The trick is not to be distracted by the noise and avoid drawing all the wrong conclusions. So, I try not to scream when the market seems blithely unaware of the cataclysm of bad news threatening to overwhelm it.
More often than ever before I find myself wondering if markets have some form of dementia. Stocks suddenly rise a couple of percent when the news sounds unremittingly bad, solely on the basis that tomorrow will likely be better, or that really, really bad news will force Central Banks to give up on monetary tightening – thus making bad news into good news.
Market sentiment is up and down like a see-saw. When senior bankers, like Jamie Dimon of JP Morgan, are telling their banks' largest clients they see a greater than 20% likelihood of something worse than a hard recession – then maybe it’s time to check your hard hat is a snug fit.
For the last few months, the tone of markets has become more and more confusing. Whether the driver of uncertainty is China, Russia, inflation, war, Ukraine, energy or simple political or central banking ineptitude – the up and down of prices feels like it is making less and less sense by the day. The thing is – these are all known unknowns, things we are aware of, and have worked out how they will hurt us.
As a humble market strategist, I continue to pick the information together to discern probable outcomes. Whether it is raw data, reading through behaviours or seeing patterns in events, there is plenty of information out there – often too much. I try to interpret it and use it to discern what markets might be doing. (The key is to understand markets don’t think – they are just a voting machine.)
But the thing that really knocks-out markets are the no-see-ums – like the pandemic or the energy spike that has routed European economies.
Recently, I was looking at Risk On/Risk Off scenarios and came to the conclusion that US Treasuries will remain the core risk mitigation strategy. What could possibly undermine the mighty dollar?
Chips have become a key strategic resource. No one wants a destructive, costly war over Taiwan, or to wreck the global chip supply.
But then I also figured out the role of the humble computer chip in the global economic picture. Such a small thing could trigger a geopolitical crisis.
Perversely, the global chip business seems to be in short-term trouble. Investors are focused on declining demand for chips as post-pandemic shortages ease, and the rapidly escalating costs of new chip foundries required to make new ones threaten to overwhelm the market. Even as some of the major manufacturers have seen their stock price tumble, global demand for chips is set to double in the next decade – hence the need for greater investment.
On the other hand, semi-conductors (to give chips their proper name) are about the most important component of the global economy. Without chips… nothing works. We would go back to the horse and cart. The imperative from Washington to Beijing is to secure their access to chips.
Chips have become a critical strategic good – and that means they have become a key issue in the geopolitical Game of Thrones being played in the South China Seas.
Here are some points relating to semi-conductors to think about. Chips are ubiquitous:
- The US has just approved a $53 billion bill to boost semi-conductor R&D – President Biden promises it will cut costs and create jobs.
- China has just revealed a state investigation into how money has been siphoned off from a $100 billion state effort to build and upgrade its semi-conductor sector as part of its $3 trillion plan to move China into the top league of global tech.
- Chinese chips are still a generation behind.
- It takes 3-4 years to build a new chip foundry – there are critical machines to source and install.
- It takes far longer to acquire the expertise to run it and produce top-end designs.
- Taiwan produces over 65% of the global chip supply. It has a monopoly on producing the most complex chips.
- Both the US and China are heavily reliant on Taiwan-manufactured chips.
- Nancy Pelosi’s most important meeting last month wasn’t with the Taiwan president, but with the mighty Taiwan Semi-Conductor Manufacturing Company (TSMC) – trying to persuade them to expedite the establishment of US production sites.
- Sophisticated modern weapons rely on chips. US and NATO stockpiles are being run down to supply Ukraine. China stockpiles remain intact. Raytheon recently reopened the Stinger production line – but could take years to deliver 1200 new missiles to an old design.
- Wargames modelling a Taiwan invasion and US intervention suggest a war could cost the US Navy and Air Force over 900 aircraft (half the US inventory) and the bulk of the Pacific Fleet. The Chinese would not win and would see their amphibious forces destroyed.
Chips have become a key strategic resource. No one wants a destructive, costly war over Taiwan, or to wreck the global chip supply. The Chinese have enough on their economic plate – property fallout, the domestic loan market, youth unemployment, plus the ongoing damage of COVID restrictions to contend with. The conflict would simply exacerbate their economic weakness ahead of critical party meetings.
But… If China wanted to inflict economic self-harm by inviting Western Sanctions and lost manufacturing orders, then they could.
The Chinese don’t actually need to invade to thoroughly destabilise the West. All they would need to do is institute a blockade of Taiwan. The West would not be certain of global support against such a move. If the Chinese frame it as domestic police action, the same countries that failed to rally against Russia’s invasion of Ukraine – critically the Gulf States – may decide to withhold support and wait and see how it plays out.
A global shortage of chips will swiftly impact the West’s manufacturing capabilities, closing down the auto sector and causing chip rationing towards defence spending. It would be dangerous – a blockade would raise the likelihood of mistakes, miscalculations and raise the risk of confrontation turning a cold war hot.
Sprinkle in some more confusion – like a new Trump administration likely to unravel the Western Democratic Alliance and break NATO. Trump had his successes, but his first presidency was an unmitigated disaster in terms of America’s international standing and relationships. He offended US allies and diminished the reputation of the Bastion of Democracy as a reliable partner. Should Trump’s new MAGA republicans win the mid-terms it will further change the signals – perhaps encouraging China to take a risk on Taiwan’s chips…
In its most recent Global Economic Prospects report, the World Bank said it expects global economic expansion to drop to 2.9% this year from 5.7% in 2021. This is 1.2 percentage points lower than the 4.1% predicted in January.
The report then predicts growth to maintain this level from 2023 to 2024 while inflation remains above target for most countries, which points to stagflation risks.
“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” World Bank President David Malpass commented.
According to the report, growth in advanced economies will likely drop sharply to 2.6% in 2022 from 5.1% in 2021.
Meanwhile, expansion in emerging markets and developing economies is expected to drop to 3.4% in 2022 from 6.6% in 2021.
“Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality,” Malpass said.
The agreement is a landmark moment for the global economy. Each country that has signed the agreement will commit to a two-pillar plan to drastically reshape the global tax system, says the Organisation for Economic Co-operation and Development (OECD) in a statement.
The announcement builds on a previous agreement between the G7 Group in London last month. It will unite all of the G20 group nations, including Russia, Brazil, China, and India. However, some countries, including Hungary, Estonia, Kenya, and Sri Lanka, are yet to commit to the reforms. A number of jurisdictions that are commonly regarded as “tax havens'' were among signatories to the agreement. This included Gibraltar and the Cayman Islands.
The reforms are currently being negotiated in talks organised by the OECD, but the basis of the agreement is that multinational companies would be forced into paying a minimum of 15% tax for each country in which they operate. The agreement also includes arrangements to prevent the moving of profits into tax havens by powerful companies by empowering signatory countries to tax such companies based on revenues generated within their borders. According to the OECD, over $100 billion is expected to be produced by controlling profit shifting, and approximately $150 billion is expected to be produced through the introduction of the global minimum tax rate.
Further talks on tax reforms will take place between finance ministers at G20 meetings next month in Venice. The goal is to reach a final global agreement by October, to then be implemented by 2023.
US
In the US, all 50 states have declared emergencies with governments at the local, state and federal level taking action to ease the financial burden on Americans. Trump’s administration and Congress agreed on a $2 trillion stimulus package, which includes income support of $1,200 per adult and $500 per child and starts phasing out for individuals who earn $75,000 per annum or $150,000 for couples. Loans worth $367 billion have been offered to small businesses struggling with the immediate drop in revenue due to the pandemic. The government will not expect the businesses to pay the money back if they manage to retain most of their employees over the next six months.
In the form of loans, loan guarantees and purchases of companies’ corporate debt, the legislation provides a total of $454 billion which will help large and medium-sized business access capital during the crisis. $58 billion have been set aside to help American airlines through loans and grants and $17 billion will be provided to help companies that are critical to maintaining national security.
UK
In March, UK Chancellor Rishi Sunak announced a £350 billion emergency package for the economy[1] which consists of state loan guarantees worth £330 billion along with a further £20 billion of handouts for struggling businesses. He also promised £12 billion in emergency support in the budget, a one-year abolition of property taxes for all companies in affected sectors and suspended business rates for many firms.
The Chancellor also added a generous £9 billion scheme to support up to 3.8 million self-employed workers hit by the impact of the pandemic. 95% of the country’s self-employed people are able to access a grant of 80% of their recent average profit (capped at £2,500).
The government also announced a job retention scheme which offers compensation in full for employment costs of up to 80% of salary bills for workers that companies can’t provide work for, but are kept on payroll.
Germany
The German finance and economic ministers have vowed to make unlimited financing available to individuals and businesses as part of the country’s efforts to immunise Europe’s largest economy from the COVID-19 impact. The government promised that there will be no upper limit on the aid that will be offered to companies that are affected by the crisis.
The government has set aside a “supplementary” €156 billion budget for 2020[2], which includes a €50 billion plan to provide direct grants to small businesses and self-employed people who can’t access bank credit. Businesses with up to five employees are eligible for a one-off grant of €9,000 for three months, whilst those with up to ten employees will receive €15,000.
The government has also set up a €500 billion bailout fund to recapitalise big companies with more than 250 employees that face struggles due to the crisis. Landlords are also not allowed to evict tenants who fail to pay their rent due to the pandemic.
The country’s also expanding its programme of export credits and other additional guarantees to help struggling companies and has committed to deterring “billions of euros” in tax payments. Germany is also compensating individuals who are sent home by their employers due to the lack of work for them. The government anticipates that the scheme will cost the Federal Labour Office €10.05 billion.
France
Like many of his colleagues from across the globe, French President Emmanuel Macron has guaranteed that the French Government will offer unlimited support for individuals and companies that have been affected by the global pandemic, which will cost the country €45 billion. He’s also committed to offering grants to workers who have found themselves in unemployment due to the pandemic crisis. France’s Minister of the Economy and Finance has also promised €300 billion of French state guarantees for bank loans to companies, as well as €1 trillion of such guarantees from European institutions.
The government has also suggested the possible rescue of companies such as Air France, which have state shareholdings, and has deferred company tax and social security payments. It’s also offered sick leave payments to parents who have to stay at home to take care of their children due to school closures.
Economists have warned that the damage from the coronavirus crisis could be similar to that from the 2008 recession.
Italy
Italy has begun distributing funds from the fiscal rescue package, totalling up to €25 billion, promising that “nobody will be left alone”. €1.15 billion of this has been distributed to their health system and €1.5 billion has been offered to the civil protection agency, which has been working on Italy’s coronavirus response.
Additionally, self-employed people have been promised one-off payments of €500 per person, companies that pay redundancy payments to their employees have been offered support, there’s been a freeze on any worker lay-offs, and people who are still working during this time have been offered bonuses.
Businesses hit by the pandemic have been promised loan guarantees and a moratorium on loan and mortgage payments is expected to be put in place. Financial support will be offered to families with children, as well as taxi drivers and postal workers who have to continue working during lockdown. The government also announced plans to financially support Italian airline Alitalia.
Spain
Spanish Prime Minister Pedro Sánchez has described the government’s coronavirus rescue package as the “biggest mobilisation of resources in Spain’s democratic history”. It includes €100 billion of state loan guarantees for companies aimed at ensuring liquidity, specifically for small and medium-sized companies. The whole package will amount to €200 billion.
Mr Sánchez has also announced a moratorium on mortgage payments for people who have been hit hard by the pandemic and a similar moratorium for utility bills. He’s also suspended some social security payments and has set aside €600 million to help people who depend on social services.
[1] https://news.sky.com/story/coronavirus-330bn-of-government-backed-loans-for-businesses-11959156
[2] https://www.ft.com/content/26af5520-6793-11ea-800d-da70cff6e4d3
Official figures released by China on Friday have shown a decrease of 6.8% in the country’s GDP between January and March.
This marks the first economic contraction that China has experienced since Beijing started releasing quarterly GDP figures in 1992. Some observers estimate that this is the country’s first period of negative growth in over four decades, pointing to the downturn of 1976 that marked the end of the Cultural Revolution.
The fall has been predicted for some time, though the figures released have been more dire than most expected; analysts at Reuter’s predicted a decline of only 6.5%.
Other data released painted an equally negative picture. Retail sales, fixed asset investment and industrial output have all seen significant declines.
These changes are an effect of the COVID-19 epidemic, which originated in the Chinese city of Wuhan. While China announced on April 6th that it had it had experienced no new coronavirus deaths for a full day, it has since revised the number of recorded deaths upwards by 50%.
China is now taking steps towards restarting its economy, ending quarantine measures and reopening its factories. However, the global fall in demand for its goods is unlikely to see a reversal so quickly.
The contraction in China’s economy is also likely to have an impact across the rest of Asia as Chinese stimulus spending is reduced.
The International Monetary Fund has warned that the world economy faces a recession that could be as damaging as the Great Depression of the 1930s.
Trump vs. China
Back in 1930, the US introduced the Smoot-Hawley Tariff Act, which raised their already high tariffs, triggering a currency war and, as economists argue, exacerbating the Great Depression. With President Donald Trump’s threat to put 10% tariffs on the remaining $300 billion of Chinese imports that aren’t subject to his existing levies, sending markets tumbling from Asia to Europe, the question on everyone’s lips is: Is history about to repeat itself?
In August, in a bid to hit back against Trump’s administration, Beijing allowed the Chinese yuan to plummet past the symbolically important $7 mark. Economists suggest that this currency manipulation is China’s attempt to display dominance and gain the upper hand in the trade war between the two countries as devaluating its currency could help counteract the effects of US’s long list of tariffs on Chinese goods.
As protectionist actions escalate and US-China relations continue deteriorating, investors and markets have been growing increasingly concerned even though Trump has delayed the imposition of his new tariffs until December. A full-blown trade war wouldn’t be good news to anyone and could seriously weaken the global economy, as the IMF has warned, making the world “poorer and more dangerous place”. Both sides are expected to experience losses in economic welfare, while countries on the sidelines could experience collateral damage. Furthermore, if tariffs remain in place, losses in economic output would be permanent, as distorted price signals would prevent the specialisation that maximises global productivity. The one thing that’s certain, no matter how things pan out, is that there will be no winners in this war.
Economists suggest that this currency manipulation is China’s attempt to display dominance and gain the upper hand in the trade war between the two countries as devaluating its currency could help counteract the effects of US’s long list of tariffs on Chinese goods.
Cyberattacks & data fraud
Millions, if not billions, of people’s data has been affected by numerous data breaches in the past couple of years, whilst cyberattacks on both public and private businesses and institutions are becoming a more and more frequent occurrence. With the deepening integration of digital technologies into every aspect of our lives and the dependency we have on them, cybercrime is one of the greatest threats to every company in the world.
Cyberattacks are rapidly increasing in size, sophistication and cost, as cybercrime and data breaches can trigger extensive losses. In 2016, Cybersecurity Ventures predicted that cybercrime will cost the world $6 trillion annually by 2021, up from $3 trillion in 2015. According to them, ”this represents the greatest transfer of economic wealth in history, risks the incentives for innovation and investment, and will be more profitable than the global trade of all major illegal drugs combined”.
Emerging Markets crisis
Since the early 1990s, emerging markets have been a key part of investors’ portfolios, as they have been offering strong returns and faster growth. However, global trade tensions, a stronger US dollar and rising interest rates have hit emerging markets hard. Still far from catching up with the developed world, many supposedly emerging markets are developing at a slower pace, which combined with the threat of a global trade war and higher borrowing costs on the rise, has made investors pull in their horns. Emerging markets are the ones feeling the strain and financial panic has been gripping some of the world’s developing economies.
With political instability, external imbalances and poor policymaking which has led to full-blown currency crises in the two nations, Turkey and Argentina have been at the centre of an emerging market sell-off last year. But they are not the only emerging economies faced with a currency crisis – according to the EIU, some economies which are already in the danger zone and could suffer from the same currency volatility include Brazil, Mexico and South Africa.
Still far from catching up with the developed world, many supposedly emerging markets are developing at a slower pace, which combined with the threat of a global trade war and higher borrowing costs on the rise, has made investors pull in their horns.
If the currency crises in Turkey and Argentina continue and develop into banking crises, analysts predict that investors could abandon emerging markets across the globe. “Market sentiment remains fragile, and pressure on emerging markets as a group could re-emerge if market risk appetite deteriorates further than we currently expect”, the EIU explains.
Climate crisis
In recent months, the media is constantly flooded with reports on the horrifying environmental risks that the climate crisis the Earth is in the midst of poses, but we’re also only starting to come to grips with the potential economic effects that may come with it.
Despite the significant degrees of uncertainty, results of numerous analyses and research vary widely. A US government report from November 2018 raised the prospect that a warmer planet could mean a big hit to GDP. The Stern Review, presented to the British Government in 2006, suggests that this could happen because of climate-related costs such as dealing with increased extreme weather events and stresses to low-lying areas due to sea level rises. These could include the following scenarios:
- Decrease in agricultural areas crop yields due to hotter weather and draught.
- Rebuilding roads that have been destroyed by flooding caused by rising seas and more frequent hurricanes.
- Having to build more efficient power grids because the existing ones are not able to withstand extreme weather conditions.
Due to climate change, low-lying, flood-prone areas are currently at a high risk of becoming uninhabitable, or at least uninsurable. Numerous industries across numerous locations could cease to exist and the map of global agriculture is expected to shift. In an attempt to adapt, people might begin moving to areas which will be affected by a warmer climate in a more favourable way.
A US government report from November 2018 raised the prospect that a warmer planet could mean a big hit to GDP.
All in all, the economic implications of the greatest environmental threat humanity has ever faced range from massive shifts in geography, demographics and technology – with each one affecting the other.
Brexit
Fears that the UK could be on the brink of its first recession in 10 years have been growing after figures showed a 0.2% contraction in the country’s economy between April and June 2019. A weakening global economy and high levels of uncertainty mean the UK’s economic activity was already lagging, but the potential of a no-deal Brexit and the general uncertainty surrounding the UK’s departure from the EU, running down on stock built up before the original 29th March departure date, falling foreign investment and car plant shutdowns have resulted in its GDP decreasing by 0.2% in Q2. This is the first fall in quarterly GDP the country has seen in six and a half years and as the new deadline (31st October) approaches, economists are concerned that it could lead to a second successive quarter of negative growth – which is the dictionary definition of recession.
And whilst the implications of Brexit are mainly expected to be felt in the country itself, the whole Brexit process displays the risks that can come from economic and political fragmentation, illustrating what awaits in an increasingly fractured global economy, e.g. less efficient economic interactions, complicated cross-border financial flows and less resilience and agility. As Mohamed El-Erian explains: “in this context, costly self-insurance will come to replace some of the current system’s pooled-insurance mechanisms. And it will be much harder to maintain global norms and standards, let alone pursue international policy harmonisation and coordination”. Additionally, he goes on to note that tax and regulatory arbitrage are likely to become more common, whilst economy policymaking could become a tool for addressing national security concerns.
“Lastly, there will also be a change in how countries seek to structure their economies”, El-Erian continues. “In the past, Britain and other countries prided themselves as “small open economies” that could leverage their domestic advantages through shrewd and efficient links with Europe and the rest of the world. But now, being a large and relatively closed economy might start to seem more attractive. And for countries that do not have that option – such as smaller economies in east Asia – tightly knit regional blocs might provide a serviceable alternative.”
Market Outlook
Mihir Kapadia, CEO and Founder of Sun Global Investments
When it comes to investment trends, every year appears to have a certain theme which dominates the markets and beyond throughout the course of those twelve months. 2017 was largely a stock market year, with global markets closing at record highs thanks to a booming global growth rate, loose tax and monetary policy, low volatility and ideal currency scenarios (for example, a weaker pound supporting inward investments). It was also a crazy year in the consumer segment with market momentum captivated with crypto assets, leading to established financial services firms to create special cryptocurrency desks to monitor and advise. Today, things are looking very differently.
Markets have since moved from optimism (led by stock markets) to a cautious tone (with an eye out for safe haven assets). This is largely due to the concerns over slowing global growth rates (especially from powerhouse economies like Germany and China), volatile oil markets and Kratom Powder For Sale induces significant market threats with the likes of Brexit and the trade wars. The rising dollar has also not helped much, with Emerging Market and oil importing economies suffering with current account deficits.
At the World Economic Forum’s annual meeting in Davos last month, the International Monetary Fund (IMF) has warned of the slowdown, blaming the developed world for much of the downgrade and Germany and Italy in particular. While the IMF does not foresee a recession, the risk of a sharper decline in global growth is certainly on the rise. However, this risk sentiment doesn’t factor in any of the global triggers – a no-deal Brexit leading to UK crashing out of the EU or a greater slowdown in China’s economic output.
While the IMF does not foresee a recession, the risk of a sharper decline in global growth is certainly on the rise.
Volatility expected
We have lowered earnings expectations globally due to more subdued revenue and margin assumptions. We believe investors will be confronted by increased volatility amid slower global economic growth, trade tensions and changing Federal Reserve policy. Our base case relies on the view that the US may enter a recession in 2020. As the market dropped 9% in December, the worst market return in any 4th Quarter post World War II, many risks are starting to be discounted by the market. We have reduced industrials, basic materials and financials due to heightened risks.
There are a number of factors that are driving this view, but it is important to note that upsides to the risks do exist:
- The Fed: The Fed’s slow pace of hiking interest rates is meant to be just enough to keep wage inflation from accelerating, but not so much that it crushes business and consumer spending. It’s a difficult balancing act.
- Fiscal stimulus: The tightening of fiscal conditions has already created a slowdown that only time and lower rates will heal. The impact from the US Government’s lower tax rates and higher spend will end when 2019 does.
- Trade and China: The lack of clarity on trade has created an ‘uncertainty tax’, forcing companies to seek alternative means of procurement, adding to inefficiencies and holding back some investment decisions. China is trying to stimulate its consumer sector, but the country is already weighed down by high debt and defaults, and it has limited ability to create demand at present.
- European politics: Brexit negotiations and Italy’s budget situation have added to the political fog affecting investor confidence.
In uncertain markets like these, we should look to do three things: reduce risk, focus on high quality and stay alert for opportunities due to dislocations.
So what do you do?
We have dialled down risk in 2018 and will likely continue to do so in 2019 as we expect global growth to slow. However, the expected volatility could cause dislocations that are not fundamentally driven, resulting in tactical opportunities to consider.
The best piece of advice to be relayed is: “Don’t run for the hills”. In uncertain markets like these, we should look to do three things: reduce risk, focus on high quality and stay alert for opportunities due to dislocations.
It would be ideal to shift allocations from cyclical to secular exposures, especially away from industrials, basic materials, semiconductors and financials due to heightened risks. It would also be ideal to focus on high-quality companies with secular growth opportunities that can generate dividends as well as capital appreciation.
Two sectors stand out as both strategically and tactically attractive - aging demographics and rapidly improving technology are paving the way for robust growth potential in healthcare. Accelerating growth in data, and the need to transmit, protect, and analyse it ever more quickly, make certain areas in technology an attractive secular opportunity as well. Where possible, our advice to investors is to maintain a tactical portion of their risk assets, because volatility may give them the opportunity to find mispriced sectors, themes and individual securities.
Still, in this climate, the bottom line is that you should be increasingly mindful of risk in your portfolio so that you can reach your long-term investment goals. 
Eastern Economies vs. Western Economies: Countries, Sectors and Projects to Watch
Dr. Johnny Hon, Founder & Chairman, The Global Group
The global economic narrative in 2018 was characterised by growing tensions between the US and China, the world’s two largest economies. The US imposed 10% to 25% tariffs on Chinese goods, equivalent to more than $250bn, and China responded in kind.
This had a seismic effect on global economic growth which, according to the IMF, is expected to fall to 3.5% this year. It represents a decline from both the 3.7% rate in 2018 and the initial 3.7% rate forecast for 2019 back in October.
Although relationships between Eastern and Western economies are currently strained, suggestions that a global recession is on the horizon are exaggerated. China’s economy still experienced high growth in 2018.
However, it is clear that trade wars have no winners. The rise of protectionism in the West is creating more insular economies and we are at a time when increased efforts are needed for mutual understanding. There are still enormous opportunities across the globe: India is among several global economies showing sustained high growth, and innovations in emerging markets such as clean energy or payments systems continue to gather pace. Investors who are savvy and businesses with true entrepreneurial flare can triumph at a time when others may be stagnating.
The rise of protectionism in the West is creating more insular economies and we are at a time when increased efforts are needed for mutual understanding.
Here are the exciting countries, sectors and projects to look out for in 2019:
Countries
Recent trends in foreign direct investment (FDI) reveal a growing trend to support developing economies. In the first half of 2018, the share of global FDI to developing countries increased to a record 66%. In fact, half of the top 10 economies to receive FDI were developing countries.
This trend will accelerate in 2019 - the slow economic global growth, and subsequent currency depreciation means the potential yield on emerging market bonds is set to rise dramatically this year. More and more investors are realising the great potential of these developing economies, where the risk versus reward now looks much more attractive than it did in recent years. Asia in particular has benefited from a 2% rise in global FDI, making it the largest recipient region of FDI in the world.
India and China are both huge markets with a combined population of over 2.7 billion, and both feature in the world’s top 20 fastest growing economies. However, the sheer quantity of people doesn’t necessarily mean the countries are an easy target for investment. There are plenty of opportunities in both India and China, but it takes a shrewd investor with a good local business partner to beat the competition and find the right venture.
Other Asian economies to invest in can be found in Southeast Asia, including Vietnam, Singapore, Indonesia and Cambodia. In a recent survey by PwC, CEOs surveyed across the Asia-Pacific region and Greater China named Vietnam as the country most likely to produce the best investment returns – above China.
Investors who are savvy and businesses with true entrepreneurial flare can triumph at a time when others may be stagnating.
Sectors
One sector in particular which remained resilient to the trade wars throughout 2018 was technology. By mid-July, flows into tech funds had already exceeded $20bn, dwarfing the previous record amount of $18.3bn raised in 2017. This was a result of the increased accessibility and popularity of technologies in business.
In the area of Artificial Intelligence (AI) for example, a Deloitte survey of US executives found that 58% had implemented six or more strains of the technology—up from 32% in 2017. This trend is likely to continue in 2019, as more businesses realise AI’s potential to reduce costs, increase business agility and support innovation.
Another sector which saw significant investment last year was pharmaceuticals and BioTech. By October, these had already reached a record high of $14 billion of VC investment in the US alone. One particular area to watch carefully, is the rising demand for products containing Cannabidiol (CBD), a natural chemical component of cannabis and hemp. Considering CBD didn't exist as a product category five years ago, its growth is remarkable. The market is expected to reach $1.91 billion by 2022 as its uses extend across a wide variety of products including oils, lotions, soaps, and beauty goods.
Projects
At a time of rising trade tensions and increased uncertainty, cross-border initiatives are helping to restore and maintain partnerships and reassure global economies. China's Belt and Road Initiative is a great example of how international communities can be brought closer together. From Southeast Asia to Eastern Europe and Africa, the multi-billion dollar network of overland corridors and maritime shipping lanes will include 71 countries once completed, accounting for half the world’s population and a quarter of the world's GDP. It is widely considered to be one of the greatest investment opportunities in decades.
The Polar Silk Road is another international trade initiative currently being explored. The Arctic offers the possibility of a strategic commercial route between Northeast Asia and Northern Europe. This would allow a vast amount of goods to flow between East and West more speedily and more efficiently than ever before. This new route would increase trading options and would make considerable improvements on journey times – cutting 12 days off traditional routes via the Indian Ocean and Suez Canal. It could also save 300 tonnes of fuel, reducing retail costs for both continents.
Since founding The Global Group - a venture capital, angel investment and strategic consultancy firm - over two decades ago, I have seen the global economic landscape change immeasurably. The company is built around the motto ‘bridging the frontiers’, and now more than ever, I believe in the importance of strong cross-border relationships. Rather than continuing to promote notions of protectionism, we must instead explore new ways of achieving mutual benefit and foster a spirit of collaboration.
Brexit, Trade Wars and the Global Economy
Robert Vaudry, Chief Investment Officer at Wesleyan
If there’s one thing that financial markets do not like, it is uncertainty - which is something that we’ve faced in abundance over the last couple of years.
The UK’s decision to leave the European Union and President Trump’s 2016 election in the US, sent shockwaves through markets, and the two years that followed saw increased volatility across asset classes. This year looks set to be fairly unpredictable too, but in my view there are likely to be three main stabilising factors. Firstly, I expect that the UK will secure some form of a Brexit deal with the EU – whatever that may look like – which will give a confidence boost to investors looking to the UK. Secondly, the trade war between America and China should also come to an end with a mutually acceptable agreement that further removes widespread market uncertainty. Thirdly, the ambiguity surrounding the US interest rate policy will abate.
The Brexit bounce
A big question mark remains over whether or not the UK is able to agree a deal with the EU ahead of the 29th March exit deadline. However, with most MPs advocating some sort of deal, it’s highly unlikely that the UK will leave without a formal agreement in place. So, what does this mean? Well, at the moment, it looks more likely than ever that the 29th March deadline will need to be extended, unless some quick cross-party progress is made in Parliament on amendments to Theresa May’s proposed deal. While an extension would require the agreement of all EU member states, this isn’t impossible, especially given that a deal is in the EU’s best interests as the country’s closest trading partner.
The ambiguity surrounding the US interest rate policy will abate.
The result of any form of deal will be a widespread relief that should be immediately visible in the global markets. It will bring greater certainty to investors, even if the specific details of a future trading relationship between the UK and EU still need to be resolved. Recently, it was estimated that Brexit uncertainty has so far resulted in up to $1trn of assets being shifted out of the UK, and I personally don’t see this as an exaggeration. Financial markets have been cautiously factoring Brexit in since the referendum vote in 2016 and, if we can begin to see a light at the end of the Brexit tunnel, it is likely that some of these vast outflows will be reinvested back into the UK. We can also expect to see a rise in confidence among UK-based businesses and consumers, at a time when the unemployment rate in the UK is the lowest it has been since the mid-1970s.
All of these outcomes would help lead to a more buoyant UK economy and the likelihood that UK equities could outperform other equities – and asset classes – in 2019.
Trade wars – a deal on the table?
Looking further afield, the trade tensions that were increasingly evident between the US and China last year could also be defused. The last time that China agreed to a trade deal, it was in a very different economic position – very much an emerging economy, with the developed world readily importing vast quantities of textiles, electronic and manufacturing goods. However, given China’s current position as one of the world’s largest economies, it has drawn criticism from many quarters regarding unfair restrictions placed on foreign companies and alleged transfers of intellectual property.
Either way, global financial markets are eager for Washington and Beijing to reach a mutually agreeable trade deal to help stimulate the growth rates of the world’s two largest economies.
It was estimated that Brexit uncertainty has so far resulted in up to $1trn of assets being shifted out of the UK.
Be kind to the FED
2018 saw an unprecedented spat between the US President and his Head of the Federal Reserve. What began as verbal rhetoric quickly escalated into a full-frontal assault on Jerome Powell, and the markets were unimpressed. With the added uncertainty about the impact of a Democrat-led US House of Representatives, we headed into a perfect storm, and equity markets in particular rolled over in December. Ironically, this reaction, coupled with a data showing that both the US and the global economy are generally slowing down – albeit from a relatively high level – has resulted in a downward revision of any US interest rate rises in 2019. The possibility of up to four US interest rate rises of 25bps each during 2019 is now unlikely – I expect that there will only be one or two rises of the same level.
Transitioning away from uncertainty
So, in summary, 2019 is set to be another big year for investors.
The recent protracted period of uncertainty has hit the markets hard, but we’ll have a clearer idea of what lies ahead in the coming months, particularly regarding Brexit and hopefully on the US and China’s trade relations too. If so, this greater certainty should pay dividends for investors in the years to come. UK equities are expected to strongly bounce back in 2019, which is a view that goes against the current consensus call.
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.
China
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.
In July, global customer experience provider Voxpro - powered by TELUS International, hosted a major event at its Centre of Excellence in Dublin, Ireland, entitled The Future of Money. Over one hundred FinTech innovators from around the world gathered to discuss the current state of the cryptocurrency industry, regulatory and operational challenges, and the opportunities that lie ahead.
“If you ask any crypto company what their biggest issue is, they're not going to tell you regulation; they're going to tell you getting bank accounts.”
That’s according to Jeremy Allaire, Founder & CEO of Circle - a speaker at The Future of Money event in Dublin. Allaire, whose company recently acquired cryptocurrency exchange Poloniex, revealed the significant obstacles that traditional banking institutions are putting in the path of his industry.
“Banks have pretty systematically limited companies’ ability to operate in this space, and that really is a challenge. I think part of that is regulatory uncertainty and part of it is just hostility to a technology which basically threatens to eliminate a lot of their profit margin and business models.”
Allaire believes the solution lies in the establishment of ‘”crypto-native banks” that will work closely with both crypto companies and central banks to provide the connectivity that is urgently needed.
The fact that traditional banks are under threat at all points to a fundamental shift in how the world views money, something that David Schwartz, Chief Cryptographer at Ripple, believes was inevitable in an increasingly global economy. Schwartz told the Dublin audience that the key problem with money as we know it is that it is neither “universal nor interoperable” and that currency needs to be one or the other if it is to serve the modern economy.
“If it was universal and everybody in the world could accept it with equal ease, then that would be fine. And if it could operate with other systems that other people use, that would be fine too. If you're stuck on an island as the economy becomes increasingly global and more and more people want to do business internationally, but have to do it through intermediaries and slow systems, then we start to really hit the problems created by that system.”
So how exactly does cryptocurrency solve this ‘money problem’? Schwartz pointed to the example of how financial services company Cuallix is using XRP, a digital currency created by Ripple, to move money between the United States and Mexico. Instead of relying on the conventional method, which is very expensive and takes several days, Cuallix buys XRP the moment they need it and a few seconds later sells it for Mexican Pesos. The speed of the transaction avoids the market volatility of both the peso and cryptocurrency, and, according to Schwartz, makes the whole process up to 60% cheaper.
As the adoption of cryptocurrency rapidly grows, so will the need for a new kind of infrastructure to support it, particularly with a view to enhancing the customer experience. Jeremy Allaire of Circle described how a new infrastructure layer of the internet is going to allow a lot of the functions currently performed by the financial industry, mostly record keeping in very proprietary siloed systems, to run on the open internet, at a radically lower cost, and with a much better consumer experience.
And he foresees a new wave of industry enabling this shift: “There are going to be very significant large technology companies built that support the move to crypto finance, just like there have been really big technology companies that have supported the move into digital media and digital communications.”
Gregoire Vigroux, a Vice President at TELUS International Europe, shared a powerful prediction with the audience at The Future of Money event. “Within just a few years, over 95% of the world’s population will hold cryptocurrencies.” Moreover, he believes that we are currently witnessing a landmark moment in history, telling the audience:
“If this was the early 1990s, we would have a panel of internet professionals telling us that the internet is coming and is going to represent a major disruption. Well, it’s now 2018 and today we’re talking about the biggest revolution since the dawn of the internet – cryptocurrency.”
The disruption of traditional financial institutions is being fuelled in part by cutting-edge customer (CX) and user (UX) experiences that are now being offered by digital currency providers. Today, more and more FinTech innovators are forming partnerships with customer experience experts like Voxpro – powered by TELUS International, in order to successfully capitalise on crypto’s increasing popularity.
With experience powering customer operations for some of the world’s leading technology companies, Voxpro has the agility, talent, and digital capabilities to ensure a world-class end-to-end experience for every user, even during periods of intense onboarding.
Leading exchange Binance, for example, recently experienced onboarding rates of up to 250,000 new users per day. If that company fails to successfully deal with the increased levels of customer contact that will naturally come their way, those users may head straight to a competitor. As crypto approaches mass adoption, companies must prioritise investments in their customer experience in order to avoid brand-devaluing issues that can come with a major spike in business.
At the end of the day, the overall customer experience provided by companies is what will differentiate them in an increasingly competitive market. Simply put, the FinTech and cryptocurrency brands that ‘put their money where their mouths are’ when it comes to investing in their customer and user experience will win the day in the modern economy.
Contact details:
telusinternational.com
voxprogroup.com
In light of Donald Trump’s dramatic withdrawal from the Iran Nuclear Deal, Katina Hristova examines how the pullout can affect the global economy.
As with anything that he isn’t fond of, US President Donald Trump hasn’t been hiding his feelings towards the Joint Comprehensive Plan of Action between Iran and the five permanent members of The United Nations Security Council plus Germany. Pulling the US out of the agreement on the nuclear programme of Iran, which was signed during Obama's time in office, is something that Trump has been threatening to do since his 2016 election campaign. And he’s only gone and done it. Earlier this month, he announced America’s immediate withdrawal, saying that the US will reimpose sweeping sanctions on Iran’s oil sector and that “Any nation that helps Iran in its quest for nuclear weapons could also be strongly sanctioned by the United States”. And as if this isn’t alarming enough, President Trump has also said that the US will require companies to ‘wind down’ existing contracts with Iran, which currently ranks second in the world in natural gas reserves and fourth in proven crude oil reserve, in either 90 days or 180 days. This would hinder new contracts with Iran, as well as any business operations in the country.
Since Washington’s announcement, signatories of the Iran Nuclear Deal, still committed to the agreement, have embarked on a diplomatic marathon to keep the deal alive. On 25 May, Iran, France, Britain, Germany, China and Russia met in Vienna in a bid to save the agreement.
So how will this hurt the global economy?
Deals worth billions of dollars signed by international companies with Iran are currently hanging by a thread. The main concern on a global scale is that the US’ decision threatens to cut off a proportion of the world’s crude oil supply, which has already resulted in an increase in oil prices, with crude topping $70 a barrel for the first time in four years.
Additionally, European companies like Airbus, Total, Renault and Siemens could face fines if they continue doing business with Iran. Royal Dutch Shell, who is investing in the Iranian energy sector, is potentially one of the biggest companies to be affected by Trump’s withdrawal which could put billions of dollars’ worth of trade in jeopardy. As The Guardian points out: “In December 2016, Royal Dutch Shell signed a provisional agreement to develop the Iranian oil and gas fields in South Azadegan, Yadavaran and Kish. While drilling is still a long way off, sanctions are likely to put any preparations already being made on ice.”
French company Total, who’s involved in developing the South Pars field, the world’s largest gas field in Iran, is in a similar situation.
Airbus and Boeing, two of the key players in the international aviation industry, have signed contracts worth $39 billion to sell aircraft to Iran. As The Guardian reports, the most significant deal is an agreement by IranAir to buy 100 aircraft from Airbus.
A spokesman from Airbus said that jobs would not be affected. “Our [order] backlog stands at more than 7,100 aircraft, this translates into some nine years of production at current rates. We’re carefully analysing the announcement and will be evaluating next steps consistent with our internal policies and in full compliance with sanctions and export control regulations. This will take some time”. Rolls Royce is also expected to be indirectly affected if Airbus loses its IranAir order, as the company is the key engines provider to many of those aircraft models.
Another European company that will be hurt by the sanctions announcement is French Renault and PSA, who owns Peugeot, Citroën and Vauxhall. When sanctions were lifted back in 2016, Renault signed a joint venture agreement with the Industrial Development & Renovation Organization of Iran (IDRO) and local vehicle importer Parto Negin Naseh, worth $778 million, to make up to 150,000 cars in Iran every year. This is one of the largest non-oil deals in Iran since sanctions on the country were lifted. Last year, local firm Iran Khodro also signed a deal with the trucks division of Mercedes-Benz, with car production scheduled for this year.
Iranian firm HiWEB has been working alongside Vodafone to modernise the country’s internet infrastructure, but it looks like the partnership will have to be reconsidered.
The consequences
The White House and President Trump appear aware of the danger that a rise in oil prices on an international level pose to the economic growth of the Trump era, however, they also seem ready to embrace the economic and geopolitical challenges that are to follow. Although the consequences of US’ Iran Deal pullout are not perfectly clear in the short term, they will undoubtedly become more visible as sanctions take effect. The deal has its flaws, however, completely withdrawing from it and threatening the US’ closest allies can only compound those issues and create new ones. It is hard to predict what will unfold from here and where Trump’s strategy will take us. The one thing that is certain though is that the world doesn’t need more hostility.
- The National Institute of Economic and Social Research's forecast of world output growth this year is unchanged at 3.0 per cent – the slowest annual growth rate since the 2009 recession. World growth is expected to strengthen to 3.2 per cent next year and 3.6 per cent in 2018, but to remain slower than before the global financial crisis.
- Downside risks to the forecast include economic downturns in the advanced economies that central banks may lack ammunition to counter, as well as financial instability as a result of low and negative interest rates. These point to a need for more balanced policies to promote expansion, with fiscal policy playing a greater role.
- With trade growth in recent years already reduced to half its pre-crisis rate, action to resist protectionist pressure and to promote further progress with international economic integration is vital.
In the advanced economies, growth has generally remained mediocre. International repercussions of Brexit have thus far been limited to the effects of a further fall in sterling. In the United States, recent data have been mixed: the appreciation of the dollar since 2012 has remained one restraining factor and political uncertainty ahead of the elections may have been another. In the Euro Area, there has been no progress since the spring in reducing high unemployment. Even where unemployment is low – notably the United States, Japan and Germany, as well as the UK – limited wage pressures raise questions about the true tightness of labour markets. Inflation has remained below targets, by wide margins in the Euro Area and Japan. Inflation is closer to target in the US, and the Fed is widely expected to raise rates in December for a second time in the current upturn.
The performance of some key emerging market economies has improved: deep recessions in Brazil and Russia are easing, with inflation falling towards targets. The gradual slowing of China’s GDP growth seems on track, but a rise in credit expansion has added to financial risks.
One set of risks that has increasingly come to the fore concerns monetary policy in the advanced economies. The scope for easing monetary policy further is limited. It could pose increasing risks to financial stability, including by threatening the profitability of banks. In addition, central bank asset purchases are increasingly constrained by limited availability of suitable assets. A further, developing, preoccupation as the economic recovery matures is that low interest rates could leave inadequate ammunition for central banks to counter recession if it were to strike. These considerations point to the need for more balanced macroeconomic policies, including expansionary fiscal policy in many cases and structural reforms that boost demand as well as potential output.
Risks related to the threat to the internationally open global economy arising from the advocacy of protectionist, nationalist, and inward-looking policies, including by ‘populist’ politicians, have lately gained increased attention. This is occurring in the context of already slowing expansion of international trade and finance. Growth in the volume of world trade since the global financial crisis has been half the average rate of expansion during the previous three decades, and has barely matched the growth of global GDP. History carries many examples of economic prosperity being stymied by defensive, inward-looking policies, and action to resume progress with international economic integration is vital.
Iana Liadze, Research Fellow at NIESR, said “With our forecast of world output growth unchanged for this year at 3 per cent we are witnessing the slowest annual growth since the 2009 recession. Even if world growth strengthens to 3.6 per cent in 2018 as we expect, it will remain slower than before the financial crisis. Low interest rates and the limited availability of suitable assets for central banks to purchase suggest the scope for easing monetary policy further is limited. As long as this situation persists it will be up to other arms of macroeconomic policy to minimise the effect from any future recessionary shock.”
Source: National Institute of Economic and Social Research
Simonetta Sommaruga, President of the Swiss Confederation and Minister of Justice and Police
Today’s global context is one of uncertainty, said Simonetta Sommaruga, President of the Swiss Confederation and Minister of Justice and Police, talking at the World Economic Forum Annual Meeting in Davos, Switzerland, yesterday.
“Overall, globalisation has led to greater prosperity and reduced poverty, but that is not the case everywhere,” she said. “It would be a dangerous mistake to ignore the uncertainty felt by many people,” she added.
Ms Sommaruga pointed to the rise of nationalist and populist parties in many countries in Europe that are critical of globalisation, reject immigration and incite scepticism towards the European Union. She called on business people and politicians to accept responsibility and address the uncertainties created by today’s global economy.
“Are we creating an economic environment in which only high performers working under constant pressure can prevail?” she asked. “Competition is growing for the highly developed economies too. In more and more countries, workers are still paid low wages but now offer highly skilled labour.”
This means that even leading economies can remain successful only if they are prepared to continuously make structural changes. “Structural change in itself is not a bad thing, but it produces winners and losers. This is something we cannot accept,” the President said.
Uncertainty has fuelled the rise of nationalist conservative parties in Europe, parties that invoke a nation’s sovereignty and a native country symbolising familiarity and safety. This describes an ideal past that never was, she added.
Sommaruga noted that business leaders have avoided assuming the responsibility for answering questions on the inequitable distribution of the benefits of globalisation for far too long. “We need business people who want to earn money but who also want something more,” she said. “We need business people who want to give others a chance; employers who set benchmarks in terms of profit and of corporate culture. We also need commodities groups that prohibit all forms of forced labour and exploitation, and that recognise the rights of others.”
The President also called on policy-makers to put in place – and enforce – a sound framework based on the rule of law, legal certainty, no corruption and protection of human rights and social justice. “These elements are key to a healthy economic and social order. This requires determination, clear values and steadfastness,” she added. “Nothing has greater value in politics than credibility.”
