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.
Global Scenario
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 destruction and 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.
Antony P. Mueller October 10, 2016
