The Strategist

Global economy in 2019: Crisis risks are lower, but no acceleration

12/27/2019 - 08:48

2019 has become another year when the most negative forecasts did not materialize. Moreover, the expectations of an imminent correction in the markets, it seems, are now beyond 2020. The trade war, which has become the main factor of uncertainty in the global markets, is paused before the next, more complex round; the drama around Brexit is also close to resolution, and monetary policy, which seemed to have no solution after a decade of low rates, is still working. However, a low, uneven growth with the persistence of a chronically low inflation target is now more likely to be considered an optimistic scenario.

There was little doubt that the trade dispute would sooner or later end with at least some kind of truce. However, the introduction of new import duties on both countries worked over and over again as a significant factor of uncertainty for the global economy as a whole, and not for individual countries. Many trade chains are tied to China and the effect of restrictions was noticed, in particular, by German exports. At the same time, duties really turned out to be a quite effective tool for influencing trade: even weakening of the yuan did not help stop the negative consequences for Chinese suppliers (in total, during the course of the trade war, the average US tariff for Chinese products rose from 3.1% to 21%; Chinese for American - from 8% to 21.1%).

But Washington didn’t dare to introduce the last, most sensitive for consumers round of tariffs - it was the planned date for the entry into force of duties on electronics and other goods, where China’s share as a foreign supplier approaches 80–90%, and became a deadline to conclude agreements. Now they have to be documented, and although difficulties can arise at any time, given the nature of these agreements (they do not relate to the key non-market principles of support for Chinese companies), the agreement of the first phase is likely to be signed. Which doesn’t mean the end of the trade war in essence - in conditions of more intense competition in key technology markets, as well as political popularity in the USA, such restrictions in Washington may resort to them again (although it is assumed that in the context of the election campaign it is easier for Donald Trump to limit himself to victory in the form of the first agreement).

In Europe, business activity has been noticeably declining all year (mainly due to stagnation of German industry, although political instability and high debt burden in Italy somehow contributed here, too). At the end of the year, however, Brexit scenario has finally became clear. Given the victory of conservatives in the country's parliamentary elections, the likelihood of a mild Brexit has increased significantly, although the parties have yet to agree on the terms of mutual trade after the "divorce."

In developing countries, the picture has been and will remain heterogeneous - experts from China expect a planned slowdown with further easing of lending conditions and increasing state investments. In general, it is worth noting that last year monetary easing again turned out to be the main response to any signs of the crisis. In the second half of the year the Fed sharply changed its course to lower rates (since July of this year the rate has been reduced by a total of 0.75 percentage points), quickly levied inversion of rates (a situation where short-term rates exceed long-term rates, which may indicate expectations of a decrease in growth). The ECB has remained just as soft, where the way out of the zone of negative rates is still not even visible. These measures turned out to be quite effective - market sentiment improved, and the combination of low inflation and low unemployment finally ceased to be surprising (in theory, higher employment requires higher economic growth, which is accompanied by increased inflation). Given the absence of tangible new risks in 2020, analysts will probably have enough time to assess the accumulated imbalances, both global and country.