Week in Review

Global Roundup

February 3, 2020

Week in Review

Global Roundup

January 27, 2020

United Kingdom casts off from the European Union. The United Kingdom left the European Union on Jan. 31 for an uncertain Brexit future, its most significant geopolitical move since the loss of empire and a blow to 70 years of efforts to forge European unity from the ruins of two world wars. (HSN)

China virus possible risk to world economy. Just as the outlook for the global economy had been brightening in recent months, a new threat has suddenly emerged in the form of the viral outbreak in China. That was the cautionary message that Chairman Jerome Powell delivered on Jan. 29, after the Federal Reserve held interest rates low in its latest policy meeting. (Business Mirror)

Arab leaders’ support for Mideast peace plan marks a regional shift. Tentative backing of a U.S. proposal reflects changing priorities, frustration with the Palestinians and more willingness to work with Israel. (WSJ)

Also this week: Lebanon passes budget with debt repayment looming; Travel and business interruption risks rise as coronavirus spreads; U.S. will keep tariffs on China; Russia exerts growing influence in Africa; USMCA is a net positive for aluminum; Shock drop in Italian and French economies; Argentina drafts bill to fix debt crisis. (Continue Reading)

Lebanon passes budget critics call “useless piece of paper.” With a $1.2bn debt payment looming, MPs approve a budget that makes rosy assumptions about the crisis-torn economy. (Al Jazeera)

Travel and business interruption risks rise as coronavirus spreads. The spread of the virus—and China’s response—is already having major impacts on businesses both within the country and around the world. (Risk Management Monitor)

U.S. will keep tariffs on China even if coronavirus starts hurting growth. White House trade advisor Peter Navarro pushed back Jan. 29 against the idea that the U.S. would remove tariffs on Chinese imports if the deadly coronavirus begins to weigh on China’s economy. (CNBC)

Russia exerts growing influence in Africa, worrying many in the West. The Kremlin is increasing arms sales, security pacts and training programs as the American defense secretary weighs withdrawing troops from the continent. (NY Times)

USMCA is a net positive for aluminum but neutral to credit ratings. The United States-Mexico-Canada Agreement (USMCA) will be a net positive for the aluminum sector in North America. This is the result of reduced uncertainty about trade relations with Mexico and Canada and provisions promoting the use of North American aluminum within the automotive sector. However, ratification of the agreement is neutral for producer credit profiles. (Fitch)

Shock drop in Italian and French economies amid wider European worries. The economies of France and Italy, respectively the eurozone’s second- and third-largest, shrank unexpectedly in the last quarter of 2019 causing GDP growth for the 19 countries sharing the single currency to miss forecasts, data showed. (Reuters)

Argentina drafts bill to fix debt crisis. We cannot sustain the debt load today, so we have to transform that load, says Economic Minister Martin Guzman. (Al Jazeera)

Commerce, currency and credit—and what’s next. The notions of commerce, currency and credit are nothing new. For centuries, we’ve found ways to barter, borrow and repay one another through the exchange of goods, services or credit. If we begin to think about the evolution of commerce in the context of innovation, we simultaneously begin to wonder, “What’s next?” (Global Trade Magazine)

South Africa's economic growth weakened by bailouts to state firms. South Africa’s economy will likely only grow by 0.8% in 2020, the International Monetary Fund said on Jan. 30, due to the weak performance of state firms and government bailouts which are widening an already large deficit. (Reuters)






Brexit: The New Norm


After more than three years since the U.K. voted to leave the EU, the U.K. and European Union have parted company with a structured withdrawal agreement. On Jan. 31 at midnight CET, the U.K.’s exit became a reality. While attention now turns to the future trading relationship between the U.K. and Europe, the near-term economic impacts for the U.K. continue to bring difficulties to businesses.

The U.K. can begin to negotiate new trade agreements in earnest now that the Brexit date has past—the most important of which being the future trading relationship with the EU. The current trading arrangements remain in place until Dec. 31. However, this short timeline makes it more likely that only a limited future deal is plausible, which could potentially spell a painful adjustment in 2021. Further, should the two parties fail to negotiate a trading agreement by the end of the transition period, they risk falling back on WTO rules. The pressures on the economic environment and the underlying uncertainties continue to take a toll across the U.K. and all EU markets.

The long period of uncertainty has created a climate of negative sentiment, and this will likely persist in 2020 in the absence of details about the U.K.’s future trading relationship with the EU. After stagnating in 2019, we expect U.K. business investment to stay flat again this year amid low confidence and high uncertainty. U.K. economic growth is forecast to slow to only 1% in 2020, cushioned to some extent by fiscal and monetary support from central sources. Many firms already significantly debilitated by the volatile conditions since the 2016 referendum remain at risk of insolvency.

Business insolvencies in the U.K. increasing further

Insolvencies can be expected to continue to rise in the U.K., up 7% or higher in 2020. Similarly, we can expect to see a rise in business failures throughout most of Europe, albeit at a more moderate rate. Insolvencies in the U.K. have been growing significantly since 2018, increasing another 8% year-on-year in 2019. The retail sector continues to face more bankruptcies due to lower consumer confidence and the changing dynamics within the sector. Heavily dependent on seasonal opportunity, retailers often look to December sales to bolster performance. However, total retail sales fell overall in November and December, according to industry body the British Retail Consortium.

For British sectors dependent on imports, in particular food and agriculture, Brexit remains a factor with the threat of higher import and logistics costs which they could struggle to absorb. The construction sector is already challenged by weak investment. The threat of increasing costs in order to attract workers and the loss of skilled labor from EU nationals working in the U.K. could further elevate the risk of insolvency.

More moderate impact on the EU, but downside risks have increased

The impact on insolvencies in the rest of Europe will be more moderate; with those countries with the closest trading ties to the U.K. more likely to be at risk, for example Ireland. The impact on insolvencies for other important trading partners, such as Belgium, the Netherlands and Denmark, as well as the rest of Europe, is expected to be visible but more limited. However, the climate remains volatile, and overall, the risk of business failures rising outweighs the likelihood of a more modest impact. Industry sectors with strong reliance on exports to the U.K., such as automotive, textiles and high-tech goods can be expected to be more significantly impacted.

While the overall economic outlook remains subdued, individual businesses continue to report success stories and the opportunity for trade growth, both during and beyond the transition period, should not be underplayed. One of the keys to success is a robust risk management strategy that combines access to reliable business intelligence to enable informed decision-making and the ability to protect the business from trading risks.




Threat of Stagflation in China and India

Chris Kuehl, Ph.D.

The existence of stagflation—a period of both slow growth and higher costs and prices—was once thought to be an unlikely occurrence by economists because the two issues most likely would never occur simultaneously.

Inflation is a scourge triggered by out-of-control growth. It means the demand for commodities, workers and other inputs cause prices to rise in response to shortages and bottlenecks. If growth is slow or nonexistent, it would seem unlikely there would be too much demand. Therefore, the threat of inflation should be limited. Stagflation should be an aberration.

This was a problem for many developed nations in the 1980s, but it has since become less common. Today, the problem has started to loom in China and India—two nations that have been fast growers, but which are now slowing drastically.

It was only a few years ago that China sported double-digit growth and India was nipping at its heels in terms of growth potential. China started to slip even before the trade war with the U.S. Since this confrontation, the pace of growth in China has fallen to half of what it was and into what looks like recession. There has been a decline in employment and revenue has slipped for many companies in China—especially those aimed at the export market. India had been expected to take advantage of China’s issues, but the nation has been getting in its own way as Hindu nationalism has preoccupied the Modi government. That has slowed the economic reforms he promised as he came to office.

The emergence of stagflation can create a real crisis. No solution adequately deals with both issues at the same time. If the focus is on inflation, the tools tend to slow the economy. The central bank can hike interest rates and the government can try to pull back on the economy with spending cuts and higher taxes, but these will compromise growth because that is what they are designed to do.

If the decision is made to deal with the stagnation issue, the central banks will lower rates and the government can add spending and lower taxes. That is a stimulus and one that will inevitably make inflation worse. The decision has to be made to address one or the other. If inflation is ignored, the population soon gets overwhelmed by high prices. If growth is ignored, there will be far higher rates of unemployment to contend with.

Given the history of the two nations and their traditional sensitivities, it is likely that China will elect to tackle inflation as opposed to slower growth. In past years, it has been the inflation spike that has infuriated and galvanized the public. In India, the issue is jobs over higher prices. The nation can’t ignore a rising rate of unemployment for long. Watch for steps to bring prices down in China at the expense of growth and expect India to push faster growth even as it brings high rates of inflation.



Senate Approves, Trump Signs USMCA

A new trade deal between the U.S., Mexico and Canada was approved by the U.S. Senate in mid-January. The Senate passed the U.S.-Mexico-Canada Agreement (USMCA) to replace NAFTA 89-10, with both Democrats and Republicans approving the deal. U.S. President Donald Trump signed the deal on Jan. 29.

The 1600 Daily, a newsletter from the White House, cites then-presidential candidate Barack Obama as saying, “NAFTA’s shortcomings were evident when signed and we must now amend the agreement to fix them.” According to the newsletter, USMCA will add up to $235 billion in new economic growth as well as nearly 600,000 jobs to the U.S. economy.

“The two biggest areas of change were imposition of rules and regulations mostly on Mexico and, to a certain extent, on Canada that revolve around labor rights and environmental concerns,” said NACM Economist Chris Kuehl, Ph.D. “In order to get the agreement through Congress, Democrats demanded both those things. As a result, it will now allow U.S. inspectors to go into Mexico and make sure labor situations are OK. A little bit of that will affect Canada but not much.”

The other change in USMCA was the approach to the domestic content laws in the automotive sector. This is not as big of a deal as people are making it out to be, Kuehl said, because domestic means any of the three countries—U.S., Mexico or Canada. “It’ll make it more difficult for Japan, Korea and Germany, but mostly for the European countries because Japan produces stuff here to get around restrictions—the Germans don’t do as much. Volkswagen and BMW are a little worried; they have plants here but bring parts from Germany,” Kuehl added.

The new agreement likely won’t have a huge impact on credit professionals and credit departments, but it should make life a little easier when using financials from Mexican businesses. “One of the challenges for credit people is trying to make sense of financials out of Mexico,” Kuehl continued. “It’s difficult to track down who knows what—Mexican credit information will be more reliable because companies have to submit to U.S. inspections.”

Kuehl believes the new agreement takes a little bit of mystery out of dealing with the automotive sector. “This kind of settles the issue. I don’t think there will be much of a change with textiles and food, but those really weren’t important parts of the agreement.”

Mexico has already approved the pact, but Canada must still ratify the deal.

—Michael Miller, NACM managing editor




 Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations