Ahead of the London World Trade Summit on October 23rd, we talk to Ana Boata, the lead Eurozone and UK economist at Euler Hermes, who will be speaking on a panel at the Summit about the global trade landscape heading into 2020.
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The UK is at a crossroads now in terms of trade and there is likely to be continued economic uncertainty. What can businesses do to mitigate for this?
At the time of this interview, companies are preparing for a ‘No Deal Brexit’ ahead of the October 31st deadline. Businesses are stockpiling and trying to get as ready as they can for a ‘Hard Brexit’. The problem with stockpiling is there are additional costs and it has a negative effect afterwards because the stock needs to be consumed and the domestic market will likely remain weak, as will the European landscape – we expect growth to be only around 1% with close to recession in some countries, while in the UK we’re expecting around 0.8%. The outlook in the European market is definitely lower than it was before.
There’s a risk of technical recession in the UK at the turn of the year because the contingency stockpiling will have a cost. One of the things companies can do to get rid of the stocks, which they will need to do more quickly than usual, is to offer some discounts. However, discounts mean a slowdown in turnover which is not great news. Discounts may also come about automatically due to the weakness of Pound Sterling but if there is a deal or extension, we expect Sterling should appreciate at the turn of the year to around 1.15 or 1.20. If businesses are not able to benefit from the having a lower valued currency, they will need to lower their prices, but this means lower profitability for them, because the import cost was higher at a time when the pound was weak.
Globally, protectionism will remain an issue going into 2020. We expect high volatility in terms of trade talks between the USA and China, and we also factor in that the USA may turn to Europe soon – for instance, in November we expect Trump to announce 10% tariffs on European imports of cars after the import tariffs linked to the “Airbus affair” which concern aeronautics parts, agri-food products and luxury.
There is no reason to believe that the global trade landscape will be positive in the year ahead, especially given the lack of major fiscal stimulus in the USA, China and Europe, monetary policy will not be able to substantially boost growth. At best we see global trade volume growths as being around 1.5% this year and 1.7% next year, which is the lowest since 2009.
In terms of value, given the strength of the dollar, we expect other currencies to continue to depreciate (3 to 5% in the emerging markets). We don’t really see how the global landscape could be profitable in the coming 18 months. Upside risks could come from a moratorium on the trade dispute following the 2020 US election and/or sizeable fiscal stimulus in Europe.
What’s going on in Europe right now that could affect global trade going forwards?
The change of the European Central Bank governance shouldn’t affect the monetary policy. In September we saw monetary policy was reactive to the stronger than expected economic slowdown and to help avoid recession in Germany. The signal there is that more can be done if needed. The change in the ECB governance we therefore see as bringing about a continuation of what has already been announced.
Because we don’t expect any improvement in the economic outlook, we should see further support from monetary policy, two more rate cuts in the deposit rates in 2020 (to -0.7%) and higher quantitative easing (to EUR30bn per month) – it will need to be bigger in size to help stabilise the economic outlook, particularly because there is no fiscal stimulus in front of the monetary policy.
What does this mean for companies, especially given the strength of the dollar? The euro-dollar should remain low at around 1.11-1.12 at the end of 2019/20, so no big move. This will mean companies will have some competitiveness in Europe.
In the UK there is some pressure or more leeway for the Bank of England to also announce some rate cuts, as they can reduce it if they see an acceleration in the tightness of the credit conditions. There are some surveys that have pointed out that the banks have been less keen to give out credit recently, particularly to SMEs. Factor in also that the Sterling rates could be affected by a stabilised political situation, should some form of extension or a deal is reached, and we’d then also be expecting low inflation, giving leeway for an easing of monetary policy.
For European companies, the ramifications of the USA-China trade dispute are key because since the impact of that started to be felt at the start of the year, there have been increased opportunities in some European countries – the UK has exported more to the USA and China for instance. Lower flows between the USA and China have meant greater flows for Europe and China and Europe and the USA.
2020 looks set to be a really pivotal moment for Protectionism with Brexit, the US election, what’s happening in Italy and Brazil and so on. How much could a changing political landscape – for better or worse – change the economic one next year?
We look closely at this in terms of having alternative scenarios to our baseline ones. At the moment we have with a relative equal probability for an upside and a downside scenario. On the upside we’d have an election that leads to a President who has a less tough stance on trade and to where Europe and China do more fiscal stimulus, so we then see sizable measures being implemented that help us to get through the muddling through we’re in at the moment. Remember we were in a similar position in 2015 when China was dramatically slowing down and there was strong correction in the stock market. At the time there was fiscal stimulus in China and the USA that got us out of that, which materialized into a synchronized economic growth acceleration across regions.
On the downside there is an equal probability of an intensifying of the trade war where President Trump would introduce 25% tariffs on all Chinese imports and also implement tariffs on the car industry which would bring the Eurozone and the USA into recession. There could also be a credit event in the USA. We should not forget that even if the US grows more than the Eurozone, the companies are indebted so we are not fully protected from a credit event. A company could default in the USA and this could have a chain effect throughout the supply chain - this is something we take into account in a downside scenario.
Beyond the Eurozone, China and USA axis, are there any other significant areas of growth or change that could affect the global economic landscape?
The major drivers are the US-China trade dispute and the monetary reaction, but we also hear alarm bells ringing in the emerging markets, particularly Argentina, Turkey and South Africa. China slowing down quicker than expected definitely has an impact – especially on South East Asia markets – but there’s also oil prices.
In the baseline scenario it’s too soon to claim there is a resolution to what’s going in Saudi Arabia, but if the shock of that lasts for 6 months, say, there will be an impact on oil prices. This would mean further liabilities to a global economic outlook which is already very weak. For the moment, though, we would not take into account an oil price above $70 per barrel; we’d say that the tensions this autumn will be resolved by the end of the year and then there would be a lower oil price.
Liability in the emerging markets is linked to oil prices, China and their politics. Some are clearly vulnerable to policy mistakes. This has improved in some emerging markets over the last year, but if you take the Turkey or Argentina cases, political risk is a key issue which pushed these two countries into recession and therefore strong adjustments.
