Week in Review

July 8, 2019

Global Roundup

EU leaders break deadlock, nominate candidates for top posts. After three days of arduous negotiations, European Union leaders broke a deadlock on July 2 and nominated German Defense Minister Ursula von der Leyen to become the new president of the bloc’s powerful executive arm, the European Commission, one of two women named to top EU posts for the first time. (AP)

Highly leveraged zombie companies threaten the global economy. Zombie companies could endanger financial stability as the global economic downturn is deeper than expected. The very detailed analysis and graphs, from the Bank for International Settlement’s (BIS) Annual Economic Report, show in no uncertain terms that one of the biggest signs of overheating in the global economy is the level of below investment grade corporate debt and the $3 trillion dollars of leveraged loans. (HSN)

Africa’s trade numbers on the rise. Africa’s output grew by 3.4% between 2017 and 2018 despite the slowdown in global growth during that period, according to the African Export-Import Bank’s latest report. (The Independent)

Russia's Putin signs law suspending INF disarmament treaty. Russian President Vladimir Putin signed legislation suspending a 1987 nuclear missile treaty, according to the law published on July 3 on an official government website. (The Straits Times)

Pacific shift from China to SE Asia, Korea. Trade tariffs cause rate differential and capacity transfer to countries “other than China.” There is no consensus on who will “win” the U.S.-China trade war, or whether there will be a winner at all, but the shipping industry has already reacted and re-priced its services to reflect to the new trade realities. (HSN)

EU farmers boss: “Devastating” Mercosur trade pact exposes Europe’s double standards. The trade deal recently reached between the EU and Mercosur countries is devastating for European farmers and exposes the bloc’s double standards, Pekka Pesonen, Secretary-General of the EU farmers and cooperatives’ association (Copa-Cogeca), told EURACTIV.com in an interview.  (EURACTIV)

What the U.S. and China each got out of the Trump-Xi meeting in Japan. Presidents Trump and Xi met on June 29, on the margins of the G-20 summit in Osaka, Japan, continuing the practice of holding leader-level meetings at multilateral events whenever both the U.S. and Chinese leaders are present. Authoritative Chinese readouts of the meeting from official media have been tonally positive but vague about the outcomes; the same holds for President Trump’s public characterizations. (Brookings)

Globalization’s wrong turn and how it hurt America. To craft a fair and sustainable global economy, policymakers should look to the flexible principles of Bretton Woods, yet today's hyperglobalization is closer in spirit to the historically more distant and more intrusive gold standard. (Foreign Affairs)

No Brexit deal possible with Irish backstop still in place, says U.K. PM candidate Hunt. Britain’s foreign minister Jeremy Hunt, one of the two contenders to be the next prime minister, said it would be impossible to have a European Union withdrawal deal that included the current Irish backstop provision. (Reuters)

Trade wars could shipwreck global economy, warns Mark Carney. Trade tensions triggered by Donald Trump’s tariff policies could “shipwreck” the global economy and are having a chilling effect on growth, the governor of the Bank of England has warned. (The Guardian)

Donald Trump might have found the art of a deal with North Korea. According to recent news reports, following the third meeting between President Trump and North Korean leader Kim Jung Un, which occurred last week at the Korean DMZ, the Trump administration has a new idea about how to negotiate with Kim. (Brookings)

White House trade advisor Peter Navarro: “Complicated” U.S.-China talks “will take time.” U.S.-China trade talks may have restarted, but a potential deal is still a long way off, White House trade advisor Peter Navarro told CNBC on July 2. (CNBC)

U.S. threatens €3.5bn extra tariffs on EU produce over aircraft subsidy dispute. Produce from the EU being exported to the U.S. could be facing additional tariffs costing billions of euros, according to a U.S. government statement released on July 1. (euronews)

Six key takeaways from the G20 summit in Osaka. From climate change to trade wars, here are the things you need to know about the annual two-day G20 summit that wrapped up on June 29 in Osaka, Japan. (euronews)

U.S.-Iran tensions: All the latest updates. Iran breaches 300kg cap on enriched uranium stockpile, raising fears over future of imperiled 2015 nuclear deal. (Aljazeera)

Surprise Move in European Leadership Struggle

Chris Kuehl, Ph.D.

Very few analysts had any inkling that Cristine Lagarde was a consideration in the race to replace Mario Draghi as head of the European Central Bank (ECB). Even fewer thought she would be interested in leaving her position as the head of the International Monetary Fund (IMF).

Her nomination has already accomplished two important things—it has rallied the bond markets because the expectation is that she will continue the ultra-loose monetary policies pursued by Draghi and her selection will have a ripple impact on who fills the other leadership posts.

The odds-on favorite to take the ECB position had been Jens Weidmann of the German central bank, but he scared many investors with his hawkish views. He tried to calm critics with more supportive statements of late, but years of being a chief critic of Draghi and the ECB policies of stimulus were not easily ignored. There was a fear that he would end those bond-buying programs that had been used to bolster the EU. Lagarde has been consistently supportive of these and other programs designed to boost European growth.

 Bond yields move inversely to prices. With this announcement, there has been a spate of bond reductions that have swept through Europe and even affected the U.S. The assumption is that more stimulus is coming rather than less. The talk of an interest rate hike at some point to combat potential inflation has been utterly abandoned at this stage. The only issue is how much rates will be cut around the world and how soon.

Germany’s 10-year bond fell again to a negative 0.397% and the French 10-year also fell deeper into negative territory. Across the board in Europe, two-year bond yields are sub-zero. The expectation is Draghi will no longer feel constrained when it comes to adding to the stimulus effort as he will be confident that his strategy will continue once Lagarde is in place as his replacement.

Meanwhile, there is the ongoing battle between President Donald Trump and the Federal Reserve. There are still assertions that Trump will fire or demote Fed Chief Jerome Powell, but it is clear this is not power Trump wields. That is the purview of Congress and there is no desire to pursue that course of action.

The latest nominees to the Fed’s Board are Judy Shelton and Christopher Waller. Shelton has been an ardent critic of the Fed for years and has compared its power to “Soviet-style leadership.” She objects to the rate-setting system in place now and wants a more market-based approach and possibly a return to the gold standard. Her views are held as radically unorthodox by most in economic circles, but she has been an advisor to Trump since 2016. Waller is less known, but is currently the head of research at the St. Louis Fed and generally reflects the views of the St. Louis Fed head. James Bullard was the only voting member of the Open Market Committee who dissented at the last meeting and urged that interest rates be cut sooner than later.

Generally speaking, there has been a significant change in attitude among the world’s central banks since the end of last year. The data at the end of 2018 was mostly positive with renewed growth in the U.S. dominating the thinking of most analysts. Europe was in the doldrums, but seemed ready to start growing and there were few real worries about what was happening in China. In the six months since all that relatively good news, there has been a steady drip of negative news and opinion. The growth in Europe never manifested and China began to falter demonstrably. The U.S. also showed signs of strain and the emerging markets were all reacting to this bad news as well. The mood of the bankers shifted fast and interest rate policy abruptly went from concerns about impending inflation to worries about a general economic slowdown.

Now the banks are all talking about rate cuts, and sooner than later. The ECB is heading away from that hawkish position everyone assumed would be manifesting under Weidmann. The Bank of England and Bank of Japan are talking rate cuts and so are many of the second-tier central banks such as the Reserve Bank of India, Reserve Bank of Australia, Bank of Canada and so on. The Fed has not yet reached the conclusion that a rate cut is in order, but there is no talk of a hike at all. Most assume the Fed will cut rates before the summer is out, but will warn that going from 2.5% to 2.25% isn’t going to change all that much. Investors have already assumed that rates will be generally down for the foreseeable future.

Randstad Surveys: Digital Readiness, Multigenerational Workforces

In a digital transforming world, employers continue to struggle in finding people with the right digital skills, according to Randstad. Employees need to keep up with digital developments in order to stay employable, the organization notes.

In the latest Randstad Workmonitor survey, 68% of the employees who responded stated that their employer should invest more in developing digital skills.

The majority of respondents (78%) felt equipped to deal with digitalization in their job. Brazilians were the most confident. About 94% of them said so, whereas the Japanese were least assured at 39%. Globally, only 34% expect their job to be automated within the next five to 10 years. This expectation is still highest in India as it has risen to 76% from 69% in 2015. People in the Czech Republic had the lowest expectation at 17%.

In an earlier survey, nearly all (90%) respondents preferred having colleagues of different ages and said this variety is mutually beneficial. However, that study also finds communication is often where the alignment between generations breaks down:

• 81% of workers agreed the primary difference between generations in the workplace is communication styles.
• More than a third of workers (38%) admitted they found it difficult to communicate with coworkers who are not in their own age group.
• Men were nearly twice as likely as women to report difficulty communicating with coworkers outside of their generation (49% of men, versus 27% of women).

The majority of workers felt their managers were generally effective in managing and working alongside employees from different generations, but there may be room for improvement:

• 83% of workers said their direct managers are talented at working together with various generations.
• 58% said their direct managers treated colleagues from various generations differently. Whether this was perceived as a positive thing or not varied from person to person, but it was clear that managers should tailor their communication styles to individual team members.

The closing keynote presentation at FCIB’s upcoming International Credit & Risk Management Summit will delve into the subject of managing multigenerational staff given that today’s workforce spans four different generations—each with its own characteristics, values and attitudes toward work.

Richard van Houten, a partner with Bron & Partners BV in the Netherlands, will discuss how to motivate and relate to members in each generational group. He will share techniques and approaches for bridging the differences among other things.

The Summit takes place Oct. 14-16 in Hamburg, Germany. To learn more, click here.

Escalation of Trade War Could Torpedo Global Trade

A global escalation of the trade war could cost nearly USD 1.5 trillion in lost trade by end 2020, Atradius predicts. That is the equivalent of all German exports grinding to a halt for one year.

Trade policy uncertainty is forecast to contribute to an increase in the number of corporate insolvencies in advanced markets, after nearly a decade of sizeable annual improvements, the firm says. In the case of a severe intensification of the trade war, trade growth could grind to a halt this year, driving growth in corporate insolvencies much higher than the 2% rise currently expected. The aggregate growth in insolvencies is almost exclusively driven by Western Europe (2%).

The application of increasingly stringent protectionist measures, particularly in trade between the United States and China, is forecast to have negative effects on other economies as well, in particular the main trade partners of the eastern giant, such as Japan, Taiwan, Vietnam and South Korea, where exports to China have slumped by 10% to 20%.

On the flipside, some trade from these economies is being diverted from China to the U.S. Vietnam, for example, has seen a 40% surge in exports to the U.S. this year, benefitting from its competitive labor costs and export sectors, especially textiles, the firm notes. In Japan, on the other hand, the opportunities for trade diversion are less drastic as relative costs are more expensive and its exporting sector is more devoted to higher value-added goods. As such, Atradius forecasts insolvencies will increase 2%.

“As trade policies remain uncertain and trade relationships tense, insolvencies are on the rise,” said Andreas Tesch, chief market officer of Atradius. “We expect trade growth to slow to only 2% this year, before recovering slightly in 2020, and business failures to increase by 2% this year. Against this backdrop, the most prominent downside risk is that businesses become increasingly vulnerable, especially in corporate debt.”

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations