We need to keep in mind that trade takes place under WTO rules. China is the U.S.’s biggest trading partner, despite no free trade agreement being in place. Of course, if Trump were to pull out of the WTO, then that would be a game changer. But, globalisation, especially e-commerce and the Internet linking markets and people, will mean that trade is likely to continue across borders as it’s hard to see a significant roll-back Costs of trade, of course, are another issue to be focused on.
Luckily, the Trump administration hasn’t honed in on e-commerce, which is good news for procurement and supply chains. Currently, one in ten transactions are already undertaken via e-commerce, and this figure will continue to grow. Trump may have moved quickly to sign the TPP withdrawal order on his first day in office, but that wasn’t a formal agreement. Extricating the United States from NAFTA for instance will require renegotiation time and then a period of notice before that free trade agreement would end. Even then, most trade agreements include implementation periods, so a “cliff edge” is unlikely which gives businesses time to plan. Therefore, there’s no need to panic or overhaul your supply chain immediately. But, of course, forward planning and following economic policies would be wise. Also, take Brexit as an example – if Britain succeeds in triggering Article 50 in March 2017, then the UK is scheduled to leave the EU by the end of March 2019 – almost three full years after the people’s vote. And even there, the Prime Minister has indicated that there may be an implementation period to allow more time for businesses to adjust to leaving the Single Market. Things to watch 1) U.S. border taxes – recently, Trump threatened BMW with a 35 per cent border tax on foreign-built cars imported to the U.S. market. This isn’t an isolated incident and American companies are under even more pressure to produce in the U.S.. Congress is also considering a similar tax, so that is worth bearing in mind as that would have the force of legislation. 2) U.K. Tariffs – one of the consequences of a “hard” Brexit where the UK leaves the EU without any preferential trade deal, which would include no agreement on the Single Market, Customs Union, is the re-emergence of customs for EU trade. Right now, significant customs procedures only apply to non-EU shipments. But, with around half of UK exports going to the EU, taking leave of Britain’s membership in the EU with no deal would means the end of free movement of goods. More customs declarations and duties would raise costs, slow down supply chains and certainly add time at border checks. A potential ‘hard border’ would be a particular issue for Ireland. 3) Resourcing Brexit – the UK Government also needs to think about the resourcing challenges involved in ramping up staff as well as IT systems to cope with the doubling of customs checks on the UK border. 4) NAFTA – As mentioned earlier, Trump has also flagged that the North American Free Trade Agreement (between Canada, Mexico and the U.S.) is up for renegotiation. If you’re a U.S. company, you need to start making plans now about how these changes will affect you. The same applies to any other of America’s free trade deals with 20 countries that Trump would have the authority to re-examine. 5) China? – Globalisation has helped China become a manufacturing powerhouse, but with numerous closed markets.However, there are very good reasons to continue to do business with China. Wages may be rising but that helps businesses to think about China as a market as well as one production locale in a supply chain. Plus, with growing protectionism in America, China’s President has signalled that China may take more of a lead in globalisation. There’s a lot to watch for. Is it possible to end extreme poverty? And by 2030?
That’s the aim of the first of the 17 UN Sustainable Development Goals (SDGs). These were adopted by all nations and have begun to drive conversations at global gatherings, including those that I have contributed to in recent weeks. This ambitious goal builds on the dramatic fall in worldwide poverty since 1990. Then, over one-third of the world’s population lived on less than $1.25 per day, adjusted for purchasing power parity or what a dollar buys in a country. That measures the level of abject poverty, and has since been adjusted to $1.90 per day. Based on these measures of extreme poverty, we are at a historic point where just 1 in 10 people in the world are poor. It means that over 1 billion people have been lifted out of extreme poverty since 1990. The halving of the global poverty rate happened more quickly than the UN’s Millennium Development Goals (MDGs) had envisioned. The MDGs aimed to halve poverty worldwide from 1990 levels by 2015 – it was achieved in 2010. So, the current SDGs are more ambitious. The aim is to end extreme poverty in just 13 years by 2030. It means lifting the remaining 767 million poor out of poverty. But, what has worked before may not be enough this time. In other words, most of the poverty reduction occurred because of China’s economic growth as well as the rest of the East Asian region – countries which are on course to ending poverty. The poverty rate in East Asia fell from 61% to 4% between 1990 and 2015. In South Asia, it's dropped from more than half (52%) to 17%. By contrast, the number of poor isn’t declining in Sub-Saharan Africa and more than 40% of Africans still live in abject poverty. This is despite Africa registering the second fastest growth rate after only Asia during this period. The implication is that though it has worked largely for China and other Asian nations, economic growth isn’t enough to reduce poverty. High levels of inequality, for instance, mean that an economy can grow and not help the very poor. So, that means eradicating poverty requires new strategies, in addition to what has been tried in the past couple of decades. Half of the 767 million poor live in Africa and one-third are found in South Asia. The remaining poor dwell in East Asia, Latin America, and Eastern Europe, all regions which are on track to end poverty. Thus, the poor in Africa and South Asia should now be the focus. And devising economic growth that helps the poorest will require new approaches. For instance, reducing income inequality should be a higher priority. That typically requires redistributive policies, but also pre-distribution ones such as mandating education to better equip the workforce. Also, capital accumulation tends to be the engine of growth for industrialising nations, so investment funds are needed. This can come from public and private sources, and usually involves both governments and businesses working together to get financing into countries to fund entrepreneurship and infrastructure. How these funds are deployed, of course, is where novel strategies are particularly needed. For instance, effective deployment of funds requires an understanding of the needs of the locality. Some of the most knowledgeable of a community’s needs are found in civil society organisations. NGOs or non-governmental organisations of any stripe can, for instance, help transmit the needs of a locality to government and businesses so that funding and resources can be used more effectively to foster economic growth. There is also a degree of accountability from smaller groups rooted in a community, as much of the evidence from social capital studies show. Of course, there is not one recipe for economic success. But, involving more participants with a stake in society is worth considering. After all, policymakers and businesses have increasingly sought feedback from their citizens and customers about governance and needs. It’s just a step further to encourage individuals to become involved to help grow their communities. Governments do not have all the answers, nor do business. Working with communities to support economic growth would be a natural step. Without trying more eclectic ways of thinking about growth strategies, poverty is likely to persist. To realise the ambition of living in a world without extreme poverty will require trying something different and more collaborative going forward. 2017 is likely to be a bumpy year for the global economy, with major economies facing political uncertainty too. The American economy will be led by a new president who faces a backlash against globalisation that could stymie trade deals. Even though it’s unlikely that globalisation will be rolled back, the lack of progress on opening markets and rising protectionist sentiment may contribute to prolonging the stagnant trade growth of the past year. China, the world’s second biggest economy, continues to be plagued by concerns over its slowing growth and rising levels of debt and could also see its president consolidating more power, which adds another level of uncertainty. The Chinese government is likely to continue to use fiscal stimulus to boost growth in 2017, despite concerns over how investment adds to debt. Finally, France, Germany and others all have elections or a referendum in 2017 that could see changes in government at a crucial time for the Eurozone, and the UK plans to formally trigger Brexit talks by March 2017. For all these nations, political headwinds may well be as important as economic reform plans in 2017.
For the decades under inflation-targeting, currencies were hardly mentioned for fear of moving the FX market. Along with the change in monetary policy regimes to include macroprudential regulation, currencies are no longer taboo to mention, though it still only occurs occasionally as central bankers are rightly concerned about igniting a currency war.
Exchange rate volatility or even a crisis has risen to the forefront of macro policy concerns. As with all such risks, whether a sufficient policy response exists matters a great deal. On this criteria, policymakers face a set of challenges. Top of the list is China. The RMB is one of the currencies that's generating the most concerns. Until recently when the ceiling on the benchmark deposit rate and the floor of the lending rate were lifted, there was no market-clearing interest rate. The gap between the two may have helped the net interest margin that raises revenue for the mostly state-owned commercial banks but it prevented the accurate pricing of risk and the efficient allocation of capital. And, it made it difficult, if not possible, to determine the long-run value of the exchange rate since currency movements are linked to the real interest rate. Now that the interest rate has been liberalised, the RMB is beginning to find its footing, helped by a stabilising current account balance even though global prices provide an ongoing challenge. More fundamentally, China's central bank hasn't relied a great on the interest rate to set monetary policy as a result so its gradual shift will bear watching. In the meanwhile, offshore currency traders are bring wrong-footed during this volatile period. Nearly $600 million worth of bets on the RMB weakening past 6.6 to the U.S. dollar, its low point during last year's surprise devaluation, have expired and become worthless. Currency trades are bilateral and not just over time. The other major global currencies are also being tugged and pulled by divergent monetary policies. Stimulative policies by the ECB and BOJ are juxtapositions against the normalisation of U.S. monetary policy to the Fed. The resultant weakening and strengthening of their respective currencies, the most traded in the world, is making it challenging for the rest of the global economy. In other words, most emerging markets have pegged their currencies to the dollar and also to the euro. Some Asian economies, due to the predominance of regional supply chains, keep a close eye on the RMB as well as the yen. Yet, the Fed has raised rates while the ECB has just unleashed a slew of loosening policies, including more cash injections or QE. In Asia, China is cutting rates now but it still is sufficiently above the zero bound for interest rates while Japan is deep in negative territory for rates. Such divergences among the dominant currencies add to global volatility because they lead to divergences among the economies that are pegged to them. So, some emerging economies are seeing their currencies rise while others are experiencing devaluation. For those central banks, their main monetary policy aim is targeting the exchange rate. So, this has become more challenging. It's especially the case for commodity exporters, who tend to be pegged to the dollar as the currency in which commodities are priced, and are seeing their exchange rate appreciate alongside the dollar when they could use a weaker currency. For what it's worth, it's even more challenging for major economies with free floating currencies. After all, the notion of a fully flexible exchange rate is that that there is no need to manage it. But, one of to members of the reserve currency club is now the RMB and there are those who worry about the Chinese currency's volatility as a risk to be managed when there really aren't many tools to do so. Still, exchange rates are also driven by financial flows, so the new macroprudential powers have an indirect effect, similar to interest rates. Still, central banks rightly remain reluctant to target currencies explicitly. It means that we should not be surprised that at a time of divergent monetary conditions and Chinese reforms that currencies are volatile and there is little that can be done by central banks. Trumpism is defined as: (1) the rejection of the current political establishment and the vigorous pursuit of American national interests; (2) a controversial or outrageous statement attributed to Donald Trump.
On winning the US Presidential election, Trump’s victory speech confirmed that he would put America first in his policies. That pursuit of America’s interests will permeate US economic and other policies in the years to come. US President Donald Trump’s effect on the economy is hard to discern due to a lack of policy detail, but there are three main areas to watch: fiscal, monetary, and foreign including trade policy. In each area, there is potential for significant change. But, as with all public policies, there will be a trade-off that is yet to be dissected. For instance, he’s vowed to double America’s growth rate, critiqued the Fed, and expressed protectionist views. How will he achieve those aims? And at what cost? Firstly, America’s economic growth has been slower than before the 2008 financial crisis. There are underlying trends that have led economists to debate whether the US, and other advanced economies, are facing “secular stagnation”. It’s a term first coined by Alvin Hansen in the 1930’s and recently revived by Larry Summers, which captures the notion that America may face a slower growth future. Trumpism’s first aim will be to raise economic growth, and the policy to be deployed to achieve that goal is to cut taxes and reduce regulation. But would that square with his desire to reduce America’s debt? The independent Tax Policy Centre, jointly set up by the Brookings Institution and the Urban Institute, estimates Trump’s plan will double the growth in federal debt. Will Trump be able to justify that trade-off in his fiscal policy? Of course, his plan to cut business taxes from 35% (which is among the highest in the OECD) to 15% (which would be among the lowest), as well as incentives to increase investment, may be welcomed by businesses who voted him into office. The Tax Policy Centre also concludes that Trump’s plan would actually increase and not decrease the tax burden on middle class Americans, while cutting taxes for the better-off and corporations. Given the stagnant median wages that have squeezed the middle class, economic growth that does not raise incomes for the average American is less than desirable. The American consumer also drives the global economy, so there are wider implications. Second, and perhaps one that’s important for markets is what happens to the Fed. Trump has criticised the Chair of the US central bank, Janet Yellen, for acting in a politicised manner. It has led to concerns over the independence of the Federal Reserve as well as whether Yellen will remain in post until February 2018. That adds prolonged uncertainty on top of the near-term economic uncertainty caused by the scant details of Trump’s economic plans. The dramatic market movements where the US benchmark stock index, S&P futures, fell so far it hit its bottom limit, as well as the plunge in the value of the dollar reflected the concerns of investors. Indeed, markets have downgraded the prospect of an interest rate rise next month to 50-50. But the most significant market movements were seen in emerging markets; notably Asian stock markets and the Mexican peso gave an indication as to how emerging economy currencies were unsettled by Trump’s foreign and particularly trade policy. Trump has said that he will revisit trade policy, including withdrawing from NAFTA if the agreement doesn’t benefit America, consistent with his philosophy of putting America first. This is an area where the President has the unilateral power to re-negotiate and even withdraw from trade agreements – congressional approval is needed to enter into free trade agreements (FTAs), but is not required to pull out. The same goes for the imposition of some tariffs, which President George W. Bush did on steel, until he was pulled back by the World Trade Organisation. In a world economy that it already experiencing weak trade growth, a more protectionist US president is certainly worrying for the rest of the world, many of whom rely on selling to the vast American market. For Asian economies in particular, growth depends a great deal on exports, including to the US. The immediate reaction to Trump’s surprise victory – polls predicted a Hillary Clinton win when the voting began – was a dramatic fall in global markets, which reflected this surprise but also an underlying concern about where America is headed. Those market declines were moderated as the news sank in. But what happens next will depend on the policy specifics around Trumpism. Until we get more detail, there will be economic uncertainty about America, and by extension, the global economy. And that tends to be unsettling. |