The world economy is expected to lose some steam this year as the effects of the US stimulus fade, global monetary conditions continue to tighten and financial markets experience more volatility. So says Atradius in the January 2019 edition of its Economic Update.
According to the trade credit insurer, the most dire risk for the world economy is the unfolding of the trade war between the US and China, which creates uncertainty for firms and leads to lower investment. “It will also hamper trade, given the trade intensity of investment. Global trade growth remains strong. But is decelerating,” reads the report.
GTR speaks to David Culotta, senior manager of US buyer underwriting for Atradius Trade Credit Insurance Inc, about the top five risks affecting the trade finance world in 2019, drawing from the Atradius Economic Update and his own insight.
1. US-China trade war: Nothing is creating more uncertainty for firms than the US-China trade war, threatening investment and hampering trade. While global trade growth remains strong, it is decelerating. After witnessing a solid 4.7% expansion in 2017 – in 12-month rolling terms – trade growth eased to 4.1% as of January 2019. In recent months, weak global exports have also clouded the trade outlook for 2019. For example, China’s December export figures were down 4.4% year-over-year, marking the lowest totals in two years. We forecast global trade to decelerate further to 3% this year. However, should the US and China significantly ramp up their trade conflict, or should tensions rise in trade negotiations with Europe – such as threats to impose tariffs on European car imports – global trade could potentially take on additional downward pressure.
2. Greater oil price volatility: Oil prices rose by approximately 25% between August and October 2018 in part due to US-imposed sanctions on Iran. While oil prices briefly peaked at US$86 per barrel in October, increased production from Saudi Arabia and Russia, and the US decision to grant temporary waivers on sanctions to several large economies importing from Iran, led to a considerable drop in prices. Subsequently, the US Energy Information Administration revised its price forecast down to US$61 for 2019 given global supply and demand expectations.
More recently, the US also imposed sanctions against the state-owned Petróleos de Venezuela SA (PdVSA) in late January 2019. The initial response sent Brent crude oil futures to over US$61 per barrel. The sanctions targeted a key source of income to the Maduro government in hopes that he would have little choice but to turn over the government to the centrist Guaido. While long-term sanctions could lead to reduced global supply – and rising prices – global oil supply still remains high at this point. Developments will impact global supply chains within the oil industry and could more broadly impact global growth.
3. External risks: While the effects of US tariffs on steel and aluminium and the retaliatory measures by the EU remain limited, uncertainty related to Brexit, the current economic climate in Italy, and trade relations continue to weigh on the European economy. In December 2018, the European Central Bank (ECB) terminated net asset purchases under the bond-buying programme. Prior to the December announcement, the ECB had already considerably scaled down its quantitative easing programme, reducing asset purchases from €60bn per month at the start of the programme to €15bn per month by September 2018.
Regardless, the ECB council is sufficiently convinced that inflation continues to converge to its medium target of 2%, and inflation figures in recent months support this view: 2.2% in October and 1.9% in November 2018. Despite low inflationary pressure, uncertainty surrounding both Brexit and US/European trade relations are likely to continue to put pressure on the Eurozone economy. Slowing growth in China could also negatively impact European exports.
4. Policy uncertainty: While the current economic expansion is nearing the longest on record in US history, economic indicators would seem to suggest an increasingly fragile environment. Despite solid estimated growth of 2.9% in 2018, trade conflict and monetary policy uncertainty have led to muted expectations for 2019 growth, with Atradius estimating a 40-basis-point deterioration to 2.5%. Private consumption continues to drive the current expansion supported by a strong labour market, record low unemployment, and a lack of material inflationary pressure. Business investment and overall economic growth are facing increasing challenges, including higher input costs and rising borrowing rates. While input costs vary by industry, trade protectionism and the resulting tariffs have increased supply costs in various industries, including the metals sector and the semiconductor industry. In addition, rising interest rates have increased the cost of borrowing, impacting business investment decisions.
The Federal Reserve increased interest rates again in December to a range of 2.25% to 2.5%, reflecting the ongoing strength of the domestic economy. But with increasing headwinds, the pace of tightening will likely slow in 2019. We expect the Fed’s next moves will be data-dependent but markets currently predict no further hikes in 2019. If the Fed maintains its recent dovish tone and data dictates a hold strategy for the foreseeable future, businesses will be under less earnings pressure in light of stable borrowing costs positively impacting both economic and trade growth.
5. Insolvencies: Per the January Economic Update published by Atradius, we project a modest 1.7% decrease inf insolvencies for 2019 across advanced markets in North America, Asia Pacific and Europe, with potential downside risks related to global trade negotiations and monetary policy decisions. This compares to a 3.6% decline in 2018. Increasing uncertainty within the global markets could also negatively impact both consumer and business confidence as well as GDP growth, potentially leading to increased insolvency rates. Over the course of the post-recession recovery, the corporate sector in the US has benefited from high consumer confidence, fiscal stimulus, easy financial conditions and high domestic demand. While these factors have driven corporate sector earnings over the past several years, the recent rate hikes and significant levels of lower rated corporate debt could play a role during an economic downturn. Emerging market insolvency rates are also expected to deteriorate moving forward. While the strong global economic conditions and easy access to financing propped up emerging market economies in 2018, the softening global outlook, increased volatility, and heightened uncertainty are expected to lead to increased default rates in 2019.