Week in Review

August 12, 2019

Global Roundup

Seoul and Tokyo’s trade war puts military pact at stake. South Korea has threatened to end a military intelligence-sharing agreement with Japan as their tensions escalate over export controls. The agreement is a symbol of the countries’ trilateral security cooperation with their ally, the United States. (Washington Post)

No-deal Brexit preparation is top priority, Johnson tells officials. British Prime Minister Boris Johnson wrote to all government employees on Aug. 9 to tell them that preparing for a no-deal exit from the European Union is his and their top priority. (Reuters)

The U.S. labeled China a currency manipulator. Here’s what it means. The move is mainly symbolic but will escalate tensions with Beijing. (New York Times)

Will India’s new line on Kashmir derail ties with China? Beijing has objected to an Indian Parliamentary decision that covers an area claimed by both countries, the latest source of tension in decades of border disputes. (SCMP)

North Korea “stole $2bn for weapons via cyber-attacks.” North Korea has stolen $2bn (£1.6bn) to fund its weapons program using cyber-attacks, a leaked United Nations report says. (BBC)

Israel gets ready to fight a multifront war. What happens when conflict breaks out simultaneously in Gaza, Lebanon or Syria? (National Interest)

Analysis: North Korea's missile tests point to end of nuclear talks. North Korea’s fourth weapons test in just under two weeks has not killed off the chance to reignite talks with the U.S. over Pyongyang’s nuclear and missiles program, but it does signal that the end of the diplomatic path is drawing closer. (Telegraph)  

Rising tensions between the U.S. and China go beyond trade dispute. President Trump set a deadline of Sept. 1 for a trade deal with China. If no deal is reached, new tariffs will take effect. In response, the Chinese government let its currency weaken, which may soften the impact of those tariffs. That led the U.S. Treasury Department to formally label China a currency manipulator. And all that is only on the trade front. (NPR)

Quarter of world's population facing extreme water stress. Nearly a quarter of the world's population lives in 17 countries facing extreme high-water stress, close to "day zero" conditions when the taps run dry, according to a report released Aug. 6. (AFP)

European shares drop on Italy's political turmoil, health care limits slide. European shares fell on Aug. 9 as worries about the stability of Italy’s government and ongoing Sino-U.S. trade tensions rattled investors, but gains in health care stocks limited losses. (Reuters)

China to refocus on Russian market due to trade escalation with U.S., says minister. China may switch to the Russian market due to the worsening trade dispute with the U.S., Russia’s Economic Development Minister Maksim Oreshkin said on Aug. 7. (HSN)

With an Early Election Ahead, Italy Remains Risky

Italy’s economy continues to waiver for the fifth-quarter in a row, and with an early election set for as soon as October, the country may begin to reach its tipping point. With an election in the near future, new people in office have the potential to downplay and toss aside in-depth negotiations for next year’s budget, according to a recent article in Bloomberg. This will further delay any discussions of reform Italy needs to continue as a functioning economy.

With far-right Deputy Prime Minister Matteo Salvini in office for just over a year, his decision to hold a snap election shocked the country. According to The Atlantic, no one can predict how the election will play out, not even Salvini himself.

“He’s playing with fire,” Stefano Folli, a columnist for the Italian daily La Repubblica, told The Atlantic.

Salvini’s party, the Northern League, ranked 38% in polls while The Five Star Movement fell sharply to about 17%, according to The Atlantic. With the Northern League gaining momentum, the populist party may see more gains in this upcoming election, continuing to send Italy down a further spiral of economic risk.

According to Bloomberg, the second half of 2019 may see a positive boost, but other factors outside of the early election keep Italy in a state of peril. The trade war with the EU and the U.S. sets Italy on a faltering path, and the recent issues with Brussels do not help Italy either.

Italy consists of a massive number of small- and medium-sized companies, and with creditors doing business with these companies, the risk associated with extending credit remains precarious. 

To learn more about Italy’s economy and its risk to creditors, watch FCIB’s on-demand webinar, “Insolvency Proceedings in Italy,” led by attorneys Eva Knickenberg-Giardina and Irene Grassi, of CLG Italia, Studio Legale e Tributario.

—Christie Citranglo, NACM editorial associate

Fears of a Global Recession Mount

Chris Kuehl, Ph.D., NACM Economist

The arrival of a recession is generally not swift. It tends to build over time and there are generally plenty of warning signs. Not that these warnings always provide an opportunity to do much about the trend, but recessions move slowly enough that people and businesses can react accordingly. The irony is that those reactions hasten the arrival of the recession. If one expects a major slowdown, there will be predictable and natural reactions. Business will be reluctant to expand as they don't want to be saddled with unused capacity or debt in the event of a slowdown. Consumers get cautious as they start to worry about their jobs and don't want to handle larger debt loads. They stop buying homes and cars or going on big vacations. Thus far, the U.S. business community and the U.S. consumer have not started to react to an impending recession—spending is still strong, jobless rates are low, capacity utilization shows some slack and measures like the Purchasing Managers' Index (PMI) and the Credit Managers' Index are still sitting in positive territory. But that is not something the rest of the world can assert.

One of the more reliable ways to examine the state of the global economy is to look at the Purchasing Managers' Index as prepared by groups like the Institute for Supply Management, Markit and others. All use the same diffusion index and ask the same questions in the same format. It is comparing apples to apples and is easy to understand. When readings are above 50, there is expansion; readings under 50 indicate contraction. It was not long ago that PMI readings around the world were in positive territory. Many were even in the 60s (including the U.S. PMI). This is no longer the case.

Of the top 15 U.S. trade partners in July, only three are in expansion territory (Canada at 50.2, India at 52.5 and the Netherlands at 50.7). In June, there were just four above 50 (Brazil was at 51, India was at 52.1, France was at 51.9 and the Netherlands was at 50.7). The 15 top U.S. trade partners (in rank order) are China, Canada, Mexico, Japan, Germany, South Korea, U.K., France, India, Italy, Taiwan, Brazil, Netherlands, Ireland and Switzerland. The lowest PMI number is Germany at 43.2. That is a real problem given that Germany is supposed to be the economic engine for the whole of the EU.

The problem is that slowdown has been global and there are no nations pulling in the opposite direction. In past years, there have been economies that served as engines of growth for the world. They had the ability to pull the rest of the world out of decline through trade. In the past, there was growth in countries such as Japan, Germany and certainly China. The rapid growth of the Chinese economy was enough to boost the fortunes of dozens of other nations that were able to sell to them. The system seemed to work pretty well with nations selling to China so China could sell to the U.S. When all was said and done, the U.S. consumer was at the heart of it all. Today, that pattern has been broken. The U.S. is not supporting trade as it has in the past. The breakdown in trade relations with China is only the most prominent change. The U.S. has been hostile towards Europe, Canada, Mexico, India, South Korea, Japan and essentially every other nation. The U.S. still imports a lot, but the pace has slowed enough that every nation has been affected. That has meant U.S. exports have declined as well.

Chinese Suppliers Forced to Accept IOUs

China’s economic slowdown and the increasing severity of its trade war with the U.S. has small businesses struggling to pay bills on time, The New York Times reported Tuesday (Aug. 6).

Business owners in China are turning to IOUs in the form of commercial acceptance bills as financial institutions pull back from lending to SMBs, reports noted, adding that the government’s crackdown on shadow banking has further limited firms’ access to capital. These commercial acceptance bills promise future payment on debts, reports explained, and are not legal tender. Government data shows that $211 billion worth of these IOUs are in circulation as of February—a 33% increase from the same time a year prior.

The IOUs are trickling through the supply chain, with small businesses using those commercial acceptance bills to pay their vendors which, in turn, pay their own suppliers with those same IOUs.

Some businesses are so desperate for capital that they sell those commercial acceptance bills for less than they’re worth, reports said.

According to Paulson Institute Research Fellow Dinny McMahon, a similar trend was seen two decades ago amid an economic boom in China, which saw state-owned enterprises exchanging commercial acceptance bills totaling about one-fifth of the nation’s economic output, according to the publication.

“You had companies holding stacks of paper,” he said. “The fact that these things are proliferating again at a time of entrenched economic downturn should be a signal of the degree of distress that companies are finding themselves in.”

One executive, Xu Jiang, the chief operating officer of architectural firm Zhubo Design, told The New York Times that developers have begun paying the firm in commercial acceptance bills, which he found “difficult to accept.”

“I didn’t know who would pay me and the debt is still on me,” he said. “But if I didn’t accept it, I couldn’t get the money. We suppliers were forced to become part of their financial chain.”

That sentiment is reminiscent of some complaints heard in the trade finance world with companies obtaining a discount on their vendor invoices in exchange for paying the bill early. It also recalls the broader issue of late supplier payments as corporates delay settling their bills in order to hold onto capital longer.

Reprinted with permission by PYMNTS.com.

 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations