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New research has revealed that people are increasingly less willing to follow the money to big economic and urban centers and are instead choosing to live, work and invest in places that give them better quality of life - and in turn the money is following them. Here Enshalla Anderson, Chief Strategy Officer at FutureBrand North America, provides her thoughts on the changing economic landscape.

This recalibration of global economies and workforces has come to light in our latest Country Brand Index, which re-orders the World Bank’s top ranking 75 countries (in terms of GDP) by how well they’re perceived against an alternative set of factors, such as value system, business potential, environmental friendliness, culture and tourism.

In the index, ‘quality of life’ was the attribute that averaged the highest in the top 10 countries, and averaged lowest in the bottom 10. In line with this are the findings that people are placing increasing importance on tolerance and environmental factors in the choices that they make about where they work, live, and visit. This is set to radically change how countries and companies organize themselves to attract talent, tourism and investment.

In the meantime, the so-called Fourth Industrial Revolution, defined by the arrival of substantial technological change, has transformed our day-to-day reality. Individuals now have more freedom to choose where they live and how they work, and they’re exercising that choice. The arrival of 5G marks a tipping point in all of this this and as telco companies roll out 5G services, we’re likely to see a spreading out of the intellectual capital across the country, instead of being isolated to the key economic hubs.

Meanwhile, we’ve observed businesses with aspirations for global growth actively avoid expanding in the expected international locations and instead set-up in relatively obscure or peripheral locations. They’re looking ahead and taking advantage of this diversifying workforce – tapping new talent, creating new opportunities for people who don’t want to live in the big cities and desire to work remotely, and benefitting from favorable tax rates and perks from regional governments along the way.

The groundswell of environmentalism is also fuelling this shifting balance of power. People are finally beginning to look beyond their household and increasingly making more personal choices of scale and import based on environmental impact and concern. This often means prioritizing ways of living and working that are less harmful to the environment, and in turn better for people’s physical and emotional wellbeing. It can also mean choosing an employer because of their stance on sustainability. By necessity, big corporates, and in turn governments, are having to prioritize facilitating this shift if they want to attract and retain the best talent.

Most recently, New Zealand (ranked no.11 in the index) has been one of the major examples of the big rebalance in power that’s taking place. Prime Minister Jacinda Ardern’s national budget balances goals that encourage the well-being of citizens (such as tackling mental health, child poverty, inequality and the environment) with traditional measures such as productivity and economic growth. Her rapid response to gun control following the Christchurch attack also asserted a genuine and urgent focus on safety and wellbeing that has set a new precedent and benchmark for other governments around the world.

There’s a growing opportunity for countries like New Zealand, and also smaller nations and cities, to compete with bigger counterparts who have more economic might than them on attributes like quality of life, tolerance and environmental concerts to attract greater tourism, trade and investment. It also serves as a warning sign for countries such as China, US and UK, who’ve scored lower in some or all of these crucial measurements, that if they don’t follow suit they’ll have to rely on doubling-down on economic might and power, which citizens, tourists and investors alike are growing increasingly less attracted to as a sole measure of country strength.

Data shows that almost half of those working in Britain have financial worries (40%) and this is linked closely with stress and depression.

The research by Salary Finance, a financial wellbeing solutions provider, surveyed over 10,000 British workers. Of the group with financial worries, a huge 73% reported to suffer with stress, and 46% with depression. Overall the data showed stress levels were 380% higher and depression levels 490% higher than those who did not have financial worries.

And of those that earned more than £100,000 per annum, over half (55%) stated they suffered from anxiety and panic attacks, and 53% stated they suffered from depression.

Anxiety and panic attacks have a fourfold higher occurrence among working people with money troubles. Sleepless nights were also reported nine times more frequently, while 41% of those surveyed admitted that their quality of work was affected by unease about the state of their finances.

The data also revealed that the nation’s financial situation is a concern - with 18.6 million working people in the UK (53%) lacking financial resilience and 11 million regularly running out of money between paydays.

Asesh Sarkar, CEO at Salary Finance, said: “As April is National Stress Awareness Month, we wanted to further highlight the issue of financial stress and the impact this can have on people – particularly in the workplace. This added level of stress is something that employers need to address by removing the taboo of talking about money worries in the workplace.

“It is not a matter to be taken lightly, but interestingly is something that people are happy to share with their employers. In our research 77% of respondents said they trust their employer to treat their financial situation as confidential. This puts employers in a great position to really help their staff become more financially stable and therefore happier in their everyday lives.”

The findings also reflected on how this impacts people during the working day. The group with financial worries were shown as eight times less likely to finish their daily tasks, and almost six times more likely to report troubled relationships with co-workers.

They also take 1.5 days a year off work due to their financial stress and are more likely to be looking for a new job. This can have a great impact on employers in turn. A recent Harvard Kennedy School study reported that the cost of losing an employee is between 16-20% of annual salary.

The overall impact on British business is estimated at £39-51 billion annually, equating to almost 2.4% of UK GDP. This is greater than the budget for defence and more than half the education budget.

Asesh added: “We are passionate about the role that employers can play in helping staff get their finances in shape. 

“Employers are in a unique position to provide support, through financial education, salary-deducted savings, advances and loans, to help employees increase their financial fitness and ultimately improve their financial wellbeing. The added dividend for businesses comes in the form of a happier, healthier and more productive workforce.”

(Source: Salary Finance)

With the 10th anniversary of the Lehman Brothers’ shocking and unprecedented bankruptcy this month, Katina Hristova looks back at the impact the collapse has had and the things that have changed over the last decade.

Saturday 15 September 2018 marked ten years since the US investment bank Lehman Brothers collapsed, sending shockwaves across the financial world, prompting a fall in the Dow Jones and FTSE 100 of 4% and sending global markets into meltdown. It still ranks as the largest bankruptcy in US history. Economists compare the stock market crash to the dotcom bubble and the shock of Black Friday 1987. The fall of Lehman Brothers was a pivotal moment in the global financial crisis that followed. And even though it’s been an entire decade since that dark day when it looked like the whole financial system was at risk, the aftershocks of the financial crisis of 2008 are still rumbling ten years later - economic activity in most of the 24 countries that ended up falling victim to banking crises has still not returned to trend. The 10th anniversary of the Wall Street titan’s collapse provides us with an opportunity to summarise the response to the crisis over the past decade and delve into what has changed and what still needs to.

As we all remember, Lehman Brothers’ fall triggered a broader run on the financial system, leading to a systematic crisis. A study from the Federal Reserve Bank of San Francisco has estimated that the average American will lose $70,000 in lifetime income due to the crisis. Christine Lagarde writes on the IMF blog that to this day, governments continue to ‘feel the pinch’, as public debt in advanced economies has risen by more than 30 percentage points of GDP – ‘partly due to economic weakness, partly due to efforts to stimulate the economy, and partly due to bailing out failing banks’.

Afraid of the increase in systemic risk, policymakers responded to the crisis through quantitative easing and lowering interest rates. On the one hand, quantitative easing’s impact has seen an increase in asset prices, which has ultimately resulted in the continuation of the old adage, the rich get richer and the poor get poorer. The result of Lehman’s shocking failure was the establishment of a pattern of bailouts for the wealthy propped up by austerity for the masses, leading to socio-economic upheavals on a scale not seen for decades. As Ghulam Sorwar, Professor in Finance at the University of Salford Business School points out, growth has been modest and salaries have not kept with inflation, so put simply, despite almost full employment, the majority of us, the ordinary people, are worse off ten years after the fall of Lehman Brothers.

Lowering interest rates on loans on the other hand meant that borrowing money became cheaper for both individuals and nations, with Argentina and Turkey’s struggles being the brightest examples of this move’s consequences. Turkey’s Lira has recently collapsed by almost 50%, which has resulted in currency outflow and a number of cancelled projects, whilst Argentina keeps returning for more and more loans from IMF.

Discussing the things that we still struggle with, Christine Lagarde continues: “Too many banks, especially in Europe, remain weak. Bank capital should probably go up further. 'Too-big-to-fail' remains a problem as banks grow in size and complexity. There has still not been enough progress on how to resolve failing banks, especially across borders. A lot of the murkier activities are moving toward the shadow banking sector. On top of this, continued financial innovation—including from high frequency trading and FinTech—adds to financial stability challenges. In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.”

The Keynesian renaissance following that fateful September day, often credited for stabilising a fractured global economy on its knees, appears to have slowly ebbed away leaving a financial system that remains vulnerable: an entrenched battalion shoring up its position, waiting for the same directional waves of attack from a dormant enemy, all the while ignoring the movements on its flanks.

If you look more closely, the regulations that politicians and regulators have been working on since the crash are missing one important lesson that Lehman Brothers’ fall and the financial crisis should have taught us. Coming up with 50,000 new regulations to strengthen the financial services market and make banks safer is great, however, it seems  that policymakers are still too consumed by the previous crash that they’re not doing anything to prepare for softening the blow of a potential new one. They have been spending a lot of time dealing with higher bank capital requirements instead of looking into protecting the financial services sector from the failure of an individual bank. Banks and businesses will always fail – this is how capitalism works and no one knows if there’ll come a time when we’ll manage to resolve this. Thus, we need to ensure that when another bank collapses, we’ll be more prepared for it. As Mark Littlewood, Director General of the Institute of Economic Affairs, suggests: “policymakers need to be putting in place a regulatory environment that means that when these inevitable bank failures occur, they can fail safely”.

In the future, we may witness the bankruptcy of another major financial institution, we may even witness another financial crisis – perhaps in a different form. However, we need to take as much as we can from Lehman Brothers’ collapse and not limit our actions to coming up with tens of thousands of new regulations targeted at the same problem. We shouldn’t allow for a single bank’s failure to lead us into another global crisis ever again.





Written by Andrew Boyle, CEO of LGB & Co


With global debt hitting another record high in the first quarter of 2018, some are sounding the alarm over the threat of a new financial crisis. The global economy has been growing for a prolonged period, so the argument goes, and it is now at the stage in the cycle at which something could go wrong. The latest figures from the Institute of International Finance (IIF) are undeniably eye-wateringly high. According to the IIF, the global debt mountain was $247 trillion (£191 trillion) in the first quarter of 2018. Meanwhile, the International Monetary Fund (IMF) has begun to warn that corporate and government debt is now higher than before 2008’s financial crisis at 225% of global GDP. The IMF also warned that governments in particular, and corporations, with elevated debt levels were “vulnerable to a sudden tightening of global financing conditions, which could disrupt market access and jeopardise economic activity.” But the current level of global debt may not be as destabilising as some fear. Taking into account its composition, we are probably better placed today to manage global debt than we were ten years ago.

Debt levels are high but have rebalanced

There are some differences between the 2008 financial crisis and now. The main one is debt which is now more evenly distributed. According to the IIF’s own figures, in the first quarter of 2018 household debt accounted for 19% ($46.5trillion) of global debt, corporate debt stood at 30% ($73.5 trillion), government debt at 27% ($66.5 trillion) and debts of financial institutions at 25% ($60 trillion) of the total figures.

Compare those figures with the same quarter a decade ago and they look like this: household debt 21% ($37 trillion), corporate debt 26% ($46 trillion), government debt 21% ($37 trillion) and financial institutions, 32% ($57 trillion).

Two things stand out. The first is that household debt has fallen a little in percentage terms, which suggests its current level is not excessive. The second is the increase in government debt and decrease in financial debt are almost the same. This is consistent with the objectives of the quantitative easing (QE) that we have seen since the financial crisis. QE involves financial institutions selling government and corporate bonds to central banks and on-lending the proceeds principally to companies.

Government debt can be good for economic growth

The debt to global GDP ratio has actually been falling for four consecutive quarters, according to the IIF. This is because global GDP has been picking up fairly robustly over the last year leading to incomes rising faster than debts. This should make the private sector debt burden easier to service, even if interest rates start to creep up.

While other factors are also at play, greater levels of public debt lead to private sector surpluses and stimulate economic activity. A simple way to look at this is that government expenditures include salaries and payments to contractors that are deposited into bank and savings accounts. Financial institutions then enable governments to balance their books by purchasing government bonds.

A substantial portion of a government’s deficit expenditure should be allocated to investment in infrastructure and innovation so that productivity gains will enable the additional debt burden to be serviced through rising tax contributions. Infrastructure investment and support for innovation are certainly high up on the UK government’s agenda. Of course, we will only know in hindsight if its allocation of resources to these areas has been adequate.

Corporate net debt ratios are stable

There is a fear that corporate debt is now so high that should interest rates rise suddenly, many companies would be unable to service the increased interest. Once again, the aggregate level of debt is not the only factor to consider.

In fact, many large corporates have huge stockpiles of cash sitting idle. US corporations alone are estimated to be sitting on around $2.1 trillion at present. While admittedly the majority of this cash stockpile is held by the US giants, corporates overall have borrowed fairly responsibly and have, in general, manageable maturity schedules. Corporate net debt levels are sitting around their 30-year average, so while the headline figures look alarming, the ability of most companies to cover their debts is reasonably robust.

Central bank policy will remain accommodative

Moreover, central banks have been at pains to point out that they are in no hurry to hike interest rates. Levels of government borrowing make them inclined to do so only if absolutely necessary.

When the Bank of England raised rates on 2nd August, its main concerns were the tightness of the labour market and firming of unit labour costs, and the impact that these factors might have on inflation. However, its Monetary Policy Committee concluded that any future increases in the Bank Rate were likely to be at a gradual pace and to a limited extent. Markets currently forecast that the Bank of England will only hike interest rates once next year and once again in 2020 taking the UK base rate to 1.25%. At this rate of increase it may not be until the 2030s that we reach the interest rate levels last seen in 2008.

In the US, while the Federal Reserve has already begun hiking interest rates and done so at a slightly faster pace, this has been justified by the fact that its economy is growing more quickly than the UK’s. It also still has more than $4 trillion of QE to unwind and, as was seen in February, any attempt to speed up the process up is likely to lead to a sell-off on Wall Street. So, the US Federal Reserve is likely to continue to tread carefully as will the Bank of England and the European Central Bank (ECB). Any rise in interest rates and any unwinding of QE will happen at a slow and gradual pace.

Borrowing in foreign currencies

Many countries have run into trouble by borrowing in foreign currencies. For example, Argentina has $4.1 billion in debt to pay this year and $13.3 billion in 2019, of which $3.4 billion and $5.9 billion are denominated in US Dollars. The recent collapse of the Peso and hiking of interest rates to 60% have made its position precarious.

Turkey too has seen a 40% plunge in the value of its currency, the lira, as well as high inflation. Turkey faces a series of problems, not least of which, around $179bn of Turkish external debt matures in the year to July 2019, equivalent to almost a quarter of its annual economic output. Most of the maturing debt — around $146 billion — is owed by the private sector, especially banks. With luck the knock-on effect of Turkey’s difficulties is likely to be minimal. While the collapse of the lira has an obvious and crippling impact on their ability to refinance that debt, no foreign financial institution has lent so much to Turkish companies that it is at risk of collapse, although some may take a significant hit.

The main concern is that the crises in Argentina and Turkey will spread to other countries and that the current strength of the US dollar puts at risk the $3.7 trillion of dollar denominated debt that has been borrowed by emerging market economies in the past ten years. But the current dollar strength will probably also hold back the US Federal Reserve from raising interest rates for fear of putting the whole of that debt at risk.

It is possible that significant currency movements will be triggered by political developments such as Brexit or international trade disputes. For the time being the pattern seems to be a sharp rhetoric from political leaders followed by compromise or a shift in position.


And then there is China. In 2007, China accounted for just 4% of global debt, but this had ballooned to 15% by 2016. When critics of global debt talk about their concerns about a looming crisis or fresh financial crash, a large part of that is bound up with concerns about China and it’s not hard to see why.

Corporate bank-borrowing has exploded since the global financial crisis. It is harder to understand where debt is being invested in China and there are many who are suspicious that much of this money has been wasted risking a destabilising financial crisis or long-term stagnation in the world’s second largest economy.

Debt in Chinese state-owned entities (such as banks) stands at 115% of GDP, but equally China is a huge creditor nation. Meanwhile, the pace at which debt is being accumulated in China has been falling for a number of years, so it is likely that the risk presented by debt in China is also falling.

Have the lessons been learnt?

Taking into account the composition of global debt, it does seem that the risks to the world’s financial system are less than implied by the absolute level of borrowing. The exposure to households, corporates and financial institutions is proportionately less than it was ten years ago. Debt service costs are low. Nevertheless, events in Argentina and Turkey highlight the need for all borrowers, whether governments or in the private sector, to match borrowing with the resources to pay.

Ahead of the Russia 2018 World Cup semi-finals kick off tonight, Dun & Bradstreet have revealed that when it comes to economic risk ratings its clear who wins. Below are graphics ahead of the match tonight between France & Belgium, and tomorrow between England & Croatia.

Below you can also see a thorough table of all countries in the World Cup that accounts for FIFA rankings vs. their D&B Country Risk rating vs. the GDP per capita global ranking.



Team 2018 FIFA Ranking D&B Country Risk Rating GDP per capita global ranking Economic overview
Switzerland 6 2.25 2 Forward-looking indicators bounce back after a period of weakness.
Iceland 22 3.25 5 Growth is underpinned by base effects and a stronger demand for fish.
Denmark 12 2.25 8 The immediate risk of a general strike has been averted.
Sweden 24 1.75 10 The economic growth forecast for 2018 edges up.
Australia 36 2.5 11 Relations with main trading partner China continue to sour.
Germany 1 1.5 16 Economic indicators maintain their downward trajectory.
Belgium 3 2.75 18 Modest economic growth continues.
England 12 2.75 22 Forward-looking indicators still suggest disappointing growth this year.
France 7 2.25 23 Dun & Bradstreet downgrades its rating outlook for France as the economy slows.
Japan 61 2.75 24 Corporate and household earnings pull ahead of demand growth.
Korea (South) 108 2.75 26 The inter-Korean summit brings an improved political outlook.
Spain 10 3.75 29 Political uncertainty will remain elevated.
Portugal 4 4 34 As expected, GDP growth decelerates.
Saudi Arabia 67 3.5 35 Strong oil prices will boost the short-term economic outlook.
Uruguay 14 4.25 40 Exports are driving growth, and investment is forecast to pick up in 2018.
Panama 55 3.5 44 The economy will keep growing at a healthy pace.
Argentina 5 5 48 President Macri's falling popularity jeopardises planned reforms.
Croatia 20 4 49 Negative indicators suggest that the economy is slowing.
Poland 8 3.25 50 The EU gives Poland a deadline to resolve judicial independence issues.
Costa Rica 23 4.5 51 Dun & Bradstreet upgrades Costa Rica's country risk rating following the election of Carlos Alvarado Quesada as president.
Russian Federation 70 6 52 Payment performance remained broadly stable in 2017.
Brazil 2 4.5 57 The growth forecast is slashed following a crippling strike and the currency sell-off.
Mexico 15 3.75 60 Elections and stalled NAFTA talks cloud near-term prospects.
Peru 11 4 68 An upsurge in public investment spending will help the economy to pick up.
Serbia 34 4.75 72 Data for Q4 indicates that economic growth is accelerating.
Colombia 16 4 74 The centre-right candidate leads in polls ahead of May's presidential election.
Iran 37 5.75 76 Dun & Bradstreet downgrades Iran's country risk rating as the US reimposes sanctions.
Tunisia 21 5.75 94 Political tension rises within the governing coalition.
Morocco 41 4 99 The diplomatic breach with Iran will boost ties with both the US and Gulf Arabs.
Egypt 45 6 104 The government faces a challenge to reduce energy subsidies.
Nigeria 48 6.5 106 Commercial bank liquidity improves as both oil export revenues and FX reserves rise.
Senegal 27 4.25 121 A new sovereign bond raises USD2.2bn.

So if you clicked this article because you want to know how much the literal world cup trophy costs, it’s currently estimated at a total $10 million, or in fact more than two human figures cast in 18 carat gold, but that’s not what this is about.

For the consumers, the ticket prices alone are eye-watering. Standard category tickets for the knockout stage matches set fans back around £2,458 ($3,249), while the group stages will have cost £2,631 ($3,477) combined. All in all, that’s around 22% of the UK’s average annual salary. Plus, flights at anywhere between £600 ($793) and £1,500 ($1,983) depending on where you are in the world, insurance at £41 ($54), and hotels at around £987 ($1,305) and counting, the cost of the world cup is a small fortune for any individual fans attending the competition.

However, the true cost of the world cup extends far beyond what most can imagine. If you take into account the cost on the host nations, the funds handled by FIFA and national football associations, the money lost in advertising, operations, infrastructure and accommodating resources for businesses worldwide, from an economic perspective the overall break-even after losses and profits is highly questionable.

This year companies in the UK witnessed a blackout the morning after some of the England games; employees just didn’t turn up to work. The estimated loss figure for employees ‘pulling sickies’ reaches £500 million ($661 million) nationwide. After the England Vs Columbia game, millions of football fans were expected to call in sick, and they did. While each individual case may seem like nothing much, all together, a £500 million loss in a day is a big hit for the economy. Realistically, other football fanatic nations may have suffered a similar fate the day after their respective teams played.

But the real cost of the world cup extends much further still, and its biggest catalyst, hosting the 32-nation tournament, touches a sensitive socioeconomic nerve. While the surge of a national team in the tournament can bring a much-needed economic boost, £2.6 billion is expected to flood into the UK economy should England reach the final on July 15th, the true cost of the World Cup is always counted in billions and can cause significant issues for the host country.

The 2014 world cup in Brazil was forecast to positively impact economies anywhere between $3 billion to $14 billion. The positive economic impact of the 2010 world cup in South Africa was estimated at $5 billion; the 2006 world cup in Germany at $12 billion and the 2002 world cup in Japan & South Korea at $9 billion. The 2014 brazil world cup was due to add an estimated $30 billion to Brazil’s GDP between 2010 and 2014.

From TV rights fees to sponsorships and ticket sales, FIFA made $4.8 billion in revenue from the tournament in Brazil, with an expense of $2.2 billion, most of which comprised funding to teams and TV production costs. $100 million of the expense was the legacy payment given to Brazil. This did not however cover the costs of building and renovating 12 stadiums and developing the appropriate transport infrastructure needed to host the world cup. The overall cost of this has been estimated at around $15 billion, most of which was public funded.

On top of this further costs incurred due to overruns, legacy concerns and missed constructions deadlines. Some of the stadiums remained unfinished or untested prior to the launch of the 2014 event. In addition, many protests erupted throughout the country calling out the troublesome impact of the world cup on day to day living in Brazil, from the way public transport was handled to the way policing was affected.

The harsh truth is that many of those stadiums remain unfulfilled and unused now. Sure, they were put to good use during the world cup in 2014, but in 2018 these stand desolate, while basic social services are underfunded and lack the capital for development. Billions in capital that could have not been spent on the world cup. One of the 12 stadiums built is the Arena da Amazônia in Manaus. Situated in the middle of the jungle, without a proper top-flight football team, a 45,000-seat stadium is unnecessary. In order to build this stadium, some parts had to be transported by boat through the Amazonian jungle.

To add to the frustration of Brazilians that year, their world cup team suffered a crushing 7-1 defeat against the Germans in the semi-finals.

After being selected to host the 2018 world Cup back in 2010, Moscow has aimed for Russia to stand out as a global superpower and host the world cup in order to benefit from a big economic boost in the long term. The results of the latter are still to be seen, though in terms of media coverage and PR, Russia has been doing pretty well, with many global fans claiming that from a social and economic stand point, Russia is a far better nation than most believe it to be.

We’re currently just past the half way line in the 2018 Russia world cup and the cost is already mounting. The overall cost of Russia hosting the world cup is reported at $14.2 billion, making it the most expensive in history thus far. Russian media channels report that most of this cost consist of repairs and renovation to existing airports and transport systems as well as building 12 new stadiums, 11 new airport terminals, 12 new roads and three new metro stations in the run up to the competition. To support these, further infrastructure such as hospitals, power stations, and hotels were also injected with cash. Clearly, Russia thought it had better odds than Brazil when it came to the long-term economic advantages of hosting the world cup.

In terms of sponsorships, of 34 potential slots offered by FIFA for the 2018 world cup in Russia, 19 were filled, mostly by Russia themselves, and China (despite not even having a team in the tournament) and Qatar. KPMG currently estimates sponsorships have made FIFA over $1.6 billion. Statista has estimated around 1,000,000 foreign fans to attend the games from the first kick off to the final whistle, with a further 2 million domestic fans in the mix. FIFA says around 98% of tickets were sold, but this hasn’t always appeared to be the case in some matches.

Once the world cup is over, it’s difficult to say whether Russia’s massive investment, the biggest yet, will reap long lasting benefits from hosting the competition. But if Brazil is to be an example, probably the worst of many, then Russia is arguably set to lose from the deal, at least financially. Although the injection of cash means they will have a few more hospitals and better airports in the long term, from a future football perspective the stadiums that were purposely built for the world cup will likely not bring much revenue back for Russia in years to come, leaving the expenditure as a substantial one-off outlay, albeit it for a very rich country.

At least high hopes still remain for the Russian football team in the 2018 world cup, as they face Croatia this Saturday in the quarter finals. If they win, maybe things will look a little brighter.


In January this year, Trump slapped tariffs of up to 30% on imports. In March, he added tariffs of 25% and 10% on imported steel and aluminium respectively. China and the EU retaliated with actual or threatened tariffs on hundreds of imported US products, but Trump hit back with a threat of further taxes.

Companies and investors caught in the cross-fire between tit-for-tat trade wars are concerned because:

The Financial Times suggests that a global trade war could knock 1-3% off GDP over a few years. They also reported that whereas capital expenditure (capex) by some US companies had risen, a Credit Suisse survey suggested that many businesses remained more hesitant about investing. Some have opted to hold onto their mountains of cash because of the uncertain outlook caused by trade war and geo-political tensions.



With reduced capex comes reduced employment and reduced productivity gains. Inefficiency eats into profit margins and competitiveness, lowering company values and economic growth, which leads to less capex, and so the vicious downward spiral continues.

Some companies might manage the situation by shifting production overseas, but in the process losing exported jobs. Relocation would also consume investment and time to raise production and adjust to the new dynamic, and in the meantime, the profit margin would diminish.



A great drag on companies’ profits and a disruptive influence on supply chains, is the uncertainty that trade wars create. When will they end? Will they escalate? Which sectors will be affected and to what extent?

Chinese parts, for example, relied upon by US manufacturers, could become unavailable, or they might not. Just a month later, the US is backpedalling on its April 2018 ban on selling US company parts to Chinese company ZTE, a reversal that will cause turmoil among exporters and importers that must now reverse their plans to circumvent the ban.

Governments might retaliate to their counterparts in other ways. In 2016, China shut down Korean companies operating in China in retaliation to South Korea's actions. Hyundai and Lotte (both Korean) were denied car parts from local suppliers and 100 Lotte shops were closed. Countries have been known to expropriate foreign companies’ assets.

In the aftermath of the 2007 global financial crisis, investors stood on the sidelines for years with their pockets full of cash until asset prices and markets stabilised from the shock. The same hesitation could occur during trade wars and other geopolitical crises.


Higher funding costs

We have already seen some shareholders switching out of volatile equity investments into safer havens such as government bonds. That is likely to raise yields for borrowers, especially for high-yield borrowers, increasing interest payments and lowering corporate profits.


Currency risk

Investors’ flight to safety could significantly impact exchange rates as they dump risky currencies (such as those of some emerging market countries) and buy safer ones (such as USD), causing currency losses for companies that have not hedged their currency risks. Conversely, companies with a depreciating currency could benefit – for example, from the increase in value of overseas earnings that are reported in the depreciating currency. Those gains could be offset more or less, by higher import costs.

The IMF reckons that (without trade retaliation) the USD could appreciate by 5%. Appreciation of the USD could accelerate, causing further rises in costs of USD-denominated commodities, such as oil.


Commodity prices

Higher oil prices would adversely affect heavy users of energy, such as aviation, motoring, and manufacturing sectors. For example, American Airlines’ share price went down 6% after it expected $2.3 billion in additional fuel costs.

Winners and losers are expected from conflicts, such as trade wars, but sometimes the outcome can be unexpected.


Unintended consequences

American company Metal Box International was going to shut down after its sales had been decimated by cheap imports, but Trump’s protectionist trade policies changed its mind.

Metal Box, and other US manufacturers of products slapped with US import duties, should have seen its market sales rise as it filled the market gap created by reduced imports.

Anti-subsidy and anti-dumping duties imposed by the US on Chinese imports did result in a pick-up in Metal Box’s sales, but it was short-lived, because, according to the company, consumers and retailers feared trade war disruption so they stocked up pre-emptively. The company increased its capex in anticipation of higher sales volumes, but the machinery now sits idle.

The company’s hopes for business success were set back further by tariffs imposed by Trump on imported steel, because the company will now probably have higher costs of steel raw material.


Stagflation and GDP

Moody’s notes that workers employed by US business sectors that use steel far outnumber those employed in its manufacture, by around 5:1. That is also the ratio of job losses: gains predicted by Trade Partnership as a consequence of US tariffs.

“Protectionist trade policies, including tariffs on raw-material imports, could exacerbate these inflationary pressures [caused by global economic growth], running the risk of tighter margins and possible supply-chain disruptions in the manufacturing sector,” said Moody’s. Inflation could necessitate faster monetary policy tightening, i.e., more interest rate hikes. That would raise companies’ costs, denting their profits.

Sustained high interest rates and inflation could stymie global economic growth and create stagflation. A March survey by BoAML found that 90% of investment managers thought protectionism would cause either inflation or stagflation, and protectionism was investors’ primary fear.

Whereas some steel users will have the ability to pass on rising metal costs (either contractually, or through their brute forces of negotiating or price-setting), smaller companies will have to absorb higher input costs to maintain market share. For the former, profit margins will be protected, for the latter, they will contract.

Where investors are concerned, borrowers also need to be concerned, because the fortunes of both are intertwined. When investors become risk-averse and hoard cash, borrowers lose access to capital or pay a higher cost. Reduced profits ultimately hurt workers’ incomes, the economy’s GDP, and investors’ return on investment.

Unchecked, stagflation could deteriorate into recession, leading to job losses, reduced investment and further corporate financial distress. With many companies and individuals already highly geared with debt, a recession or stagflation that reduces income and the ability to service debt interest obligations, could trigger a wave of personal bankruptcies or corporate insolvencies, reducing GDP further and leading potentially to recession.

Companies might have to lay off employees to remain profitable or in business. Where last-in-first-out stock valuation accounting policies are used, profits will be quickly dented, reflecting higher stock costs. Cashflow will fall because of more expensive stock, or else companies will try to stretch their trade creditors’ goodwill even farther. Companies that can control their working capital interactions are more likely to survive than those with poor credit, stock, and trade creditor management practices.


Credit insurance

Companies’ trade credit insurance premia might increase, or be stopped of their financial position deteriorates. Credit insurance providers stopped providing credit protection to Woolworths’ suppliers, meaning it had to pay in cash, exacerbating the strain of its debt pile and leading to its administration. Without credit insurance, factoring of invoices, and conventional credit from suppliers, Toys R Us had to buy its games and toys as they were delivered. Without cash, a company’s shelves soon begin to empty, payments become overdue, staff are not paid, and operations grind to a halt, i.e., bankruptcy or insolvency ensues.



Companies that have low gearing or operate in strong cashflow sectors such as fast-moving consumer groups, might withstand a cash crisis by raising additional debt, but companies already creaking under a mountain of debt and/or debtors, are more likely to break under the strain, and relatively sooner.

Almost 2/3 of aluminium and 1/3 of steel are imported by the US. Caterpillar and Boeing were caught in the firing line between the US and its trading partners because of their heavy and critical reliance on metals, and their international operations. Investors realised the negative implications so both companies’ shares dumped, sending their prices down more than 5%.


Winners and losers

Shareholders in US steel makers made a mint from US tariffs, US Steel and AK Steel, for example, rose 6% and 10% respectively. In the longer-term, US steelmakers could lose out from trade wars, however, for example, if manufacturers relocate, cut back on domestic production volumes, or use alternatives materials.

Other winners in the latest trade spat are companies that are more inward-looking or resilient to tit-for-tat retaliation, such as healthcare and BioTech. For example, shareholders in Johnson & Johnson, Merck, and Pfizer were some of the biggest winners in March. Other defensive regions and sectors include: Australia, Brazil, parts of Europe and Japan, and sectors such as telecoms, utilities, insurance, and retail. Countries whose GDP depends heavily on exports to the US, such as Mexico and Canada, are likely to suffer most from US protectionism.



Companies are in the cross-fire between trading countries, so they need to, above all, pay close attention to their cash flow and their survival over the longer term, even at the expense of near-term profit and revenues. They also need to monitor a changing geopolitical landscape and adapt accordingly. At such times, a company is likely to soon find out how committed banks and other investors really are to the company’s survival.




According to many reports, Italy’s ongoing political failure has potential to bring the Eurozone crashing down, which in turn could cause mass impact across the globe’s economy, both short term and long term.

In a recent turnoff events, both parties Five Star Movement and Lega Nord have been committed to the Italian government following a period of limbo since the March general election. Italy currently represents almost a fifth in the Eurozone economy and is feared as “too big to be saved.” Giuseppe Conte has been appointed the interim PM.

Below Finance Monthly has collected Your Thoughts in this financial debacle, summarising some points of expertise form top reputable sources across Europe.

Daniele Fraiette, Senior Economist, Dun & Bradstreet:

Italy’s new prime minister, Giuseppe Conte, will need to try and strike a balance between reassuring European partners about Italy’s permanence in the eurozone, and the 5SM’s and NL’s overt intolerance towards European Union rules on budgets and immigration.

In the weeks before the resolution of the crisis, Italian bond yields rose to levels only seen at the peak of the debt crisis in 2012, dragging yields on other peripheral euro-zone economies’ debt higher. The spread between Italy’s 10-year government bonds and Germany’s equivalent-maturity bonds also soared, passing the 330 basis point mark. The political vacuum seems now to have been filled; however, the spread remains at levels which signal significant market concerns around the country. The end of the ECB’s bond-buying is an additional factor of concern as they could prompt a significant increase in Italy’s borrowing costs.

Italy’s overall macroeconomic environment has improved remarkably over the past years: real GDP grew by 1.5% in 2017 and looks set to expand further in the 2018-19 period, the current account surplus currently stands at around 3% of GDP and its debt service cost has dropped to below 4% of GDP, down from above 6% before the introduction for the single currency. However, at 132% of GDP, Italy’s stock of public debt is huge, and the ongoing political turmoil poses a threat to the country’s stability. Indeed, should the political crisis morph into a sovereign debt crisis, debt costs would soar and debt service become unsustainable.

If Italy defaulted on its debt (which is not Dun & Bradstreet’s baseline scenario given Italy’s strong domestic investor base), the survival of the eurozone would be irreparably compromised. There is also a risk that concerns over a possible referendum on the euro, repeatedly contemplated by the 5SM and the NL but eventually scrapped from their election manifestos, could trigger a flight of deposits from Italian banks, many of which remain saddled with high levels of non-performing loans.

Although the darkest hour of Italy’s politics seems to be over, tensions between the Italian government and the EU, as well as within the government itself, are highly likely to persist; political uncertainty will likely remain elevated in the quarters ahead and the risk of early elections constantly looming.

Roberto Sparano, Globalaw:

After the longest political crisis in Italian history, a new cabinet of ministers was appointed on Saturday. Technically, the new government needs the confidence vote of both chambers of the Italian parliament, but it seems likely that the vote will go in favour of the odd alliance between the 5stars movement and the Lega.

In the closing moments of his BBC TV commentary for the 1966 FIFA World Cup Final, Kenneth Wolstenholme said "They think it's all over," but in reality it was not! This is, more or less, what is happening now. Most Italians are happy that it is over and we are back to normal, however, in realty this is only the beginning.

Local elections are scheduled for the 10th of June, and both the Lega and M5S will campaign on different and opposite barricades. Campaigns can easily turn ugly in Italy, and the first objective of the new government will be to survive these next few weeks without any major clash between the two parties.

In fact, the new local elections will be the first referendum against Europe and the Eurozone.

As Italians, we always have difficulty owning up to our responsibilities, that is the way we are, and we have become experts in the art of shifting the blame onto others. Germany has, for many reasons, been the perfect target since the end of WWII.

The notion of external control was actually one of the factors that convinced Italian lawmakers and politicians to join the European Union in the first place. This is because, if anything goes wrong, or is hard to swallow and unpopular, the blame falls on the EU as an external body- and obviously the Germans!

This may be a hopeless situation... but it is not serious, like in the 1965 movie directed by Reinhardt.

I do not think that the Eurosceptic have been strengthened from the last Italian elections. The truth is that most people are not ashamed to feel anti-EU (given that the EU has served as a punching ball and a symbolic cradle-of-all-evil over the past decades). Two non-traditional political movements are only going to cash in on this feeling.

Italy’s political climate will have a consequential effect on the Eurozone and the European Union. I am convinced that the Lega is aware that we cannot leave the EU or the Euro (I cannot speak for the M5S since I do not think they have any policy or line at all), but they are also aware that the other Euro partners cannot afford Italy’s break from the Euro or the EU.

The current anti-European feeling will undoubtedly be used as a bargaining chip for other purposes, for example, to stop immigration or, even better, to accelerate the process of moving immigrants from Italy. If Germany and the EU play this the hard way it could be fun to watch, although, as an Italian, it will be painful. On the flip side, it could be the perfect opportunity to change the EU, although, while Lega and M5S are calling for a new and stronger Europe, nobody knows (including Lega and M5S) what a “stronger Europe” really means.  My idea of a stronger Europe … I fear it is exactly the opposite of the idea of the Lega.

The situation is unpredictable, some of the measures that form part of the “Contract” between Lega and M5S could have a beneficial impact on our economy, although the Italian debt will skyrocket and in the long term, this would have a devastating effect.

The real problem will be the Italian State rating and the Italian bank rating. If the new government leads to a downgrading, the ECB will not be allowed to acquire our State bonds. Due to this, quantative easing measures will cease to help our growth, and the banks will collapse.

Italian economics are already not brilliant (that is lawyerlish for awful). We are the slowest growing European member, our private sector has never driven, and our banks … well our banks are declining.

We are already a supermarket for foreign corporations; Chinese, Indian, USA and other European companies have already acquired most of the jewels of the crown in terms of brand know-how, and excellence. Despite this, if anything goes wrong, we will become a discount or outlet!

On the other hand, our history shows that Italy always manages to survive, after all, on April 25th each year we celebrate the victory against nazi-fascism in WWII.

Giuliano Noci, Professor of Strategy and Marketing, Politecnico di Milano School of Management:

Following a week of political uncertainty in Italy, international financial markets are recovering well. Analysts expect that the announcement of a new government and the unlikelihood of fresh elections indicate that no further disruption will occur.

However, the root causes of how Italy landed in this particular political situation – where the young Five Star movement and Matteo Salvini’s League won more than half the votes in parliament – must not be ignored.

Both parties – although internationally scorned for Eurosceptic views – were able to gain the support of the Italian population, playing on both their emotions and feelings of insecurity. Both delivered well-designed storytelling campaigns via social media rather than mainstream media – a technique neglected by other parties.

The population’s insecurity has two main manifestations. Firstly, the feeling that the EU did not do enough to help Italy during the mass immigration of refugees of Syrian war. Secondly, the sense that the EU is failing Italy in important economic areas. Five Star promised a basic income for the unemployed whilst they train and upskill, and the League pledged to reduce the burden of fiscal taxation on companies by introducing a flat tax system.

So, are the parties reaching the core of Italy’s problems and setting out the right solutions? This is a question which deserves careful consideration. In my opinion, the parties were wrong to use aggressive tactics to fuel the debate about whether to remain in the EU. However, they were very right to suggest that the European Union must significantly change the rules of the game. We are seeing problems not only in Italy, but in Greece, Spain and perhaps even France in the imminent future.

These are signs that the Eurozone is not working, which is most likely because the Euro project is incomplete. Although we have a unique currency, there is no unique system for managing the risk of banks or the unbalanced, heterogenous economic systems of each country.

In the long run, a lack of reforms will create a bigger problem for the Eurogroup than Italy’s political situation. Change must come from within the EU following this situation and discussions of structural reforms in the banking sectors, as well as a safety net fund, must begin.

If no change occurs, the 2019 EU elections are likely to be just as complex as Italy’s.

Stephen Jones, Chief Investment Officer, Kames Capital:

Following Macron’s victory, the eurozone was the ‘good news’ story of 2017 as the area’s economy burst into life and global investors returned in droves. This year has seen economic momentum collapse sharply and, perhaps more than coincidentally, populist pressures have brought the fault lines back to the fore. For the moment this is an Italian issue but these pressures exist in most eurozone nations.

Equity markets have weakened on these changes but Italian worries have largely reinforced a trend already in place. Elevated ratings, and analysts offering a very rosy earnings outlook, left markets vulnerable to poor news and a variety of geo-political developments have emerged to offer that challenge; fat profits were there to be taken.

These risk markets setbacks have, however, taken the steam out of rising short rate and long yield forecasts and will probably succeed in ensuring that quantitative easing is continued in Europe for longer than might otherwise have been the case. When the dust settles, this should underpin equity markets, allowing progress to be made afresh and from safer levels; the positive earnings outlook offered by analysts have good real-world support.

However, to be clear, this supposes that Italy stops short of turning a drama into a crisis. Those of us of a certain vintage know well enough that Italian politics are not to be trusted.

Jordan Hiscott, Chief Trader, ayondo markets:

I was recently asked If I thought the current situation in Italy, in regard to potentially leaving the EU, was a black swan event. My response was no; a grey swan would be a much more suitable adjective to describe Italy in its current state. The ultimate definition of this would be a risk event that can be anticipated to a certain degree but still considered unlikely. A black swan being an event that is not anticipated in the slightest.

Italy has the third largest economy in the Eurozone and this political turmoil, of once again populist vote, threatens the unity of the bloc. But the situation is further exacerbated by the perilous state of Italian banks. Indeed, this is nothing new and they have been in the poor shape for a while, and the only surprising part to me is that the market hasn’t been paying attention to this, until now.

The culmination of the situation is we now have a perfect storm. Another type of a coalition government has been formed and the cynic in me looks at Italian politics on a historical basis and questions if this is this indeed the end of an unstable ruling government or in the colloquial sense, papering over the cracks? This is coupled with a worsening financial situation for the nation’s major banks. The move on Italian two-year treasury yields last week was nothing short of astounding, with the range and volatility more akin to a cryptocurrency than of a bond from a first world country.

The Italian stock market is now almost completely unchanged on a five-day basis, given it was down over 7% at once stage last week.  In addition, to confirm this, EURUSD has moved from a low of 1.1520 last week to 1.1750. The next move will be key, but from my perspective I’m finding it hard to feel positive, even from a mean reversion perspective, for the pair, given the length and weighted negative implications surrounding Italy at present.

April LaRusse, ‎Fixed Income Product Specialist, Insight Investment:

In contrast to the European sovereign crisis, Italy is now an idiosyncratic story. Across Europe, the previous crisis hit countries such as Spain, Greece and Portugal are all on an improving path, reaping the rewards of structural reforms implemented after the crisis. In Italy, pension reforms were certainly a positive step, but the country failed to undertake the deeper changes needed to sustainably raise potential growth.

The two key parties are proposing a range of expansionary fiscal measures, cutting both income and corporate taxes and proposing a minimum citizens income of €780 per month. Although more controversial measures, such as asking the European Central Bank (ECB) to write off up to €250bn of Italian debt, have been dropped, investors will be well aware that these were considered serious policy proposals by elements of the new government.

Debt/GDP will start to rise once again and credit rating agencies are likely to start to downgrade Italian debt, in contrast to the rest of Europe where credit ratings are improving. This leaves us cautious on Italian spreads, especially in an environment where we believe the ECB will be winding down its quantitative easing purchases.

David Jones, Chief Market Strategist,

There is a familiar feel to the catalyst behind the increased levels of volatility that traders and investors have seen across all markets, leaving some wondering if we are going to have another Eurozone crisis along the lines of that involving Greece from 2016. At this stage that does seem like an overly-pessimistic view, but it’s not hard to understand why safe-haven buying is the order of the day.

An oft-repeated phrase from past Eurozone crises was “kicking the can down the road”, referring to deferring that country’s debt obligations. This time around it feels as if the political can, rather than the financial one is being kicked into the long grass - and this is what is spooking markets. One of the main worries for traders is another election in a few months could result in a populist government that wants to renegotiate Italy’s debt with the EU. This is running at around 130% of the country’s GDP - the second highest level after, you guessed it, Greece.

The obviously immediate casualty was the euro. It had hit a three-year high against the US dollar as recently as February this year. Since then it’s dropped back by around 8% to its lowest level since last July. There is a double-whammy behind traders’ decisions to sell euros. Clearly any uncertainty about Italy’s debt repayments and the country's commitment to the single currency doesn’t inspire confidence - plus this year already we have seen a resurgence in popularity for the US dollar after its slide in 2017 was the worst performance for more than a decade. It can always be argued that the market reaction is overdone - but whilst Italy’s political future remains uncertain, it’s a brave trader who calls the bottom of this slide.

European stock markets have also been hit. The Italian market is the obvious biggest casualty and is now down by 13% in just one month - but the German and UK markets are also lower as investors adopt the familiar “risk-off” approach at the slightest whiff of a possible euro crisis. Many world stock markets already had some fragility when it comes to investor sentiment after the sharp falls seen in February and an ever-increasing oil price - it is difficult to see these recent losses being made back quickly.

While some sort of “dead cat bounce” can’t be ruled out in the days ahead, as long as this political can-kicking continues, then investors are likely to remain cautious about taking on risk - so it could be a summer of European-inspired volatility across all asset types.

Tertius Bonnin, Investment Analyst, EQ Investors:

This had been a slow moving car crash in which the signs have been there for all to see; populist parties were the clear winners of the March election (nearly three months ago) and the two largest parties, the Five Star Movement and the Northern League, had been negotiating a framework for co-governance since. Surprisingly, a number of market participants had expressed that they didn’t anticipate the “change” in attitude of the two famously Eurosceptic parties towards the euro. It should be noted that Italy isn’t new to political uncertainty, with Italian voters seeing 62 governments since 1946.

The Italian President’s veto of the proposed finance minister, Paolo Savona, and the subsequent increase in the probability of another election caused a kneejerk reaction in the markets on Monday. These moves spilled into the Tuesday session as the Monday was a bank holiday in the US and UK. Trading volumes on the Monday were therefore relatively thin in comparison. Tuesday saw huge spikes in key barometers of relative risk such as the Italian-German government bond spread (difference in yield) and the Italian two year bond yield. Global banking stocks, considered most sensitive to a change in economic activity, also sold off. Despite the so called PIGS (Portugal, Italy, Greece and Spain) taking significant knocks, investors in relatively safe government bonds (German bunds, UK gilts and US treasuries) benefited from a “flight to safety” whereby panicked investors moved capital into less risky assets.

There had briefly been calls by the Five Star Movement’s leader to impeach President Mattarella. Under Article 90 of the Italian constitution, parliament may demand the president to step down after securing a simple majority. Italy’s constitutional court would theoretically then decide whether or not to impeach Mr Mattarella. Given the president had not violated any Italian laws, this route appeared relatively futile. On this impasse, the populist coalition appeared to have collapsed and the market took a collective sigh of relief as the Italian President moved to appoint ex-IMF director Carlo Cottarelli to run a short-term technocratic administration until the next set of elections. It should be noted that the Five Star Movement, the Northern League and Berlusconi’s party all said they would have vetoed this.

It is likely this development fed into the Northern League’s decision to call for fresh elections at a political rally, having seen an uplift of circa 8% in opinion polling. Investors once again panicked that the risk of future elections had the potential to not only reinforce the populist parties’ positions in both parliamentary chambers, but become a de facto referendum on Italy’s euro membership. After 2017 being relatively benign year for political risk, investors had been caught asleep at the wheel in terms of pricing in uncertainty in the political sphere.

By Friday the situation had turned around once again after the Italian President provided more time for the Five Star and Northern League parties to form a government; the former designate Prime Minister Giuseppe Conte was sworn into office while the key Finance Minister role went to a seemingly more pro-European, Giovanni Tria, who headed the Economy Faculty at Rome’s Tor Vergata University. Paolo Savona, the former candidate vetoed for this position will now serve as Minister for European Affairs in a sign that the new administration’s focus will be on fiscal expansion plans and rolling back reforms, rather than investor angst around fresh elections and euro membership. This rollercoaster ride in political uncertainty has been tracked by the spike in yield of the supposedly risk-free Italian government bond.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

Is globalised trade in reverse? Is protectionism on the rise with the potential of a spreading trade war? These are questions at the top of many business leaders’ minds. The answer to both these questions is yes, and business models are going to have to change as a result. Dr Joe Zammit-Lucia, co-author of ‘Backlash: Saving Globalisation from Itself’, explains for Finance Monthly.

WTO figures already show a significant slowdown in the growth of international trade as a percentage of GDP. We are still only at the early stages, but a trade war and a stalling of globalized trade is almost inevitable.

This first part of the 21st century has seen many shifts from the post-war global world order that we had all become used to and on which the trans-national business model has been built. These changes are significant, encompassing political, cultural and economic shifts that have upended old assumptions.

To cite but a few examples, global governance structures (WTO, IMF, World Bank, etc) were previously seen as fair arbiters of the global order. Now their governance structures are seen by developing countries as dominated by the West and by the developed world as no longer serving their interests.

‘World trade produces net benefits for all’ was the 20th century mantra. Now it is clear that such benefits are very unevenly distributed with consequent economic, social and political implications. The free movement of global capital was seen as a vital fuel for growth and development. Now it is seen as potentially destabilizing, a system for hiding large amounts of illicit money, and a facilitator of tax arbitrage.

Low labour costs were seen as the competitive advantage of developing countries. Now they are seen as the basis of ‘unfair competition.’ Persistent trade imbalances were dismissed. Now we understand their corrosive effects on deficit countries.

In an information driven world, privacy and national security issues affect trade – from the manufacturing of routers to the security of data platforms, to building self-driving cars. For instance, Qi Lu of the Chinese tech company Baidu explains: “The days of building a vehicle in one place and it runs everywhere are over. Because a vehicle that can move by itself by definition it is a weapon.

But maybe most important is the major geopolitical shift. The post-war world order was characterized by Western dominance and overseen by the hegemonic power of the US. Now we have three more or less equally potent trading blocs – the US, China and its sphere of influence, and the European Union. Economists have known for decades that in such a structure, competition between blocs was much more likely than co-operation.

Trans-national business has played a role in these changes. A meaningful proportion of the US trade deficit comes not from ‘Chinese goods’ but from American goods that are being manufactured in China (the computer I am writing this on, for example). Businesses have long engaged in arbitrage between countries in investment, jobs and taxes, nurturing, over time, what has turned out to be a political time-bomb.

Neither can business leaders be blamed for such behaviour. They were doing their job: optimizing their business models. But times have changed. The rules of world trade need overhaul. And business models will have to change with them.

Some business leaders are already taking action. “The days of outsourcing are declining. Chasing the lowest labor costs is yesterday’s model” says Jeff Immelt of GE. “Now we have a strategy of localization and regionalization” states Inge Thulin of 3M.

It is also worth bearing in mind that the trade agreements that we have all become used to were developed in a world of trading largely in goods. They are poorly suited to trade in services, digital commerce and large financial flows.

It is tempting to dismiss talk of trade wars as a Trump phenomenon. Much bombast, little meaningful action, and something that will soon pass. That would be to misunderstand the slow but sure tectonic shifts – political, cultural and economic – that are happening.

How individual businesses react, or, preferably, pre-empt these shifts will determine their future performance. And they will determine whether the political consequences of their actions will, over time, smooth things out or make them worse.

China has been beating its currently forecast growth rate. According to official data, China's economy grew at an annual pace of 6.8% in the first quarter of this year compared to the same period in 2017.

Over the past year China has seen national economic growth that is unparalleled and unprecedented worldwide. This week Finance Monthly set out to hear Your Thoughts on the following: Is China's economic growth rate on the rise? How resilient can Chinese business maintain current growth? Will consumer demand continue to fuel its growth spurt?

Olivier Desbarres, Managing Director, 4xGlobal Research:

With mounting concerns about the impact of potential protectionist measures on global trade and growth there has been much focus on GDP data releases for the first quarter of the year. China accounted for nearly 30% of world growth last year so Q1 numbers had top billing even if doubts remain as to the reliability of Chinese GDP data.

Chinese GDP growth remained stable in Q1 2018 at 6.8% year-on-year, in line with growth in the previous 10-quarters but marginally higher than analysts’ consensus forecasts and quite a bit faster than the government’s 6.5% target for the full-year of 2018.

The stability of Chinese growth has done little to alleviate concerns that this pace of growth may not be sustainable, given the changes in the underlying driver of growth, or even advisable going forward.

In recent years, aggressive bank lending to households, companies and local government has funded rapid investment growth, including in large infrastructural projects and the property market, and driven overall Chinese growth. Property development investment growth continues to rise at above 10% yoy.

This has led to a sharp rise in public and private sector debt as well as environmental pollution. The government has responded with a raft of measures, including a crackdown on the shadow banking sector, a tightening of real estate companies’ access to credit, a tightening of the approval of local infrastructure projects and pollution controls. These measures may in the medium-term help reduce or at least stabilise debt levels, channel funds to a manufacturing sector which has seen a rapid growth slowdown (to around 6% yoy) and reduce environmental damage. Property sales growth, a leading indicator of property investment, has indeed slowed to around 3.5% yoy.

However, near-term there are concerns that these deleveraging and environmental measures could put pressure on Chinese growth at a time when net trade’s contribution to overall Chinese growth is potentially under threat. For starters, the structural shift in China has seen buoyant consumer demand and imports curb the trade surplus. Moreover, if the war of words between the US and China over import tariffs escalates into a full-blown war China’s trade surplus could erode further and household consumption run into headwinds.

The transition from one economic model to another is challenging for any government and China’s leadership has so far avoided a potentially destabilising rapid fall in GDP growth. The increasing focus on high valued-added exports, consumption and broader quality of life indicators is unlikely to go in reverse. However, this transition may not always been smooth as policy-makers deal with the overhang from years of excessive lending and investment. This could well result in slower yet more balanced and sustainable economic growth in coming years.

David Shepherd, Visiting professor in Global Macroeconomics, Imperial College Business School:

Recent figures for Chinese GDP growth suggest the economy is expanding roughly in line with Government targets, with growth at 6.85% compared to the stated 6.5% target. Moving forward, the question is whether this kind of rate can be sustained or whether we can expect to see lower or perhaps even higher growth over the coming months and years?

The outstanding growth performance of the Chinese economy over the last 20 years stems from a successful programme of industrialisation based on market reforms, capital investment and a drive for higher exports. But that was in the past, and it is unlikely that these factors alone can be relied upon to sustain future growth, partly because of a change in the political environment in the United States, which has become increasingly antagonistic towards the Chinese trade surplus, but mainly because of purely economic factors related to high market penetration and the rise of competing low-cost producers in Asia and elsewhere. While exports and capital investment will always be important for China, if further high growth is to be sustained it will have to come either from higher domestic consumption or increased government spending.

The share of government spending in the Chinese economy is currently only 14% of GDP and the Chinese economy would undoubtedly benefit greatly from increased expenditure on health, education and other public services. While this could in principle be a significant engine for growth, in practice there are significant constraints on the ability and willingness of the government to finance increased spending, not least because of an already high fiscal deficit. The implication is that if high growth is to be sustained in the future it will almost certainly require a move towards higher consumption.

In contrast to the United States and the United Kingdom, where consumption has increased significantly over the last 20 years and now accounts for almost 70% of GDP, in China consumption spending has if anything been falling and currently accounts for only 40% of GDP. For the US and the UK, consumption is arguably too high and both economies would benefit from lower consumption and increased capital investment and exports.

In China, the opposite re-balancing is required, and the relevant consideration is how a sustainable increase in domestic consumption can be achieved. Consumption typically rises when real wages rise and when households choose to save less, but in China, saving rates are high and the share of labour income in national income has been falling. The challenge for policy makers is to find the best way to change these conditions, to reduce saving and boost wages at the expense of profits and other business incomes, all in a context of considerable uncertainty about the economic environment. It is now almost nine years since the current economic expansion began and, if history is any guide, the next recession is not too far down the road. But how that would affect China’s growth performance is another story!

Alastair Johnson, CEO and Founder, Nuggets:

Napoleon once referred to China as the ‘sleeping giant’. It’s looking, certainly in terms of its economy, like the giant is finally rearing its head. China’s unprecedented and unparallelled growth in the e-commerce sector trumps that of other nations, boasting a 35% rise in the past year (with a market twice the size of that of the rest of the world).

There is a great deal of focus, not only in online retail commerce in and of itself, but in the bridges built to link it to peripheral services. China dominates the O2O (online-to-offline) model, strengthening the connection between strictly digital commerce and brick-and-mortar merchants. Instead of displacing traditional commerce, the nation’s retail industry is instead evolving by combining physical stores with increasingly innovative online solutions.

Development of applications such as WeChat and Alipay have lead to a seamless user experience, whereby individuals can simply access stores and make purchases from within the app. It integrates with some of the biggest players in ecommerce, including the behemoths that are Alibaba, and ULE.

Worth considering on the telecommunications front is China’s plan to bootstrap a new network for 5G (versus simply building atop existing ones). Given that 80% of online purchases are done on mobile (versus under half in the rest of the world), this development will only serve to further strengthen the connection between mobile devices and e-commerce.

It’s hard to see the trend dying down anytime soon. Businesses appear to have grasped the importance of user experience, and identified the lifeblood of the industry: consumer demand. New wealth in the nation is fuelling purchasing power. To maintain this hugely successful uptrend, companies in the sector should continue to foster an ecosystem of interconnectivity, both with retailers and tech companies. Smartphone manufacturers anticipate that their growth in 2018 will be slow in China, due to saturation and slow upgrade cycles. Brands will need to look to Western markets for continued development.

Jehan Chu, Chief Strategy Officer, Caspian:

China's rise is not only measured by its achievements, but also by its insatiable appetite to develop new industries. Despite the ban on ICO's and cryptocurrency exchange trading in China, there has been a surge in interest and development in Blockchain technology - the underlying rails of crypto.

From new startups like Nervos (blockchain protocol) and veterans like Neo (US$5bil coin market cap tech) to institutions like Tencent (Blockchain as a Service) and Ping An (internal infrastructure projects), China is leading the world in developing efficient solutions using Blockchain technology. In addition, increased restrictions inside of China have spurred ambitious Chinese developers and entrepreneurs to decamp to crypto-friendly cities like Singapore and San Francisco, creating expert and cultural diaspora networks that span the globe but lead back to China.

Looking forward, it is clear that the sheer volume of engineering talent combined with its seamless adoption and endless ambition to build the new Internet on top of blockchain will keep China at the forefront of technology for decades to come.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

In a recently published report, S&P Global Ratings said it sees political risk and international investor sentiment toward the UK as the key risks facing UK banks in 2018 (see UK Banks: What's On The Cards For 2018). This isn't new--the UK banking system has operated against a constant backdrop of elevated political risk since 2014 and during that period, they have made good progress toward improving their balance sheets. Achieving stronger returns on equity has proved more elusive, however.

As the Brexit talks rumble on, we expect them and the related parliamentary processes to dominate the newswires. The UK's minority government increases political risk, especially as the UK is unused to operating with a minority government. Our sovereign rating on the UK has a negative outlook and our economists forecast relatively low GDP growth of 1.0% in 2018. Nevertheless, we anticipate that economic and industry trends will be stable for the UK banking sector.

We see some possibility of unsupported group credit profiles (UGCPs) being revised upward in 2018, if balance sheet strength further improves and earnings prospects accelerate, but it is hard to imagine wholesale sector upgrades, given the political backdrop. Unless the political and economic environment deteriorates more sharply than expected, or banking groups experience management mishaps, we consider the likelihood of lower UGCPs to be limited.

Uncertainties related to Brexit negotiations, specifically regarding transitional arrangements, are likely to weigh on business confidence, while inflation is set to outpace pay growth for most of 2018. We forecast that the economy will grow more slowly in 2018 than in 2017 as these factors weigh on business investment and private consumption. In our baseline forecast, we expect that economic growth will moderately accelerate in 2019 and 2020 while the UK transitions to its new relationship with the EU in 2021.

Only a rating committee may determine a rating action and this report does not constitute a rating action.

(Source: S&P Global)

The US economy’s growth rate last quarter was recently revised on the basis of stronger investment from businesses and government bodies than previously assessed. GDP in Q3 was revised up to 3.3% annual growth rate compared to the previous quarter. This was according to the US Department of Commerce in a press release on the 29th November 2017.

This week Finance Monthly reached out to sources across the globe to hear their take on the current situation in the US, what has impacted growth across several industries, and what the forecast for 2018 looks like.

Josh Seager, Investment Analyst, EQ Investors:

US growth was revised to 3.3% annualised on Wednesday, up from an initial reading of 2%. This was the fastest growth rate in 12 quarters but there is likely to be some hurricane distortions, so we must interpret the data with caution, we don’t expect it to continue at this level.

Looking into the numbers and things look broadly positive. Consumer spending, which accounts for around 70% of the US economy, remained strong, growing 2.3%. This wasn’t quite as strong as last quarter but is a good level nonetheless and shows that the US consumer is relatively healthy. For the consumer to continue to spend, we really need wage growth. So far, this has been pretty anaemic in spite of very low unemployment. We believe this could be about to change. NFIB Small Business Surveys show that 35% of small business are now finding it hard to fill jobs and 21% are planning to raise compensations as a result. This data points are at cycle highs and this is highly likely to feed into US wage growth at some point.

Business investment picked up, contributing 1.2% to growth, up from 1% the quarter before. This is a pleasing sign as it suggests that corporates are gaining confidence in the economy and are willing to make the investment necessary to capitalise on this. Corporate profits were also up last quarter which should give corporates the financial freedom to continue to develop and (hopefully) growth wages.

Dan North, Chief Economist, Euler Hermes North America:


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Tim Sambrook, Professor of Finance, Audencia Business School:

The upward revision, from previously 3.0%, was mainly due to a higher than expected increase in public and private spending.

The increase compares favourably with the second quarter of 2017 of 3.1%, and the third quarter of 2016 of 2.8%. It is the fastest rate since Q3 2014.

If the current estimate of growth in the Q4 GDP is realized, then this would represent the first time since 2004 that the US economy has posted three consecutive quarters of over 3%.

The growth rate is in line with the government’s target. They are engaging a tax cut plan to lift GDP to 3% annually. However, economists see such a pace as unsustainable and expect growth to slow sometime in 2018.

If you were to look for some bad news in the revision, then you could point to the fact that the revision comes from public and private spending and not consumer spending, which makes up 70% of the US economy. In addition, inventory build-up was significant and could prove to be a drag on growth in the future. However, this upward revision comes with a backdrop of severe hurricanes and low wage growth, which should have been quite negative for consumer growth.

This positive news will strengthen the case for the Fed to raise rates next month, although the announcement had little effect on the dollar or the markets.

Duncan Donald, CEO, The London Academy of Trading:

The highlight of last week’s US data card was the release of the GDP numbers for the third quarter of 2017. The number brought US GDP from 3% to 3.3%.

This is slightly above the median expectation of 3.2%, and shows the US economy continues to expand progressively with the GDP reading being the most aggressive since late 2014.

But in context, what does this mean for the US rate path, as the December rate decision from the Federal Reserve rate setting committee comes next week? From freshly inaugurated Federal Chair Jerome Powell’s perspective, the data is on course for a hike. Even the departing Janet Yellen appeared to shift her dovish tone, referencing data with the possibility of a hike in December.

We need to look no further than the recent performance of US stocks and the dollar for confirmation that the market believes in the upcoming rate hike. Despite the ongoing investigation into President Trump’s electoral campaign, which is an obvious anchor, there are no signs of a slowdown in the US positivity story. The one final hurdle for the market to overcome ahead of next week’s decision is the Non-Farm Payrolls on Friday. The data has been somewhat muddied over the last few months, as hurricanes have taken their toll. However, this month, we should expect to get a true reading on the strength of the US jobs market.

A strong Friday performance will push the market up the final few percent towards a December hike.

John Lorié, Chief Economist, Atradius:

Across the Atlantic, the US economic outlook is also robust, which is reflected in high business confidence. US GDP is expected to expand a solid 2.0% in 2017 and 2018. The positive outlook is supported by strong job growth, very low and still declining unemployment, and even firming wage pressure. In this environment, the number of bankruptcy filings is at historical lows. In Q3 of 2016, the number of bankruptcies in the US reached its lowest quarterly level since Q4 of 2006. We forecast a 4.0% decline in the overall number of insolvencies this year and a mild 2.0% decline in 2018. The US outlook is subject to risks, on the upside (tax reform) as well as downside (trade, NAFTA).

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

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