Week in Review

July 15, 2019

Global Roundup

Japan: No plan to retract trade decision on South Korea. Japan says it has no plans to retract its tightened control on high-tech exports to South Korea, saying it involves Japanese internal policy review. (Business Mirror)

Russia delivers missile system to Turkey in challenge to NATO. Russia began delivery of an advanced missile defense system to Turkey on July 12, a move expected to trigger U.S. sanctions against a NATO ally and drive a wedge into the heart of the Western military alliance. (Reuters)

China imports from U.S. plunge 31% in June amid tariff war. China’s trade with the United States plunged in June amid a tariff war with Washington over Beijing’s technology ambitions that has battered exporters on both sides. (AP News)

Asian economies benefiting from U.S.-China trade tensions amid vulnerable global economic outlook. The initial round of tariffs imposed by the U.S. government on China imports earlier this year has started to make significant and demonstrable impacts on global trade, according to analysis released by PwC. (HSN)

Ireland considering port checks on whole island in no-deal Brexit. Ireland is exploring the idea of checking live animals and animal products from Britain as they arrive at ports on the whole island of Ireland if there is a no-deal Brexit, Prime Minister Leo Varadkar said on July 12. (Reuters)

What you should know about Africa’s massive, 55-country trade bloc. Leaders from 55 African nations met on July 7 to make a critical expansion to their continental free trade zone. If the massive deal works as hoped, it will connect 1.3 billion people, create a $3.4 trillion economic bloc, and heat up commerce within the continent itself. (HSN)

Greece creditors say no changes in bailout terms for new leader. Greece’s bailout creditors on July 8 bluntly rejected calls from the country’s new conservative government to ease draconian budget conditions agreed as part of its rescue program. (Associated Press)

Five takeaways from Germany's economic outlook. Germany’s economic performance has been strong for the past decade, with the unemployment rate currently at a record low, and healthy public and private balance sheets. But the export-dependent economy has been hit hard by the slowdown in global demand, while structural challenges are looming in the medium term. (IMF)

Four decades later, did the Iranian revolution fulfill its promises? Iran has indeed experienced progress over the last 40 years. Whether these successes have been a result of post-revolutionary policies, societal pressures, or the foundations laid by the shah remains hotly debated. (Brookings)

EU mulls adding Saudi Arabia to money-laundering grey list. The European Union is preparing an overhaul of its listing of countries that pose money-laundering risks, an EU confidential document shows, a review that could allow Saudi Arabia to be moved to a new grey list after having been briefly blacklisted. (HSN)

China’s looming deflation fears strengthen policy-easing case. The case for Chinese policymakers to ramp up stimulus grew stronger, as tepid domestic demand and falling commodity prices increase the risk of a return to factory deflation. (Bloomberg)

How far will Israel go in annexing the West Bank? Israeli Prime Minister Benjamin Netanyahu’s recent pledge to annex Jewish settlements in the West Bank, has raised fears that annexation is imminent. (Global Risk Insights)

EU-Mercosur deal divides both sides of the Atlantic. Two weeks ago, the EU and Mercosur (Argentina, Brazil, Paraguay and Uruguay) signed a free trade agreement that will cover a market of 780 million consumers. However, diverging opinions on both sides of the Atlantic remain. (EurActiv)

Iran’s uranium enrichment breach burdens Europeans to ease impact of U.S. sanctions. European leaders have signaled they won’t rush to slap penalties on Iran, but they’ll find it increasingly hard to resist pressure from the Trump administration if Tehran abandons multiple commitments. (Business Mirror)

Another Populist Experiment Ends?

Chris Kuehl, Ph.D.

The Greeks ushered in the era of the populist reformers a few years ago with the surprise election of the Syriza Party. It had been essentially a small protest party of the left, but after years of corruption, cronyism and a stagnant economy, the country was ready for a change to something new. Very few had any real idea what Alexis Tsipras had in mind, but the consensus view was the traditional center-right and center-left parties had not succeeded. From the start, the policies pursued by Syriza were controversial and confrontational—especially when it came to Greek relations with the rest of Europe. The Greek crisis dragged everyone in the EU into a series of financial disputes as the Tsipras government demanded relief from the debt that had burdened the country. The country received three bailouts; all three financed primarily by the Germans. These came at a price in terms of reforms and budget adjustments. Few were popular with the population. Pensions were cut and government programs curtailed. Granted, the Greeks had some of the most generous programs in the EU—retirement at 56, pensions that paid twice what was made while working, very generous vacation time that essentially gave some in Greece an extra month of pay. The problem was these benefits were not paid for with national income but by incessant borrowing. The only people who got these perks were government workers and those who belonged to the powerful unions. Over the last few years, the reforms have stalled and Greece has fallen further and further behind. The voters began to lose faith in the Tsipras plan and Syriza.

The new prime minister is Kyriakos Mitsotakis from the center-right New Democracy party. In the recent elections, his vote percentage was 39.8% and Syriza fell to 31.5%. Mitsotakis will need the support of some smaller parties to put him over the 50% level, but he will likely get some defections from Syriza. The hard left had already eroded the Syriza party as they objected to the decision by Tsipras to start severe austerity programs as a condition for the last bailout. Meanwhile, the hard-right populists (Golden Dawn) failed to reach the 3% threshold for entering parliament.

Mitsotakis inherits a nation with a plethora of problems and very few easy answers. The unemployment rate is the highest in Europe at 18%. The taxes imposed as a condition of the last bailout are high and the population is not seeing much of that money since most of it goes to paying off debt. The new government has pledged to focus on jobs and gaining foreign investment, but neither of these goals will be easy to accomplish. The voting public remains very skeptical and impatient. The best and the brightest in Greece have fled to greener pastures and the immigration crisis has landed in the laps of the Greeks. They have tried to be hospitable, but the pressure has been enormous and Greece wants a lot more help from the EU.

To keep peace with the Greek population, the Syriza leaders put through a whole series of handouts and bailouts of its own, but these are frowned upon by the EU monitors that are watching what Greece does with the money it is getting from EU coffers. Mitsotakis will be expected to cut back on these handouts by the EU, but such a move will be very unpopular and could undercut his government even before it starts.

Trade Tensions Causing Global Economic Downturn

The U.S. and China have been locked in a trade battle dating back to the first half of 2018, and these tensions have hindered both economies. According to the latest Country and Sector Risk Barometer for the second quarter of 2019 released earlier this month, Coface states the back-and-forth clash between the U.S. and China is doing damage to the global economy as well.

World trade is down for the first half of 2019, but is expected to make a slight recovery during the second half, resulting in an overall drop of 0.7% for the entire year. Global economic growth is also predicted to slow down from 3.1% in 2018 to 2.7% in 2019.

The U.S. economy will step back in growth dramatically in 2020 (1.3%), according to Coface, while China saw exports to the U.S. decline by 10% during the first quarter of 2019. “The resumption of the trade talks will provide an opportunity, but something will still have to give before any sort of long-term deal is struck,” said NACM Economist Chris Kuehl, Ph.D. following the G20 summit in Japan late last month. “The assumption is that trade confrontation will last for an extended period of time.”

The trade war between the U.S. and China has also weighed heavily on business confidence, culminating in a decline, particularly in manufacturing. The automotive sector was hit the hardest due to political risks and consumption behavior, among other reasons, Coface states, which downgraded the sector’s risk in 13 countries, much of it within Europe. This includes the U.K., which has just over half of its automotive exports heading to the European Union. Brexit is a dark cloud hanging over both sides and, depending on the Brexit outcome, could push the sector one way or the other.

Emerging economies will also struggle on a global scale due to the U.S.-China trade impasse, with less opportunities to grow rapidly. The trade war is joined by a slowdown in the German economy and others throughout Central and Eastern Europe that will impact emerging economies. Coface downgraded four German sectors, including metals and pharmaceuticals.

Automotive sector risk has a bleak outlook in the Barometer across the board, but it saw significant downgrades in Europe. India and Japan each had its automotive sector downgraded to high risk as did the Czech and Polish sectors. Information and communication technologies (ICT), pharmaceuticals and energy are also among the sectors downgraded by Coface.

Big Four Accountancies Fail UK Audit Test

All of the U.K.’s so-called Big Four accountancy firms—KPMG, PwC, EY and Deloitte—have reportedly failed to reach audit quality standards set by the Financial Reporting Council (FRC), Reuters reported this week.

It marks the second year in a row that the Big Four failed the auditing test, while second-tier auditors Grant Thornton, BDO and Mazars also all failed to hit the FRC’s target that 90% of audits require only limited improvements.

Only 75% of the audits of the U.K.’s largest 350 public firms met that 90% performance threshold. The FRC said accountants are failing to take a tougher stance with their clients and question information given to them.

Further, the FRC warned, there had not been any improvement in audit quality between last year and this year.

That conclusion could place further pressure on the U.K. government to force changes in the sector following a string of high-profile corporate collapses leading analysts and members of parliament to question how auditors missed the warning signs.

“At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable,” said FRC Chief Executive Stephen Haddrill in a statement.

Reports noted that politicians proposed industry reforms late last year that have been met with some resistance in the auditing sector. The U.K.’s uncertain exit from the European Union has also placed doubt over how and when such reforms would occur.

Pressure on the industry will continue to rise, too, with the FRC planning to raise the threshold of audit performance from 90% to 100% starting with June 2019 financial year-end statements.

Grant Thornton is under particular scrutiny. According to reports, only half of the firm’s audits were considered good quality, down from 75% last year.

“The FRC has therefore increased its scrutiny of Grant Thornton,” the watchdog said in a statement. It will review a larger number of the firm’s audits in the coming year.

Grant Thornton was the auditor for scandal-ridden cafe chain Patisserie Valerie.

Reprinted with permission from PYMNTS.com.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations