan, Europe, India, Turkey and elsewhere. Some of this is to be expected given the role these banks play in the conduct of economic policy, but lately the pressure has been much more intense than is normally the case.

It seems central banks have been made into scapegoats or have been expected to do more than their mandate. Ideally, central banks are designed to work in tandem with the legislature/executive of a given nation. They have a simply stated mission, but one that can be very difficult to execute.

They are to manage monetary policy in such a way as to ensure economic stability—not too much inflation and not too much joblessness. They are designed to be immune to the pressures that affect the elected officials. As has been demonstrated repeatedly, the elected representatives nearly always err on the side of pushing inflation—they have never met a spending program they didn’t like and they always want to offer tax cuts.

There is always tension between the politicians and the central bankers—especially when there is a difference of opinion over what the economic policy should consist of. The Federal Reserve has been under attack from President Donald Trump for months as he asserts interest rates are too high at 2.5%. He maintains that the slower growth in the U.S. is due to these higher rates and has threatened to fire Fed Chief Jerome Powell. He has tried to place allies on the Fed’s Board of Governors, but with little success.

The European Central Bank (ECB) is in the midst of figuring out who replaces Mario Draghi as the leader when he retires next year. The favorite is Jens Weidmann, the president of the German Bundesbank, but he is a very controversial figure who has long been critical of the ECB’s stimulating strategy. He has opposed lower rates as well as the bond-buying program that Draghi advocated. His advance would signal a radical change in ECB strategy. This has been virulently opposed by the southern tier nations in the EU as they have been the biggest beneficiaries of ECB policy.

The Reserve Bank of India has been in turmoil as members have been resigning in protest of Prime Minister Narendra Modi’s interference. Modi has been trying to browbeat the bank into slashing rates as a means by which to boost economic growth, but the members of the bank’s board fear this policy would unleash rampant inflation—a problem in India already.

There is a similar contest of wills taking place in Japan as the government of Prime Minister Shinzo Abe has been pushing the Bank of Japan to push rates lower. The Bank of England (BoE) faces a set of challenges as the issue of Brexit looms at the same time that BoE Governor Mark Carney has announced his plans to step down. The British economy is set to slow down due to the Brexit mess. The only question is by how much. The worst-case scenarios assert Britain will fall into actual depression. Even the less dramatic assumptions have the economy slowing to almost zero. The BoE is expected to do something to help, but it is unclear what it can do given that rates are already low.

The fact is much of what has to be done to “fix” these economies has to be done by the legislatures and the executive branches, but thus far they have been unwilling or unable to take the necessary steps.

Most of these countries are facing budget deficits and high debt loads already, so they are limited in terms of what they can spend to encourage economic growth. They are unable to do much with taxes either. Steps that could be taken are politically unpopular.

The U.S. has a labor shortage issue that has limited expansion and productivity that could be addressed though immigration, but that has become anathema to the GOP. Britain could clear the way toward economic growth by settling the Brexit crisis, but the Tories are unwilling to do so. Japan tries to boost the economy one day and then panics over tax revenues the next. It moves to boost consumer spending taking place at the same time that taxes are being raised. All of these banks are protecting their independence, but the pressure keeps mounting.

Payment Delays Expected to Increase in North America

A third of suppliers interviewed in the United States, 34% in Canada and 40% in Mexico expect an increase in the number of customers that delay payments by more than 90 days, according to the latest Atradius Payment Practices Barometer. In turn, those delays will bring about problems managing cash flow and DSO.

In the U.S., 83% of respondents in the metals sector, 40% in the construction sector and 33% in the ICT/electronics sector anticipate this deterioration in payment behavior. In Canada, this is the case for three out of five respondents in the construction industry. In Mexico, 64% of suppliers interviewed in the machines sector and 54% in both the consumer durables and construction sectors anticipate an increase in the time it takes to collect overdue business-to-business (B2B) receivables.

“After 10 consecutive years of decreasing insolvencies, payment delays in North America are expected to increase over the coming months,” said David Huey, Atradius regional director for the U.S., Canada and Mexico. “This is a clear reversal from last year. It is chiefly due to the regularly changing government trade policies and slowdown of the global economy.”

With more customers expected to take longer to pay and a worsening economic outlook, Atradius survey respondents are also planning to do more to protect their cash flow. For example, 38% of respondents in Mexico, 35% in the U.S. and 30% in Canada plan on more frequently checking their buyers’ creditworthiness before offering credit terms. In addition, 33% of Canadian respondents, 28% in the U.S. and 18% in Mexico plan to increase their bad debts reserves.

The Atradius Payment Practices Barometer is an annual survey of B2B payment practices conducted by Atradius N.V. The Americas edition examines payment behavior in Brazil, Canada, Mexico and the U.S. This year’s survey was conducted approximately six months after the conclusion of the USMCA trade deal.

Survey results are particularly telling for USMCA countries as more than half of the exports of 56% of the suppliers interviewed in the three countries are within the USMCA region, Atradius noted. And 18.3% of respondents (up from 16.5% one year ago) trade only within the region. While it may still be early to draw conclusions, USMCA appears to be good for trade, the firm finds. For 87% of the suppliers interviewed in Mexico (up from 81.5% last year) and 92% in Canada (up from 90% one year ago) exports to the U.S. have either increased or not changed over the past year. Seven of 10 suppliers interviewed pointed to both economic reasons and government trade policies for the renewed stability.

Global Growth to Weaken to 2.6% in 2019, Substantial Risks Seen

Global economic growth is forecast to ease to a weaker-than-expected 2.6% in 2019 before inching up to 2.7% in 2020, says the World Bank in its June 2019 Global Economic Prospects: Heightened Tensions, Subdued Investment. Growth in emerging market and developing economies is expected to stabilize next year as some countries move past periods of financial strain, but economic momentum remains weak.

Emerging and developing economy growth is constrained by sluggish investment, and risks are tilted to the downside. These risks include rising trade barriers, renewed financial stress and sharper-than-expected slowdowns in several major economies. Structural problems that misallocate or discourage investment also weigh on the outlook.

“Current economic momentum remains weak, while heightened debt levels and subdued investment growth in developing economies are holding countries back from achieving their potential,” said World Bank Group President David Malpass. “It’s urgent that countries make significant structural reforms that improve the business climate and attract investment. They also need to make debt management and transparency a high priority so that new debt adds to growth and investment.”

Growth among advanced economies as a group is anticipated to slow in 2019, especially in the Euro area, due to weaker exports and investment. U.S. growth is forecast to ease to 2.5% this year and decelerate to 1.7% in 2020. Euro area growth is projected to hover around 1.4% in 2020-21, with softness in trade and domestic demand weighing on activity despite continued support from monetary policy.

Growth among emerging market and developing economies is projected to fall to a four-year low of 4% in 2019 before recovering to 4.6% in 2020. A number of economies are coping with the impact of financial stress and political uncertainty. Those drags are anticipated to wane and global trade growth—which is projected to be the weakest in 2019 since the financial crisis a decade ago—is expected to recover somewhat.

“While almost every economy faces headwinds, the poorest countries face the most daunting challenges because of fragility, geographic isolation and entrenched poverty,” said Ceyla Pazarbasioglu, World Bank Group vice president for equitable growth, finance and institutions. “Unless they can get onto a faster growth trajectory, the goal of lowering extreme poverty under 3% by 2030 will remain unreachable.”

Analytical sections address key current topics:

• Government debt has risen substantially in emerging and developing economies, as hard-won cuts in public debt ratios prior to the financial crisis have to a large extent been reversed. Emerging and developing economies need to strike a careful balance between borrowing to promote growth and avoiding risks associated with excessive borrowing.
• Growth rates in low-income countries are expected to rise to 6% in 2020 from 5.4% in 2019, but that is still not enough to substantially reduce poverty. While a number of low-income countries progressed to middle-income status between 2000 and 2018, the remaining low-income countries face steeper challenges to achieving similar progress. Many are poorer than the countries that made the leap to higher income levels and are fragile, disadvantaged by geography and heavily reliant on agriculture.
• Investment growth among emerging and developing economies is expected to remain subdued and below historical averages, held back by sluggish global growth, limited fiscal space and structural constraints. A sustained pickup in investment growth is necessary to meet key development goals. Business climate reforms can help encourage private investment.
• Sharp currency depreciations are more common in emerging and developing economies than in advanced economies, and central banks are often required to respond to these fluctuations to maintain price stability. The exchange rate pass-through to inflation is more limited when central banks pursue credible inflation targets, operate within a flexible exchange rate regime and are independent of the central government.

“In the current environment of low global interest rates and weak growth, additional government borrowing might appear to be an attractive option for financing growth-enhancing projects.” said Ayhan Kose, World Bank prospects group director. “However, as the long history of financial crises has repeatedly shown, debt cannot be treated as a free lunch.”

Regional Outlooks:

East Asia and Pacific: Growth in the East Asia and Pacific region is projected to slow from 6.3% in 2018 to 5.9% in 2019 and 2020. This is the first time since the 1997-1998 Asian financial crisis that growth in the region has dropped below 6%. In China, growth is expected to decelerate from 6.6% in 2018 to 6.2% in 2019, predicated on a deceleration in global trade, stable commodity prices, supportive global financial conditions and the ability of authorities to calibrate supportive monetary and fiscal policies to address external challenges and other headwinds. In the rest of the region, growth is also expected to moderate to 5.1% in 2019, before rebounding modestly to 5.2% in 2020 and 2021, as global trade stabilizes.

Europe and Central Asia: Regional growth is expected to firm to 2.7% in 2020 from a four-year low of 1.6% this year as Turkey recovers from an acute slowdown. Excluding Turkey, regional growth is expected to grow 2.6% in 2020, slightly up from 2.4% this year, with modest growth in domestic demand and a small drag from net exports. In Central Europe, fiscal stimulus and the resulting boost to private consumption will begin to fade in some of the subregion’s largest economies next year, while growth is expected to modestly recovery to 2.7% in Eastern Europe and moderate to 4% in Central Asia. Growth in the Western Balkans is anticipated to rise to 3.8% in 2020.

Latin America and the Caribbean: Regional growth expected to be a subdued 1.7% in 2019, reflecting challenging conditions in several of the largest economies, and to build to 2.5% in 2020, helped by a rebound in fixed investment and private consumption. In Brazil, a weak cyclical recovery is expected to gain traction, with growth rising to 2.5% next year from 1.5% in 2019. Argentina is projected to revert to positive growth in 2020 as the effects of financial market pressures fade, while easing policy uncertainty in Mexico is expected to help support a moderate growth uptick in Mexico next year, to 2%.

Middle East and North Africa: Regional growth is projected to rise to 3.2% in 2020, largely driven by rebound in growth among oil exporters. Growth among oil exporters is anticipated to pick up to 2.9% in 2020, supported by capital investment in the GCC and higher growth in Iraq. Among oil importing economies, increasing growth is predicated on policy reform progress and healthy tourism prospects.

South Asia: The outlook for the region is solid, with growth picking up to 7% in 2020 and 7.1% in 2021. Domestic demand growth is expected to remain robust with support from monetary and fiscal policy, in particular in India. Growth in India is projected to accelerate to 7.5% in FY 2019/20, which begins April 1. Pakistan’s growth is expected to slow further to 2.7% in FY2019/20, which begins July 16.

Sub-Saharan Africa: Regional growth is expected to accelerate to 3.3% in 2020, assuming that investor sentiment toward some of the large economies of the region improves, that oil production will recover in large exporters and that robust growth in non-resource-intensive economies will be underpinned by continued strong agricultural production and sustained public investment. While per capita GDP is expected to rise in the region, it will nevertheless be insufficient to significantly reduce poverty. In 2020, growth in South Africa is anticipated to rise to 1.5%; growth in Angola is anticipated to pick up to 2.9%; and growth in Nigeria is anticipated to edge up to 2.2% in 2020.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations