US-China trade war, Brexit, slowing global growth top risk list for 2019

ALEN LEPAN
ISTANBUL
Published 01.01.2019 00:36
Updated 01.01.2019 10:24
A copy of the local Chinese magazine Global People with a cover story that translates to “Why did Trump win” at a news stand in Shanghai, China, Nov. 14, 2016.
A copy of the local Chinese magazine Global People with a cover story that translates to “Why did Trump win” at a news stand in Shanghai, China, Nov. 14, 2016.

As we enter 2019, all eyes are on the riskier events taking shape in the world. The next 12 months will be led by trade wars between the U.S. and China, developments in the Brexit process and fears over slowing global growth

After a roller-coaster 2018, a year of unprecedented events that impacted markets in unexpected ways, everyone is now wondering what is in store for global economies, particularly the emerging ones. Much was seen in the year behind, but the confrontation on trade between the U.S. and China has left the biggest mark. It is an issue that almost everyone agrees poses the biggest risk and could derail growth in 2019. Added to that, many other worrisome topics and uncertainties also remain on the table such as what will happen with the Brexit process, then monetary tightening policies and interest rate hikes by key central banks in the world, prospects of slowing global growth as well as the extreme volatility in financial markets.

"In 2018, the trade war was the dog that barked. In 2019, it will bite," is how Bloomberg cited the trade war between the world's two largest economies. So far, the trade war resulted in billions of dollars of losses for both sides in 2018, hitting industries including automotive, technology and agriculture.

The world's leading financial institutions, including the International Monetary Fund (IMF) and the World Bank, had warned that the trade tensions threatened to rip apart the global economy.

The IMF warned in December it could further cut its global growth forecasts in January. Citing the potential fallout from the trade war, the IMF cut its global growth forecast in October to 3.7 percent for both 2018 and 2019, down from 3.9 percent projected in July. The European Central Bank (ECB) also said that the global economy is set to slow down in 2019.

"I see the U.S.-China tension turning into a real 'trade war' as the greatest risk for the global economy in 2019. Such a situation would

lead to the opening of a door leading to a long period of distress for the global economy, and it is not known what will come out of that door," QNB Finansinvest Chief Economist Burak Kanlı told Daily Sabah.

Particularly for the U.S. and China, Kanlı said, trade wars bring along foreign exchange rate wars, then capital controls, a slowdown in the global economy as well as inflation, "all of which are annoying to even think of."

In a major development following their escalating fight throughout the year, U.S. President Donald Trump and his Chinese counterpart Xi Jinping called a 90-day truce, until March 1, in the ongoing trade war during their Buenos Aires steak dinner on the sidelines of the G20 summit in Argentina on Dec. 1.

TARIFFS COULD HIT CHINA'S GDP BY 1.5 PERCENT IN 2019

The truce leaves American tariffs on $250 billion in Chinese goods in place but removes - for now - Trump's threat to increase the tariffs on $200 billion of those goods in January to 25 percent from 10 percent and to impose tariffs on all imports from China.

Even if the G20 truce holds, according to Bloomberg, the dispute could represent the early stages of a prolonged economic cold war. Bloomberg Economics suggested that if Trump follows through on threats to slap duties on all imports from China, it could hit China's 2019 gross domestic product growth by 1.5 percentage points, taking the growth down toward 5 percent. Kanlı also said he expects the tension that "led us to 'sit and hop up' in the last few months to dissolve or at least to slack" in the first quarter of 2019.

Trump offered investors a ray of hope that 2019 may offer less volatility when it comes to China, after his tweet on Saturday that big progress is being made toward a possible trade deal between the two countries.

"Just had a long and very good call with President Xi of China," Trump wrote on his Twitter account. "Deal is moving along very well. If made, it will be very comprehensive, covering all subjects, areas and points of dispute. Big progress being made!"

On the other hand, Reuters cited Chinese state media, which quoted Xi as saying that teams from both countries have been working to implement a consensus reached with Trump.

"I hope that the two teams will meet each other half way, work hard, and strive to reach an agreement that is mutually beneficial and beneficial to the world as soon as possible," Xi said, according to the state-run Xinhua news agency.

Experts previously suggested that both sides agreed that things were getting a little too hot and that they decided to give each other some months of breathing room but that it would be difficult for the two to fundamentally resolve the differences that they have had.

Whether the said 90 days will be enough for the two countries to sort all of their problems out remains to be seen.

SLOWING GLOBAL GROWTH, TIGHT MONETARY POLICIES

Meanwhile, prospects of slowing global growth also persist. After what turned out to be its best performance since 2005, the U.S. economy is expected to slow down next year. The extreme volatility in financial markets and softening business activity has raised concerns the U.S. economy might enter a recession in 2019. The same goes for the global economy as well.

"I do not agree with the views that emerged over the last month that the U.S. economy will be entering a recession in 2019, so I think the market is a bit too pessimistic," İş Yatırım International Markets Director Şant Manukyan told Daily Sabah.

"Although the warning signs are on, a slowdown that could turn into such stagnation is out of the question. However, a slowdown is possible in the rate that will affect developing countries," Manukyan said.

Kanlı, on the other hand, said, "I think it is too early to sink into recent pessimistic views that global growth is likely to fall sharply. Although some slowdown in growth seems inevitable, I believe it may be limited by the alleviation of the problem between China and the U.S."

He noted that at the moment, the political risk premium in the U.S. is perhaps for the first time in history higher than that of many emerging economies.

"At the moment, uncertainty about trade wars creates a huge price and demand uncertainty for the producer in the U.S., and expectations are worsening at the pace we have not seen recently. In such an environment, the government is shutting down in the United States, and even the dismissal of the Fed [Federal Reserve] chairman was absurdly being discussed. What else to expect?" Kanlı noted, adding that these overlapping shocks caused investors in the U.S., who are unused to these kinds of shocks, to panic and sink into pessimism.

Meanwhile, even though the Wall Street posted gains on Friday, building on a late rally on Thursday, the benchmark S&P 500 index ended 2018 with most probably its worst December slump since the Great Depression.

Earlier in the volatile last week, the S&P 500 touched a 20-month low. Then on Wednesday, the S&P 500, the Dow Jones industrial average and Nasdaq posted their biggest daily jumps in nearly a decade.

"We are entering 2019 in an environment where the risk premium is very high. I think this panic will decrease in the next few months, especially by noting that I expect the tension between China and the U.S to decrease. As for the developing countries, especially for those having external balance issues such as Turkey, it points to a year in which the U.S. economy will grow but not very fast, and actually an appropriate environment in terms of capital flows and financial stability. Especially, the decline in commodity prices creates a great relief," Kanlı added.

Furthermore, global monetary policies will be another important issue that will be looked after in 2019, with markets paying special attention to the key central banks such as the Fed, the ECB and the Bank of England (BoE).

The Fed, on Dec. 19, hiked its benchmark interest rate by 25 basis points to a range of 2.25 percent to 2.50 percent despite warnings from Trump against the move and it also lowered its projections for hikes in the next year, citing financial market volatility and slowing global growth.

The decision was the fourth increase in 2018 and ninth since Fed began normalizing rates in December 2015. It projects two rate increases in 2019.

Despite concerns of an economic slowdown in the EU over the next couple of years, the ECB at its December meeting formally halted its 2.6 trillion euro ($2.96 trillion) crisis-fighting bond-buying program it used to stimulate growth and has pushed billions of euros into higher-yielding markets.

On the other hand, during its last monetary policy meeting in December, the BoE decided to keep its interest rates on hold at 0.75 percent, warning about the Brexit uncertainty.

"Although the monetary tightening of major central banks creates financial volatility and periodic confusion in an environment where emerging economies continue to grow, I do not expect it to have a negative impact on these countries," Kanlı explained.

However, he said, "Capital inflows will certainly be more selective in an environment where the amount of money is no longer increasing and the cost is on the rise."

In this sense, Kanlı added, countries with lower indebtedness and whose source of growth is the productivity increase will go through this period without any problems, while countries that "have not done their homework tenaciously in the recent years will have difficulties in attracting capital."

On the other hand, the İş Yatırım International Markets director said, "As for the euro zone, the economic slowdown has already shown itself in the PMI (Purchasing Managers' Index) data in recent months."

"This slowdown may be further accelerated by the ECB's halt of asset purchases," Manukyan said.

Indicating that different scenarios await the developing countries, he noted that a serious slowdown, a great victory of extremists in the European Parliament elections in March or a crisis created by Italy will also bring about a negative environment.

"On the other hand, while reducing the balance sheet of Fed, the borrowing of nearly $1 trillion by the U.S. Treasury and putting the pressure on the dollar liquidity and its cost will force developing countries," Manukyan added.

Until March, he continued, there are important developments concerning the global markets, the start into a new year by the U.S. House of Representatives, which has passed under the control of Democrats, the debt ceiling issue, the European Parliament elections, the Brexit and the Trump investigation.

"For this reason, I think we will see a little more sales of U.S. indexes behind a short-term optimism. But as I said before, I think it is early for a 2008 bear alike market. The actual problems, especially those originating from Europe, will emerge in 2020 and in a very violent manner. In short, although 2019 will not be a bad year in terms of pricing, it will be a very critical year to prepare and streamline our home," he said.

BREXIT BIGGEST RISK IN SHORT TERM

Brexit D-Day is getting closer as Britain's departure from the European Union is due to happen in just three months. However, there is little consensus on how that will be eventually achieved. Experts and business people see it as the biggest risk in the short term.

Brits voted in a referendum on June 23, 2016, on whether the U.K. should leave or stay in the EU. The referendum saw 52 percent of voters opt for the exit deal and almost two and a half years later the U.K. Prime Minister Theresa May agreed on the EU Withdrawal Agreement with the EU. However, there is still work to be done as Parliament also needs to accept the negotiated Brexit deal.

The postponed vote in Parliament on Britain's Brexit agreement will be held the week of Jan. 14 - more than a month after it was originally scheduled. This vote is potentially the biggest threat to May's plans.

The U.K.-based Institute of Directors (IoD), a group representing business directors and leaders, said recently business leaders' confidence in the British economy has sunk to its lowest level in more than 18 months as the risk of a no-deal Brext in a little over three months grows. According to Bloomberg Economics, a no-deal Brexit could mean the British GDP is about 7 percent lower by 2030 compared to remaining in the EU.

The report also suggested that a Brexit that involves the U.K. staying part of a customs union with the EU would still have a hit on the economy, adding that output would likely be 3 percent lower by 2030 in that scenario.

Furthermore, Bank of England Gov. Mark Carney warned recently the economy could shrink by 8 percent in the space of a year in the event of a "disorderly" no-deal Brexit, a sharper contraction than during the 2008 financial crisis.

The impact the Brexit could have on the other countries is also one the issues being discussed. Speaking of the matter, Kanlı told said that he expects the process to be solved sooner or later, emphasizing that he does not expect it to have a greater impact on non-European countries.

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