The transition in the United States from President Barack Obama to Donald Trump does not run smoothly and adds to the general uncertainty that clouds the beginning of 2017. As the inauguration of the new president gets nearer, the controversies mount. While fierce disputes marked already the electoral campaign, these became even more severe after the election. The quarrels are not confined to the United States. Already during his campaign, the incoming president has provoked severe concerns in Mexico, China, and Europe. Trump has put the role of NATO into doubt and stands for a complete turn-around as to its relation with Russia. Across the globe, concerns are on the rise that the United States will lead the world toward the abyss of protectionism.
With economic growth relatively weak in most places of the world, protectionism gains popularity. Populism is on the rise also in countries that have seemed immune. The Brexit vote came as a shock. More news that is unpleasant can be expected with the elections that are scheduled in Europe in 2017, particularly in Germany and France. Concerns are on the rise that the European Union will not be sufficiently resilient to weather the storms while at the same time a deep split divides the United States.
The greatest concern for the world economy refers to protectionism. As economic conditions deteriorate and domestic controversies rise, governments tend to resort to protectionism as a way to safeguard domestic jobs. Protectionism is ruinous not only because it invites retaliation but also because in tends to escalate. In the end, each country will be worse off.
Historically, such beggar-thy-neighbor policies have often been the prelude to wars. During the Great Depression, protectionism has massively contributed to the length and depth of the crisis.
While in some countries, such as in the United States, the official unemployment rates have come down, employment has remained weak. Long-term unemployment brings with it, that more and more people leave the labor market and the official statistics does no longer register these persons as unemployed. This has happened in the United States where the unemployment rate has fallen over the past couple years below five percent, relative employment has hardly recovered and the so-called labor participation rate is still below 63 percent.
With the exception of Germany, most countries in the Euro Area suffer from persistently high unemployment rates. In Spain, unemployment has shot up to over 25 % and has only come down to under 20 % in the past year.
Exchange rate and current account
The dollar continues being strong and correspondingly other currencies, particularly the euro and the Chinese yuan have been weak.
In order to stabilize its currency, China sold part of tis dollar assets and thereby diminished considerably its stock of foreign exchange reserves by one trillion US-dollars to three trillion.
The strength of the US-dollar will further deteriorate the persistently high US current account deficit and exert additional pressure that the new US administration my resort to protectionist measures.
China still depends on its exports to keep its economy going while Germany’s export performance is strongly linked to both the US and the Chinese economy.
Prices and Money
There are signs that consumer price inflation is on the rise. Since July 2016, the American inflation rate has risen from below one percent to close to two percent.
In the euro area, the deflationary trough in the first semester of 2016 has ended and inflation rate have now risen to over one percent.
There is a huge monetary overhang in the world just waiting to get rolling. Over the past ten years, the major central banks has flooded the globe with base money.
A large part of these funds has been used to bolster the balance sheets of commercial banks. This way, there has been little transmission to the real economy. This, however, could easily change, once inflation rates pick up more markedly.
Knowing that an increase of interest rate my abort economic recovery, central banks in the industrialized countries have been very reluctant to raise interest rates. Central banks are still behind the curve. While the U.S. central bank has lifted the FED rate to 0.75 %, the European Central Bank still sets its basic rate a zero percent, while Japan has kept its policy rate at -0.1 %.
Historically, a massive monetary overhang has always led to price inflation, which has come upon the countries like an avalanche.
The future course of the world economy depends on economic growth, and economic growth depends on productivity. Over the past couple of years, U.S. productivity growth has been quasi stagnant as has been the case in the Euro Area and has even slightly fallen in Japan.
Public expenditure programs will fail to stimulate the economy, when productivity remains low. Likewise, low interest rate will not stimulate economic activity, when the return on investment remains meagre.
The downward trend of the economic growth rates continues. See GDP quarterly rates below:
Private investment is paralyzed by uncertainties. Many of big Brazilian companies are deeply involved into the corruption scandals. The present government is almost as unpopular as the preceding one. Private consumption is held back by rising unemployment and high interest.
In order to avoid outright government bankruptcy the public sector has frozen expenditures. As of now it is hard to see from where there should come a way out, particularly because Brazil’s major trading partners, such as China and the United States are in trouble and Brazil’s neighbors such as Argentina and Venezuela experience even deeper crises.
Mexico is experiencing a crisis of its development model. The country has relied on an ever-closer relationship with the United States. This strategy is now in doubt. The fallout from the incoming new American president is already severe. Tensions are on the increase. As the Mexican economy deteriorates, domestic conflicts are also on the rise. From around five percent, Mexico’s annual economic growth rate has fallen to around two percent.
In past couple month there has also been a sharp depreciation of the country’s currency.
This has forced monetary authorities to raise interest rate from around three percent in 2015 to almost six percent recently.
Russia suffers from the severe sanctions imposed on it by the Western countries. Additionally, NATO has increased its presence in Eastern Europe and Baltic states. Russia’s annual economic growth rates has turned negative since the beginning of 2015.
Yet the unemployment is still low and the inflation rate has come down from 17 percent in 2015 to 5.4 percent by the end of last year.
The rate of government debt to gross domestic product has risen drastically over the past years, yet by the end of 2016, this rate is still under 18 percent.
A new chapter in U.S.-Russian relations will most likely begin when Donald Trump will assume his presidency after his inauguration in January 2017. When Western sanctions will be lifted and oil prices will recover, the Russian economy could experience a period of excellent performance.
China’s annual economic growth rates have come and seem to stabilize around six percent.
The official inflation rate has been relatively stable and stands currently at 2.1 percent.
The same holds for the official unemployment rate, which has been steady over the past decades at around four percent. In order to stabilize its currency and counteract the outflow of money, Chinese monetary authorities sold US dollar assets to the amount of one trillion over the past year.
GDP numbers for the industrial countries show that economic performance is actually not as dismal as often complaint. Taking into account that these countries show moderate or no population growth at all, economic growth rates above one per cent are not bad at all. In the third quarter of 2016, the US economy grew 1.6 % down from 2.8 % the year before, while the economic growth remained steady in the Euro Area at 1.6 %. Japan is still struggling as its growth rate fell from 1.9 % to 0.8 %. Britain is doing fairly well with an economic growth rate of 2 % in the third quarter of 2016, only slightly down from the third quarter of 2015 when the economic growth was 2.2 %. While there is much lamentation about low growth, the numbers are actually better as the public mood and media discussion seem to suggest.
The growth rate so-called fixed capital formation fell in the United States from 4.7 % to 1.4 % and in the United Kingdom from 5.1 % to 1.2 from the third quarter of 2015 to the third quarter of 2016. In the Euro Are, investment growth was relatively strong as it rose from 2.2 % in the third quarter of 2015 to 3.2 % in the same period of 2016. Japan, which experienced still a strong growth of investment in 2015, suffered a setback in 2016 when investment growth slowed down to 0.5 % in the third quarter of 2016.
Private consumption continued to grow strongly outside of Japan. In the United States, after rising 3.3 % in 2015 (3Q), private final consumption receded to 2.6 % in 2016, while the rate for the Euro Area remained steady at 1.8 % and accelerated in the United Kingdom from 1.3 % to 2.8 %. In Japan, the growth of consumption has not yet recovered at a rate of -1.1 in the third quarter of 2015 and 0.1 in the third quarter of 2016. Austerity, as it is often claimed, happens neither in the US nor in Europe.
Official unemployment nearly disappeared in the United States as the unemployment rate fell to under five percent in the third quarter of 2016, well below the rate of over ten per cent, as it is still the case in the Euro Area. Even lower than in the United States is the unemployment in Japan, where in currently stands at three per cent. Putting these figures in perspective, however, requires taking into account the peculiarities of the individual labor markets. While in the United States, for example, the unemployment rate has fallen, the labor participation rate has fallen as well, while labor participation has been increasing in Europe over the past couple of years.
Exchange rate and current account
There has been a steady trend of appreciation of the U.S. dollar that as lowered the euro exchange rate almost to parity. The Chinese yuan continues to depreciate together with the British pound, which is still suffering from the Brexit blues. Not least because of the depreciating euro, the Euro Area enjoy a huge current account surplus that rose from 3.8 % of GDP in the second quarter of 2015 to 4.3 % in the same period of this year. Even worse than for the U.S., which has a current account deficit of 2.5 %, is the balance for the United Kingdom that rose from 4.7 % of GDP to 5.9 %.
Consumer price inflation is still extremely low in all of the industrialized countries. However, with the exception of Japan, price inflation has been rising since 2015. While in October 2015 the rate of consumer price inflation in the United States was still as low as 0.7 %, this variable rose to 1.9 % in October 2016. A major rise, albeit at very low levels, occurred also in the Euro Area and in Great Britain, where prices rose from a rate of 0.3 % to a rate of 0.7 % in the Euro Area and from a rate of 0.2 % to 0.9 % in the United Kingdom over the same period. Only in Japan did the rate fall from 0.30 % in October 2015 to a rate of -0.06 % in October 2016.
Before long-term interest rates rose in November of 2016, they have fallen until October 2016 to 1.76 % in the United States, to 0.78 % in the Euro Area, to 1.08 % in the United Kingdom and to a negative rate of -0.06 % in Japan. The decline of long-term interest rates happened in the United States although short-term interest rates rose from 0.25 % to 0.72 %. Deflationary expectation were still well in place and have changed only recently. Until October 2016, the Euro Area experienced negative short-term interest of -.05 % in October 2015 and -0.31 in October 2016. Both in the United Kingdom and Japan, short-term interest rates also declines over this period to 0.37 in the United Kingdom and to 0.06 in Japan.
Money growth accelerated in the United States, Japan and the United Kingdom, but slowed down in the Euro Area. In the U.S., the rate of growth of narrow money (M1) rose from an annual rate 3.8 % in October 2015 to a rate of 8.2 % in October 2016, and slowed in the Euro Area from a rate of 10.3 % in October 2015 to 6.1 % in October 2016. In Japan the annual rate of the growth of narrow money accelerated from 4.1 % in October 2015 to 7.8 % in October 2016, and in the United Kingdom during the same period from 6.5 % to 10.6 %.
Political uncertainty continues under the new government. The legal procedures in connection with the corruption scandal involving the Brazilian oil company Petrobras affect the heart of the Brazilian political system. All political parties, so it seems, are involved in widespread corruption. Hardly a day goes by without some news about another prominent politician who is involved in a corruption scandal. In the meantime, new areas of corruption are under investigation that affect also local politicians. Consequently, there is not yet green light for a solid economic recovery.
Over the past two decades, Mexico has experienced a period of strong growth with low inflation. There has been a massive inflow of foreign direct investment. Employment has grown steadily. Yet now dark clouds appear on the horizon. It still must be seen whether the threats of the new U.S. president-elect can be taken seriously or not, but nevertheless, growth outlook is already dimmed and there are growing inflationary pressures. The first signal that riskier times are ahead will come from the currency market when the Mexican peso begins to weaken.
South Korea, one of the economic star performers of the past couple of decades, enters troubled waters. Korea’s first female president who has been in office for nearly four years faces impeachment on ground of her influence paddling. When the Constitutional Court confirms the impeachment, there will be a new elections in 60 days. There should be little concern, however, as to the economic performance of the South Korean economy. The one thing South Korean has to fear are incalculable threats by North Korea that could go so far as to escalate into a military confrontation.
Russian president Putin tries hard to define his country’s global role. Russia has increased its military presence in the Middle East and is actively involved in the Syrian war theater. At the same time, NATO is moving eastwards in an attempt to protect the states that have gained independence with the fall of the Soviet Union.US-Russian relations have deteriorated during Obama’s presidency. A new chapter in U.S.-Russian relations will begin when Donald Trump will assume his presidency after his inauguration in January 2017. When Western sanctions will be lifted and oil prices will recover, the Russian economy could experience a period of excellent performance for long period of time.
It is only a matter of time until Venezuela will
default on its foreign debt. After a short peak in 2009, when the country’s foreign
exchange reserves stood at over 40 billion US-dollars, Venezuela has been steadily
hemorrhaging its reserves down to 10 billion US-dollars. In 2016, Venezuela started
to sell gold in order to compensate for the loss of its monetary reserves. As its
consequence, Venezuela’s gold reserves plunged from over 360 tons down to less
than 190 tons. Other than in the case that some foreign power, such as China
for example, would jump in as a lender, Venezuela’s default seems unavoidable.
Venezuela is not only the victim of falling oil prices
although these have the strongest immediate effect on the country’s finances. Oil
revenue finances more than half of Venezuela’s government budget and accounts
for almost all export income. Venezuela’s deeper problem comes from the fact
that almost all of the government’s so-called social benefits in the wake of
the “Bolivarian revolution” under presidents Hugo Chavez and Nicolás Maduro
have been financed by monetary expansion.
In 1998, before Hugo Chavez became
president, the extended broad money supply (M3) stood at 10.6 billion
Bolivars. In 2010, the Venezuelan money supply had already risen to an
estimated 292.0 billion Bolivars, and as of October 2016, money supply M3 stood at 7513.9
billion Venezuelan Bolivars. As its consequence, annual price inflation shot up from around 25 per cent in the years before
2012 to over 180 per cent by the end of 2015 until the government practically stopped publishing the official figure. The International Monetary Fund estimates an inflation rate of 480 per cent for 2016 and of 1640 per cent for 2017. In February 2016, the Venezuelan
government officially devalued its currency by 37 per cent against the
US-dollar from 6.3 to 10 Bolivars all the while when the black market rate
stood at over 1000 Bolivars for one dollar.
Since 2012, the price of Venezuelan oil has dropped
from 100 US-dollar per barrel to less than 50 US-dollars. Due to political
turmoil and socialization of the industry, the overall oil production of the
country has fallen to a 13-year low in 2016. Venezuela’s exports that consist
almost completely of oil have plummeted from a peak of 30.7 billion US-dollars
in the third quarter of 2008, to currently less than 10 billion US-dollars per
The Bolivarian Revolution, which Hugo Chávez started
in 1999, is coming to its end. Severe shortage of basic goods, food lines,
exorbitant black market prices, the collapse of the currency and hyperinflation
now afflict a country that claims to possess the highest proven oil reserves of
It is only a matter of time until Venezuela can no
longer finance its imports and social and political chaos of unprecedented
proportions will afflict the country. The fallout will also affect Venezuela’s
Donald Trump surprises the world as he wins the U.S. presidential race. The candidate of the Republican Party can count on a majority of his party in the Senate and Congress. The polls were wrong again. Uncertainties grow.
The now president-elect promised many drastic measures during his campaign. Yet the expectation that his victory would lead to a sell-off at the stock market did not happen. However, the rise of the interest rate that has been going on recently gained a new momentum.
The major policy measures of Trump’s agenda include the protection of America’s manufacturing sector and massive investment in infrastructure. Both of these items will lead to an increase of the interest rate as they can hardly be realized without a rising price level.
There are also fears that the next president will interfere with the independence of the American central bank. It is unclear how he could manage the deportation of millions of illegal residents as was promised.
Furthermore, despite many formal declarations of both sides, the Democratic opposition will not lightly give in. The dispute between the two major American parties is not free of bitterness and will poison the discourse in years to come.
There is reason to expect more turmoil.
Profound Changes Ahead
The major concern for the financial the markets will be that the period of falling interest rates is coming to end. The United States will turn more inward and become more protectionist. The role of the United States as the dominant world power is coming to end. This change will first become manifest in the global role of the U.S. dollar.
Many of the ailments of the U.S. economy that were pointed out by Donald Trump in his election campaign are the result of the position of the U.S. dollar as the world’s major reserve currency,
The global role of the U.S. dollar brings with it the temporary advantage that deficits do not matter – neither of the government budget nor of the current account. Because the dollar serves as the major reserve currencies, foreign countries and foreign investors are more than eager to finance these deficits.
The dark side of the story is that absorption exceeds production. With imports cheap and easily to finance, domestic production is exposed to a permanent process of erosion. The structure of the U.S. economy thus has become highly lopsided with the side effect of growing inequality of income and wealth. Such a trend cannot go on forever. In the case that the change is not made in a voluntary way as it is the intention of Trump, it would have come anyway, and in this case by necessity.
Macroeconomic policies will change
The period of expanding debt and extremely low interest rates in the major industrial countries is coming to an end. Rising interest rates are looming. Fiscal crises will become more frequent on an international scale because rising interest rates in the industrialized countries would have a global impact. Such a perspective would imply that it cannot be excluded that the world is moving towards a new international debt crisis. It is not hard to imagine what the combination of higher interest rates and U.S. protectionism would mean for the world economy.
Protectionism on the rise
The problem with protectionism is that it does not remain limited to a country but tends to spread even more so when the United States as the world’s largest economy acts as the pioneer of protectionism. Protectionism was already a horrible tendency in the 1920s and 1930s; in the 21st century, protectionism would be fully catastrophic. It remains to be seen whether the insight comes to the U.S. leadership that the international trade imbalances are not the result of free trade but have come about to the United States as the erosion of its manufacturing base because of the role of the American dollar as the international reserve currency.
New role of the United States
American isolationism would leave a gigantic vacuum in the world. When a great power recedes from its role as the hegemon, it is common that a host of new contenders will appear. The fight for succession is never peaceful. In the case of the United States as a global hegemon, its demise of this role would put the whole world under the threat of worldwide conflicts.
Europe must strengthen its position
As a consequence of U.S. protectionism, Europe must redefine its role in the world. Since the end of Second World War, Europe has prospered under the guidance of the United States. The North Atlantic Treaty Organization (NATO) was the common organizational structure of this system. In so far as the new American administration puts the role of NATO into doubt, Europe must find a new anchor. As of now, the European Union specific defense initiatives have been scanty. This will surely change in the future. An ironic consequence of both the Brexit and the Trump election could thus be a strengthening of the European Union.
Emerging Markets Scenario
Right after the announcement that Donald Trump has gained the U.S. presidential election, the Mexican peso began to fall drastically. The deportation of millions of so-called “illegal immigrants” – most of them Mexicans – was a central part of Trump’s campaign. The incoming president, who will officially be inaugurated on January 20th, 2017, has also announced that he would renegotiate the North American Free Trade Agreement (NAFTA) with Mexico. Should the new president really pursue his announcements, Latin America might reconsider its international economic position and move towards own trade arrangements which might even lead to a strengthening of the MERCOSUL.
Brazil’s economy is not yet out of the woods. It is not just a cyclical downturn that is happening. The fall of the economic growth rates is rather a symptom of deep-rooted structural distortions. The standing of the present transitory government that came to power after the former president was ousted, is too weak for a forceful structural change. As of now, the activity of new government is limited to install some measures of fiscal restraint. Fiscal adjustment is a necessary but not a sufficient condition for economic recovery.
China builds a global network
Irrespective of the political turmoil in American, the ongoing bloody conflict in the Middle East and the refugee crisis that afflicts Europe, China is steadily working on its global trade and investment network – the New Silk Road that extends from Western Europe to South East Asia. The world’s economic center shifts from the West to the East. Step by step, China is extending its sphere of influence and its path to prosperity seems to be unstoppable. Different from many other take-offs of developing countries, the rise of China is not only based on the mobilization of labor and capital as factors of production but also on a rapid acceleration of its capacity for technological progress.
A growing part of Africa falls into the sphere of interest of China. Africa’s space and natural resources attract Chinese business interests. Free of the stain of a colonial power, China is welcome in many parts of Africa as the chosen partner of industrial development.
Global Economic Overview October 2016 Top Macroeconomic Themes British pound continues to plunge
Preparing her nation for the Brexit, British Prime Minister Teresa May faces a divided Conservative Party.
The British pound suffered a severe “flash crash” when the Prime Minister pushed for a more populist agenda at the Conservative Party’s congress in Birmingham on October 2nd.
With the prospect of even more disunity among the Conservative Party members, the likelihood of a Labour victory in the next Parliamentary election is on the rise.
Labour Party leader Jeremy Corbyn would most likely resurrect the policies of “Old Labour”.
In the meanwhile, members of continental European countries of the European Union close their ranks and will confront Britain’s exit negotiations with strict conditions, most of all that there will be no free British access to the European single market without a free movement of labor.
British banks depend to a large extent on the continental European business and the potential loss for the British finance industry would be enormous if access should be denied.
As of now, new foreign direct investment to the United Kingdom have virtually stopped and foreign resident companies consider moving their business out of the country.
Dark shadows cloud the world economy
The global economy moves further into unchartered territory. Negative interest rates in the major industrialized countries have created the perverse situation of extreme asset valuations in combination with almost no and even negative yield.
Despite the continuation of massive monetary stimuli, the prospect of higher economic growth rates has diminished. Consequently, the US Federal Reserve has not raised its policy interest rate.
Severe uncertainties come also from politics where neither of the two presidential candidates can count on a solid support among the voters. There is even talk that the candidate of the Republican Party, Donald Trump, should resign from the race.
There is global debt overhang that will becomes a serious problem if growth should not return.
The current troubles of the Deutsche Bank are symptomatic of the precarious financial situation of global banks. Faced with a huge fine because of illegal market transactions, Deutsche Bank faces a massive fine that could wipe out its capital.
As Deutsche Bank is also very active in the market for derivative financial instruments, a collapse of Deutsche Bank would have global repercussions.
Macroeconomic policies hit the wall
With fiscal policies blocked because of the high public debt levels, and with monetary policies having reached the end of tis capabilities as interest rates have become zero or even negative, macroeconomic policy is paralyzed for the year to come. Likewise, high consumer debt burdens, limit private consumption. The stimulus of low interest rates has little effect on business investment in an environment of generally weak consumer demand
Germany’s exports power ahead
After a short phase of weakness, the export performance of the German economy is on the rise again. German products are highly competitive not only because on their traditional quality, but for years now also because of their relatively favorable prices. This is the result that the euro currency is underperforming because of the troubles in the Southern periphery of the euro area. This means that Germany enjoys an undervalued currency. As a result of this imbalance, Germany’ economy is at risk of overextending the export sector of its economy.
U.S. twin deficits
While Germany registers a high current account surplus and a government budget surplus, the United States suffers from a persistent current account deficit and rising public debt. There are signs that America is on its way of having to confront a situation of declining willingness and capability of foreign creditors to finance the U.S. deficits. China is reducing its exposure to US financial assets and the oil exporting countries face drastically diminished return because of the falling price of oil
Expect more troubles to come
Stock markets in the industrialized countries, particularly in the United States and Germany, have reached extreme valuations – mainly due to the lack of alternative sources of revenue. The risk is rising that some singular event - for example the collapse of a major bank - will provoke a stock market crash. Beyond this possibility, it must be taken almost for granted that global financial markets will suffer severe decline when finally interest should rise. Such an increase of interest rate may actually also happen without a move by the central banks when price inflation returns and nominal market interest adapt accordingly.
Emerging Markets Scenarios
A hard landing of China?
China’s debt to gross domestic product is rising fast. At the same time, China’s foreign exchange reserves are falling rapidly. Both trends point to trouble. Rising internal debt comes with mounting non-performing loans that will put China’s banking system at risk. The global effect of a severe domestic financial contraction would in this case come form a fire sale of China’s foreign exchange reserves that still are in the range of three trillion US –dollars.
Brazil on its way to recovery?
Brazil’s economy continues to shrink. Industrial production in particular is falling. Unemployment is on the rise. Public finances are in severe conditions, especially at the state level. There is not green light in sight. Foreign demand for Brazilian goods, particularly for commodities, will remain weak, and there is no indication in sight that domestic demand could rise. Additional uncertainty comes from politics where the corruption investigations encompass not only prominent politicians but also major companies
Venezuela is a lost case - hopeful signs in Argentina
Venezuela is moving towards hyperinflation and total economic collapse. The countries neighbors could soon be confronted with a severe refugee crisis.
The change of government in Argentina has lifted the prospects for this country. Nevertheless, the economic policy errors in the past were so severe that it will take many years before Argentina could again prosper
No way out for the Middle East
The Middle East and North Africa are moving ever deeper into war and destructionand have become a hot bed of terrorist. Over the past month, both Russia and the United States have increased their stakes in the region. Russia is still a military superpower and is forming new broad coalitions while America’s NATO allies are increasingly hesitant to join in
There is hope for Africa
I In a relatively quite way, an increasing number of countries in the African heartland push forward free market reforms and benefit from foreign direct investment, particularly from China. There seem to a trend in the making that could surprise many observers in the future.