It is all about global risk mitigation

Last year has been the worst for the global economy in terms of growth since 2008 with all major centres of economic activity in the world registering a decline in growth. And 2020 will, at best, be slightly better. Any hope to the contrary was dashed by the latest global economic growth forecast published this week by the International Monetary Fund (IMF). Global growth for this year has been cut from 3.4 to 3.3 per cent — compared with 2.9 per cent in 2019. 2021 would not look so much better with growth expected to be at 3.4 per cent, down from the previous 3.6 per cent forecast. And bear in mind that IMF’s forecasts tend usually to be on the optimistic side. 

In fact, all the factors which were bearing down on the economy last year are still there. Corporate leaders and investors are as worried as ever, if not more, by the rise of geopolitical, non-business, risks. First among them is the rise of protectionist policies in many parts of the world and the unrelenting assault on the multilateral trade system. 

In that respect, there can be no illusion that the trade deal between Washington and Beijing signed on January 15 is no more than a pause in the economic, technological and strategic competition between the US and China, with major forces in the Trump administration more intent than ever to pursue a contain and decouple strategy towards China. As worrisome is the fact that Donald Trump seems likely to use that “pause” to turn his sights to Europe and the US trade deficit with the European Union. The White House has been quite clear on its intention to impose trade sanctions on France if it pursues its intention to tax the revenues of the US high-tech giants made on its soil. Similarly, Brussels has been as clear in its warning that it would retaliate if the US were to act on its threats. Still hanging in the air is the threat of US tariffs against German cars. 

Anemic condition, or slowing down factors of different nature, continue to prevail in all major economies. Germany’s manufacturing sector is now in its 16th month of recession with exports on a significant downward trend, impacted by China’s economic slowdown and the trade war initiated by Mr Trump. The Bundesbank now expects Germany to grow by only 0.5 per cent this year, with negative reverberations all over Europe as the country accounts for more than 30 per cent of the eurozone gross domestic product (GDP). More importantly, this is not a cyclical crisis. The German growth model based on exports, downward pressures on wages, emphasis on sectors such as automotive and chemical and “black zero” budgets — constitutionally mandated balanced budgets leading — to notably insufficient infrastructure investments, is now reaching obsolescence. 

In China, the leadership is struggling with a tough balancing act between pursuing the deleveraging of the economy to reduce the financial risk, created by bloated indebtedness in some corporate sectors and among provincial and local governments, and putting as floor under economic growth at 6 per cent — the country’s lowest expansion rate for the last 30 years. Beijing’s challenge in the coming months will be to find ways to boost domestic spending and the confidence of the consumers and private sector investors as youth unemployment is on the rise.

India, for its part, has seen economic growth decline over the last 18 months, with the latest IMF forecast for the country revised down 0.9 per cent to just 5.8 per cent. The country is paying the price of much needed corporate de-leveraging and a government that seems to have dropped the ball on the economy, as it gets mired in damaging political diversions. India is very much at risk of missing the opportunity created by the US-China trade and technology confrontation to attract more foreign companies as a manufacturing base. It remains to be seen if the dearth of private sector investment and the slowing down of infrastructure investment will be reversed by new measure in the Budget in addition to a set of recent measures aimed at reviving growth.

Japan is notably the only large economy where the IMF forecast is revised upward as the impact of the stimulus package enacted by the Shinzo Abe government at the end of 2019 and the boost to economic activity expected from the Olympics 2020 should drive the country growth to 0.7 per cent against a previous forecast of only 0.5 per cent.

While the US economic cycle remains quite resilient, with the expansion phase now in its 10th year, consumer confidence still high and an unemployment rate at a record low of 3.5 per cent, growth is expected to decline from 2.3 per cent in 2019 to just 2 per cent this year. One can count on Mr Trump to keep the economy humming in the coming months as a major asset in his reelection drive. However, the remaining impact of the tax reform will definitely fade away in the course of 2020; consumer sentiment is exposed to any stock market reversal, and the sharp increase of low-credit-quality bonds stimulated by low interest rates is generating warnings from US economists as well as from the IMF. Last but not least, the propensity of the Trump administration to engage in trade wars, with the uncertainties they create, could continue to damper business investment.

Add to this picture a geopolitical environment marked by uncertainty, volatility and prone to crises, which can erupt almost overnight in the Middle East or, for instance, about Taiwan or the South China sea issues; then take also into account the challenges created by climate change, the painful and costly adjustments that major sectors such as the automotive, energy, chemical, steel industries will have to make in a relatively short span of time to comply with new stringent regulations on carbon emissions. So it is no surprise that global risk mitigation will remain a top priority for business leaders and policy makers in the course of 2020.    

The writer  is president of Smadja & Smadja, a Strategic Advisory Firm; @ClaudeSmadja

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