Economic Outlook for 2020 Is Good, but Risks Abound - Foreign Policy

Economy

Economic Outlook for 2020 Is Good, but Risks Abound – Foreign Policy

Published

4 years ago

January 1, 2020

Harry Miller

A storm hits Southern California on Dec. 26. The economic outlook for next year is generally positive, but there are any number of metaphorical storms on the horizon. Robyn Beck/AFP/Getty Images

After a rocky 2018 and truly rough patches in 2019, especially particular sectors such as global manufacturing and U.S. agriculture, the consensus outlook for the global economy next year is surprisingly sanguine.

Most mainstream forecasters expect that the worst of the storms are past, and they are expecting global growth to rebound: the International Monetary Fund by 3.4 percent, the World Bank by 2.7 percent. One big reason for the dose of optimism is the generally looser approach to the money supply taken by central banks around the world, which helped offset some of the pain of trade wars and falling investment in 2019 and promises to allow a modest rebound next year (but which carries its own risks).

But those growth expectations are premised, in both cases, on a couple of potentially tenuous foundations: a rebound in emerging markets, such as Argentina and Turkey, that have been hammered in recent years, and a halt to further nasty surprises like trade wars, imploding markets, debt time bombs, and the like. Economists expect the wild cards for 2020 to point in one direction: downward.

“[D]ownside risks seem to dominate the outlook,” noted the IMF in its latest big report on the global economy’s prospects. Whether it’s still-simmering trade tensions, the ongoing Brexit saga, China’s economic transformation, worries about a sharp market correction, central banks with few bullets left to fire, historically massive piles of debt, or the usual geopolitical risks that could upend the best of projections, here is a look at some things to keep an eye on that could make or break the global economy next year.

Trade Wars

Despite the preliminary agreement between the United States and China of a “phase one” trade deal that promises at least a cease-fire between the world’s two biggest economies, the trade wars are far from over. That “phase one” deal with China isn’t yet a done deal—and similar agreements have come undone in months past.

Even if U.S. President Donald Trump and Chinese President Xi Jinping finally ink some sort of truce that will see a partial restoration of trade amity between the two countries, most of the tariffs the Trump administration imposed on China (and those Beijing slapped on the United States in return) will remain in place. What the Peterson Institute for International Economics calls a “new normal of high tariffs” will mean that about two-thirds of Chinese imports to the United States and more than half of U.S. exports to China will remain taxed at relatively high levels. That means a guaranteed, continued drag on U.S. manufacturers that rely on many of those goods as inputs for their own finished products, adding financial pain for firms, consumers, or both.

And trade tensions aren’t limited to the fight between Washington and Beijing. With a new NAFTA wrapped up and an apparent China truce in hand, Trump’s trade negotiators are returning their gaze to ongoing trade fights with Europe, which include ongoing spats over U.S. tariffs on European steel, U.S. tariffs on European goods due to the Airbus-Boeing dispute (with potentially another set of European retaliatory tariffs in the pipeline), and U.S. tariffs on French goods in response to a controversial French digital tax—a tax that is under serious consideration in several other countries and that could spread that trade fight even further.

There’s more: The United Kingdom will formally exit the European Union at the end of January, but that will only sound the starting pistol for the really heavy lift: negotiating a free trade agreement between the U.K. and Europe before the end of the year, a deadline that European officials feel is almost impossible to meet. Failure to sort out key issues, such as tariff rates between Britain and the continent or regulatory standards between the two sides, could lead to another Brexit cliff edge at the end of the year, with all that entails for new investment, business and consumer confidence, and growth.

To make things more interesting, the United States hopes to negotiate its own free trade deal with the U.K. next year. But that would mean pulling Britain closer to the United States in terms of economic regulation—making it that much harder for the U.K. to close any meaningful deal with Europe.

Ultimately, greater trade tensions between big economies, coupled with the end of the World Trade Organization’s ability to resolve disputes between countries, could mean a return to relatively fettered trade, with countries slapping tariffs on imports at will. The World Bank warns that a return to higher duties across the board could be as devastating for global trade as was the great financial crisis a decade ago.

And then there’s the China question—or rather, questions—which, given the size of the Chinese economy, inevitably loom large in the outlook for the rest of the world.

First, the Chinese economy is clearly slowing, and not just because of the impact from Trump’s tariffs. One big question is what will Chinese growth, already at three-decade lows, look like this year? The IMF expects GDP growth of a paltry 5.8 percent, well below that of recent years, while the World Bank expects a slightly better 6.1 percent growth. As the World Bank notes, one big tool that China has to juice growth—fiscal stimulus—risks aggravating one of the very ills that plague the Chinese economy, namely massive indebtedness. It might work in the short run, but it would risk making barely profitable companies less productive and would impact future growth.

If China does face a big slowdown, the pain will be felt elsewhere, especially among many developing countries that are the linchpin of next year’s consensus expectations for global growth.

“I think a hard landing in China isn’t nearly as likely as many of the other major risks on the horizon for 2020—such as a chaotic Brexit—but if that were to occur, it would have massive effects on other economies and global growth, because China is so deeply interconnected with all other major economies,” said Julian Gewirtz, a China expert at the Weatherhead Center for International Affairs at Harvard University.

And there is a bigger question about the future of the Chinese economy: Will it continue to be as deeply interconnected, or will it redouble its efforts to unwind its economic interdependence with the rest of the world, something that hawks in both Beijing and Washington seem to want?

“The single biggest thing that worries me is U.S.-China decoupling,” said Cliff Kupchan, the chairman of Eurasia Group, a risk consultancy. “The inexorable march by the two countries to separate at least the technology sectors, and possibly more—I fear it will lead to the weaponization of tariffs as the new normal, force third countries to take sides, and act as a real drag on growth.”

And that’s not just a Trump effect. What Kupchan calls the “petrification” of U.S.-China relations is now enshrined in U.S. politics, with lawmakers and Democratic presidential hopefuls all vying to be tougher on China. “It’s a real threat to the global economy and global stability,” he said.

The case of Huawei and Chinese technology already gave a taste of what it will mean if China seeks to make its own economy, rather than its trading partners, its main supplier. Expand that to the rest of the economy, including renewed efforts (despite Washington’s efforts to the contrary) to expand the Chinese model of state subsidies and industrial policy, and you have a taste of the fundamental transformation that could be in store, with potentially big implications for nearly all other economies.

“The big uncertain question is what this truly epochal reassessment of interdependence by top leadership means for the future of the Chinese economy,” Gewirtz said.

Such a move, he said, would involve state capitalism on a massive scale, with the creation of national suppliers for key industries, dismantling of existing supply chains, a reinvigorated industrial policy, and even more industrial subsidies. It would also likely entail China playing offense with the many levers of economic coercion that China has, from punishing South Korea over missiles and trade to cowing the NBA over critical tweets. And it would only invigorate China’s on-again, off-again efforts to finally break free of U.S. financial dominance by accelerating Chinese moves to help craft alternatives to the U.S.-dominated global payments system and the central place of the dollar, which give Washington outsized leverage in pressuring other countries to do its bidding.

“If you are a top-down system and have decided that in multiple domains, from commodities to technology—potentially finance—that you need to become profoundly more self-reliant, that would be a very profound change for 2020,” Gewirtz said. “Things long predicted would finally be coming true.”

The Debt Bomb

Globally, debt—whether corporate debt, household debt, or national debt, whether in developed or developing economies—is at record-high levels, which is itself partly a product of the loose-money policy many central banks pursued to cushion trade and other shocks to the economy. That is itself a cause for concern, as those central banks, with interest rates already low, don’t have a lot of room to cut further to cushion any fresh debt shocks.

And the debt pile is huge. The World Bank, in a special report, noted that global debt levels reached an all-time high of 230 percent of GDP in 2018 and have grown since. Debt growth is particularly alarming in emerging markets, the World Bank says, which hold about $50 trillion in debt, making them particularly vulnerable to any shock, whether a generalized slowdown, or more trade wars, or a financial markets correction stemming from either of the other two. Developing countries have already been through three debt crises—in the 1980s, the 1990s, and the 2000s—with hugely painful consequences. A fourth might be on the way, the World Bank warned, with similarly nasty implications: “The fourth wave looks more worrisome than the previous episodes in terms of the size, speed, and reach of debt accumulation” in emerging markets, the bank found.

The sheer amount of global debt means that any financial market correction—whether triggered by continued trade wars or corporate bankruptcies and defaults or something else—would have immediate impacts, especially on countries with few built-in shock absorbers.

“Renewed episodes of substantial financial market stress could have increasingly pronounced and widespread effects, in view of rising levels of indebtedness,” the World Bank said.

Even advanced economies such as the United States are potentially vulnerable, with a heavily indebted corporate sector. If corporate defaults rise, which could lead overvalued stock markets to plummet, that would have knock-on effects on consumer sentiment, which in turn would have huge impacts on U.S. growth expectations: Fitch Ratings agency expects that would halve its outlook for U.S. growth in 2020 to just 0.8 percent.

“Long-term valuation metrics for US equities are near historic highs increasing the probability of a correction, especially as potential risk triggers such as a hard landing in China or trade-related uncertainties are likely to persist,” said Fitch.

Geopolitical Risks

And there are all the usual troubles in the world, from ongoing tension among Iran and Saudi Arabia and the United States to spreading chaos throughout North Africa to the prospect for heightened tensions in Asia, whether over North Korea’s nuclear program or China’s ambitious designs on the South China Sea, Hong Kong, and Taiwan.

There are also good old-fashioned political risks, such as the global resurgence of populism around the world, which in many cases means taking aim at market economics, to the detriment of what drove growth for decades.

“Global leaders have their heads in the sand when it comes to the Fourth Industrial Revolution, and they are going to pay for it,” Kupchan said. “There is little systemic thinking about how to deal with automation, the backlash against globalization, the structural factors against what I call ‘nativistic populism.’” If that were merely a local problem, whether in the United States or Hungary or elsewhere, that would be one thing. But such political upheavals also threaten many of the very economic sinews that have driven broad-based prosperity since the end of World War II.

“Populism doesn’t trust markets. If you have a structural driver away from markets, you have a hell of a long-term economic problem,” Kupchan said.

In the shorter term, there is enough to worry about. Greater tension, or outright conflict with Iran as a result of the Trump administration’s maximum pressure campaign, would likely send oil prices higher, which would act as a brake on global growth. Intensified protests in the broader Middle East and North Africa, coupled with renewed fighting in Libya and an adventurous Turkey, raise questions about the economic resurgence of many of the region’s emerging economies, themselves a key for global growth this year.

And in Asia, China’s internal economic woes could well find expression in foreign policy, whether in the South China Sea, or over the standoff in Hong Kong, or over Taiwan’s future, which could in turn further roil markets and broader economic confidence.

“A downturn in China would also have significant global effects if it prompted the leadership to adopt an even more nationalistic or adventurist foreign policy,” Gewirtz said.

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Economy

Charting the Global Economy: Fed Delay Recalibrates All Rates – BNN Bloomberg

Published

2 hours ago

April 20, 2024

Harry Miller

(Bloomberg) — Federal Reserve Chair Jerome Powell signaled US central bankers will wait longer to cut borrowing costs following a series of surprisingly high inflation readings, which reduces room for easier policy around the world.

Global finance chiefs convening in Washington for the International Monetary Fund-World Bank spring meetings are sweating the strength of the US economy, as elevated interest rates and a strong dollar force other currencies lower and complicate plans to bring down borrowing costs.

Meanwhile, an escalation of the conflict in the Middle East is raising concerns of a wider regional war that could send oil prices over $100 a barrel.

Here are some of the charts that appeared on Bloomberg this week on the latest developments in the global economy, geopolitics and markets:

World

The high tide for global interest rates has passed, but respite for the world economy may be limited as policymakers stay wary at the threat of inflation. Powell’s latest pivot creates a quandary for central bankers around the world.

The IMF inched up its expectations for global economic growth this year, citing strength in the US and some emerging markets, while warning the outlook remains cautious amid persistent inflation and geopolitical risks.

The increasingly hopeful economic story of 2024 so far is that of a world headed for a soft landing. Unfortunately that same world is also becoming more dangerous, divided, indebted and unequal.

US retail sales rose by more than forecast in March and the prior month was revised higher, showcasing resilient consumer demand that keeps fueling a surprisingly strong economy. So-called control-group sales — which are used to calculate gross domestic product — jumped by the most since the start of last year.

As President Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it. While the world’s largest economy is helping support global growth, it also means the US is “slightly overheated,” the IMF’s Kristalina Georgieva said — thanks in part to Washington’s fiscal stance, with the budget gap pushing toward 7% of GDP.

Emerging Markets

Israel reportedly struck back at Iran on Friday morning, following days of frantic diplomacy from the US and European nations in which they tried to convince Israeli Prime Minister Benjamin Netanyahu not to respond too aggressively, if at all, to the Iranian attack. Their main concern is to avoid a wider war in a region already roiled by the Israel-Hamas conflict and which could send oil prices above $100 a barrel.

India forecast an above-normal monsoon this year, raising optimism that ample rains will spur crop output and economic growth, as well as prompt the government to ease curbs on exports of wheat, rice and sugar. Forecast of a normal monsoon bodes well for easing food costs, and headline consumer price inflation eventually, said Anubhuti Sahay, head of economic research, South Asia, at Standard Chartered Plc.

Europe

European Commission President Ursula von der Leyen is unleashing a barrage of trade restrictions against China as she seeks to follow through on a pledge to make the EU a more relevant political player on the global stage. It’s in the area of clean tech where the EU is most fervently fighting to stave off competition from cheap Chinese imports of everything from EVs to solar panels.

UK inflation slowed less than expected last month as fuel prices crept higher, prompting traders to further unwind bets on how many interest rate cuts the Bank of England will deliver this year.

Asia

China reported faster-than-expected economic growth in the first quarter – along with some numbers that suggest things are set to get tougher in the rest of the year. Gross domestic product climbed 5.3% in the period, accelerating slightly from the previous quarter and beating estimates. But much of the bounce came in the first two months of the year. In March, growth in retail sales slumped and industrial output fell short of forecasts, suggesting challenges on the horizon.

–With assistance from John Ainger, Irina Anghel, Enda Curran, Shawn Donnan, James Hirai, Rajesh Kumar Singh, John Liu, Lucille Liu, Eric Martin, Alberto Nardelli, Tom Orlik (Economist), Pratik Parija, Zoe Schneeweiss, Craig Stirling and Fran Wang.

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Economy

Bobby Kennedy And The Ownership Economy – Forbes

Published

5 hours ago

April 20, 2024

Harry Miller

In recent decades, populist presidential campaigns have arisen from the left (Bernie Sanders) and the right (Pat Buchanan). Both of these campaigns had limited appeal across the political spectrum or even attempted to engage Americans of diverse political views.

Over the past year in his independent presidential campaign, Bobby Kennedy Jr. has sought to bring together members of both major political parties, with a form of economic populism that expands ownership opportunities. In contrast to Sanders, Kennedy’s goal is not to grow the welfare state or state control over the economy. His economic populism is free-market oriented, aimed at building a broader property-owning middle class. It is aimed at widening the number of worker-owners with a stake in the market system, through their ownership of homes, businesses, employee stock and profit sharing, and other assets.

Whether Kennedy’s economic strategies can achieve the goals of ownership and the middle class he has set, remains to be determined. But his “ownership economy” is one that should be discussed and debated. Currently, it is largely ignored by the legacy media—or subsumed by the parade of articles speculating about of how many votes he will “take away” from President Biden or President Trump.

I wrote about Kennedy’s heterodox jobs program late last summer. In the eight months since, he has sharpened his jobs agenda, and connected it to a broader platform of worker ownership. It is time to revisit the campaign’s economic themes, briefly noting three of the subjects Kennedy often speaks about in 2024: the abandonment of vast sections of the blue collar economy, low wage workforces, and the marginalization of small businesses.

Abandonment Of Blue Collar Economy

“Compensate the losers” is the way that political scientist Ruy Teixeira characterizes the Democratic Party approach to the blue collar economy since the 1990s. According to this approach, workers whose jobs are impacted by environmental policies (oil and gas workers) or trade polices (heavy manufacturing workers) will be retrained for jobs in the green economy or in advanced manufacturing or even as white collar fields like information technology (the oil worker as coder). Since the 1990s a vast network of dislocated worker programs and rapid-response programs have arisen and are prominent under the Biden administration.

As might be expected, retraining hasn’t proved so easy in practice. One example: here in Northern California, the Marathon Oil
MRO
refinery closed in October 2020, laying off 345 workers. The federal and state government immediately came in with the union offering a range of retraining and job placement services. A study by the UC Berkeley Labor Center found that even a year after closure, a quarter of the workers were still unemployed. Those that were employed earned a median of $12 less than their previous jobs. Other studies similarly have identified the gap between theories of skills transference and re-employment and the realities for most blue collar workers—including the realties of alternative energy jobs today that usually pay considerably less than oil and gas jobs.

Each refinery closure or plant closure has its own business dynamics, and in many cases, like the Marathon Oil refinery, the facility will not be able to avoid closing. Re-employment cannot be avoided. Kennedy has spoken of improving the re-training and re-employment process for laid off workers, implementing best practices in retraining with the participation of unions and worker organizations.

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Manufacturing jobs as a share of total jobs have been in decline for the past four decades, and even as he urges trade policies for reshoring jobs, Kennedy recognizes that manufacturing going forward will be a limited part of the blue collar economy. The blue collar jobs of the future will increasingly be in the trades and services. Kennedy has enlisted “Dirty Jobs” host Mike Rowe to highlight the importance of the trades, and identify policies that can improve conditions and wages for the trades. Among these policies: a greater share of the higher education federal budget redirected from colleges into training in the trades, and support for the workers who seek to enter and remain in the trades.

Improving the economic position of blue collar workers also means expanding employee stock ownership and profit sharing. While worker cooperatives have failed to gain traction in America, forms of employee stock ownership and profit sharing are being implemented in companies with significant blue collar workforces, such as Procter & Gamble
PG
, Southwest Airlines
LUV
and Chobani. Kennedy poses the challenge: Let’s have workers-as-owners more fully share in the economic success of their employers.

Inflation Impact On Low Wage Workers

In nearly all of his talks on the economy, Kennedy addresses the issue of affordability, and how inflation has undercut wages of America’s lower wage workforces. He posts regularly on the increased cost of food, transportation, and housing, the financial strains on working class and middle class families, the number of workers who live paycheck to paycheck. When the March national jobs report was issued earlier this month, he noted the slowdown in year-over wage growth (at 4.1% the lowest year-over increase since 2021) and the increase in part-time jobs.

Kennedy recognizes that many of the low wage workforces are in such sectors as long-term care, retail, and hospitality, in which profit margins for employers are tight, and employers have limited flexibility individually to raise wages. Kennedy continues his calls for a higher minimum wage, reducing health care costs, strengthening protections and benefits for workers in the gig economy. He urges a reconsideration of trade and tax policies and the need for immigration policies that secure the nation’s borders. Kennedy’s strict border policies reflect both the “humanitarian crisis” he sees with the drug cartels and migrants, as well as the impact of unchecked immigration on the wages of low wage service and production workers.

Home ownership has a special place in Kennedy’s ownership economy, as part of bringing more workers into the middle class, and he has stepped up his advocacy on home ownership. Across society, widespread home ownership stabilizes communities, promotes civic involvement, serves as a hedge against social disorders.

Small And Independent Businesses

During the pandemic, Kennedy warned that economic lockdowns were devastating the small business economy. Today, in a regular series of podcasts on small business, he highlights the ongoing small business struggles. Just this past week, the National Federation of Independent Business, the nation’s largest small business organization, released a survey showing small business optimism is at its lowest level since 2012.

As with home ownership, Kennedy characterizes widespread small business ownership in terms of the social values as well as the values to the individual owners. Small business drives enterprise and service to others, in providing goods and services that customers value and will pay for. It drives job creation, including for individuals who do not fit easily into larger employment venues. A Kennedy Administration will prioritize rebuilding the small business economy, particularly in rural and inner city communities.

Kennedy’s small business agenda goes beyond a laundry list of small business grant and loan programs. As with the wage question, Kennedy seeks to tie a vibrant small business economy to underlying trade and tax policies. He also seeks to tie this economy to reforms in federal government procurement policies, which he describes as ineffectual.

Economic Challenges And Alternatives

The middle class society and economy of the 1950s that Kennedy grew up in and is central to his worldview was the product of unique economic forces and America’s dominant position in the post-World War II period. There is no way to get back to it, and recreating it will be more difficult than in the past, in the now global economy, and with rapidly advancing technologies.

But a broad middle class of worker-owners, is the right goal, and private sector ownership the right approach. People may find Kennedy’s strategies insufficiently detailed or unrealistic or even counterproductive. But Kennedy raises thoughtful challenges and alternatives to the economic platforms of the two main parties—just as he is raising serious challenges on a range of other issues.

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Economy

Biden's Hot Economy Stokes Currency Fears for the Rest of World – Bloomberg

Published

15 hours ago

April 19, 2024

Harry Miller

As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.

The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.

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