Heads of state, high-ranking economic experts and business leaders came together at the World Economic Forum’s annual meeting in Davos, Switzerland, to exchange views and opinions. Amid concerns about the Chinese-US trade war, Brexit and a looming economic downturn, this year’s WEF meeting saw numerous calls for increased international cooperation.
The International Monetary Fund (IMF) opened the meeting prominently, warning in its “World Economic Outlook” about an impending downturn of the world economy. Against the background of the trade dispute and other uncertainties, the outlook for the global economy has dimmed somewhat, the current IMF forecast finds. The global GDP growth estimate has been reduced to 3.5 per cent this year and 3.6 percent for 2020, where the forecasts still lay at 3.7 per cent respectively in October.
“A global recession is certainly not yet imminent,” said IMF Managing Director Christine Lagarde at the report’s presentation in Davos. “But the risk of a stronger decline in global growth has certainly increased.”
“The slowdown seems to be coming sooner than expected," IMF Deputy Managing Director David Lipton told Reuters TV. While the economy is still doing well, there are numerous risks, ranging from trade disputes to poorer financing conditions, Lipton said.
Merkel bangs the drum for multilateral cooperation
Against this background, several heads of state called for increased international cooperation and a renunciation of protectionism in Davos. Germany's Chancellor Angela Merkel called for further free trade agreements, explaining that she is seeking allies for multilateralism: “Anything else would lead to misery,” Merkel emphasised, adding that she would like to see a reform of the major international organisations to reflect the massively increased influence of economies such as China or India.
Japan, which currently heads the group of the 20 largest industrialised and emerging countries (G-20), also spoke out in favour of strengthening the multilateral order. “Japan is determined to maintain and develop free, open and rule-based international order,” Prime Minister Shinzo Abe declared at the WEF.
Without naming the US, Abe called for confidence in the international trade regime to be restored. The World Trade Organization (WTO) has an important role to play as the guardian of free trade. However, US President Donald Trump, seeing his country badly treated by the WTO, went as far as to threaten the US’s resignation.
China’s Vice President Wang Qishan sees international trade regime seriously endangered, criticising that many countries were looking inwards more and more, putting a damper on international trade and investment, while unilateralism, protectionism and populism are increasing. Wang described economic globalisation as an “inevitable trend”. Wang emphasised the enormous potential utilizable, if the individual countries’ competitive advantages were exploited and economic ties strengthened. In response to the challenges facing the world, he declared that countries must take this course of action jointly and actively.
Wang made no mention of the ongoing trade war with the USA in his speech. A scheduled meeting in Davos to discuss the trade conflict with US President Trump was not held due to Trump’s cancellation at short notice. However, Trump’s was not the only prominent cancellation: France’s President Emmanuel Macron and UK Prime Minister Theresa May also did not attend the WEF this year due to domestic political problems. Austria was represented by Federal Chancellor Sebastian Kurz and Foreign Minister Karin Kneissl.
Forecasts are not a reliable indicator for future developments.
As hopes for an end to the trade war between the US and China increase, the stock markets reflected the sentiment with gains at the outset of the new year. After recent talks between representatives of the two countries in Beijing, the leading US index, Dow Jones, gained almost 3 per cent by Friday. Major European stock indices such as the DAX or the Euro-Stoxx-50 also gained between 2 and 3 per cent. Outperforming them, Austrian stock index ATX even gained over 6 per cent since the start of the year. However, while the stock markets saw the most gains during the eagerly awaited talks, the unresolved differences after the end of the negotiations halted the positive development again.
Negotiators from China and the USA met in Beijing for talks in the second week of January. The negotiations to end the trade dispute were originally scheduled for two days, but were then surprisingly extended, to close scrutiny by the markets. These were the first direct talks since US President Donald Trump and China’s Head of State Xi Jinping had agreed a 90-day break in the customs dispute at the beginning of December after a series of escalating mutual punitive tariffs in the billions.
Progress after negotiations, but many differences still unresolved
Both countries reported constructive talks. China’s Ministry of Commerce stated that the talks fostered mutual understanding and yielded a basis for addressing the concerns of both sides. Yet despite the initial progress, much work still needs to be done to end the trade war.
According to the US Department of Commerce, China has kept its promises to buy “significant quantities” of US products and to allow more service deals. According to the Wall Street Journal, progress has been made regarding additional imports and the opening of the Chinese market to US capital. However, differences remain over issues such as protection of intellectual property and subsidies for Chinese companies.
During the talks, the Chinese government agreed to open its market to further genetically modified grains, which was considered a sign of progress as the US had been demanding this for years. According to insiders cited by the Wall Street Journal, the trade talks also paved the way for possible further higher-level negotiations. A possible next step would be a meeting between China’s Vice Premier Liu He and US Trade Representative Robert Lighthizer. US President Trump could also meet China’s Vice President Wang Qishan for talks at the World Economic Forum in Davos.
However, time is of the essence. In December, US President Trump had promised to provisionally suspend the announced further increase in US punitive tariffs on Chinese imports to the tune of USD 200bn until 1 March. If no agreement is reached by then, the dispute could escalate again, which could impact not only the economy in China and the USA, but also some European countries hard.
Meanwhile, Trump’s policy continues to make headlines in other areas. The trade dispute between the US and the EU recently saw some progress after high-ranking representatives of both sides came together to discuss an agreement. However, the conflict over possible US punitive tariffs on European cars is not yet resolved, and neither is the dispute over Trump’s planned border wall to Mexico, which is preventing the adoption of a budget law by Congress. As a result, most of the federal authorities have been shut down since 22 December.
At their meeting in Vienna on Friday, the OPEC+ countries agreed on a production cut. Starting in January, the daily production volume will be reduced by 1.2 million barrels (1 barrel = 159 liters) for six months. Of these, the OPEC countries are cutting 800,000 barrels per day, with Saudi Arabia alone providing a 500,000-barrel cut. The 10 leading oil-producing countries outside of OPEC, which form OPEC+ together with the oil cartel, are to cut a further 400,000 barrels, with Russia reducing its output by 130,000 barrels per day.
Iran, Venezuela and Libya are exempted from the agreement. The production cut will be upheld for six months, and reassessed in April 2019.
At present, the 15 OPEC members alone produce around 33 million barrels of oil per day, covering around one third of the world's crude oil production. According to the International Energy Agency, however, the demand for 2019 is only 31.3 million barrels of OPEC oil per day, and current production levels are already based on a daily production limit of 32.5 million barrels. The restriction has been in effect since the beginning of 2017 and was only extended in June 2018 until the end of the year.
With this cut, OPEC aims to stabilize the crude oil market. However, analysts are skeptical about the cut and its proposed effect. According to market experts, around two million barrels of oil – almost twice as much as announced – would have to be withdrawn from the market every day in order to achieve a sustained positive effect on the oil price.
The reduction was also met with criticism in the USA. US President Donald Trump had already spoken out against possible production cuts in the run-up to the official decision, writing that OPEC would hopefully not cut their production. “The world does not want to see, or need, higher oil prices,” he added in a Tweet.
Brent bounces after 30-per-cent drop since early October
Following the decision, oil prices rose sharply on Friday in accordance with OPECs intentions. After the agreement was announced, Brent saw a 5-per-cent bounce and climbed to just over 63.0 USD. In early trading on Monday, the price pulled back a little to around 62.0 USD. Viewed over the year as a whole, however, the Brent oil price still shows a minus of just under 7 per cent. Since early October, the price has dropped by a whopping 30 per cent.
The fact that the lower price of crude oil does not manifest in lower petrol prices for car owners seems paradoxical at first, but is due to the low water levels of rivers important for the oil market. Refineries and depots distribute most of the processed crude oil by ship, but since river levels are very low this year along important waterways, ships can only travel to a limited extent or not at all. This hampers logistics and requires oil deliveries to be increasingly shifted to rail or truck, which is expensive and only possible to a certain extent due to limited capacity. This leads to a shortage of petrol and consequently to higher prices at the pumps.
The draft for Britain’s withdrawal agreement from the EU is in place. At the eagerly awaited EU special summit on Sunday, Britain and the EU agreed on their relations following Britain's exit from the EU at the end of March 2019. British government negotiators and the EU Commission had previously already agreed on a corresponding political declaration, in which many key points, such as British access to the EU’s internal market, remained undecided until just before the summit.
For British Prime Minister Theresa May, a lot is at stake. After the publication of the draft, she faced massive opposition from her own country: May’s opponents fear that the UK may be forced into a customs union with the EU for an indefinite period even after the Brexit, with Northern Ireland awarded special status. The treaty entails a one-time extension of the transitional phase, initially scheduled to last until the end of 2020. In addition, there will be no hard border with controls between Northern Ireland and Ireland.
Although May’s cabinet approved the draft on 14 November, three ministers, including Brexit Minister Dominic Raab, resigned on the same day. Less support for the draft, however, comes from Parliament, and a majority for the treaty is in doubt – whereas preparations to overthrow May are in full swing. A vote of no confidence is planned, but there are still not enough supporters for such a vote. In addition, calls for a second Brexit referendum are becoming louder. Parliament is to vote on the deal at the beginning of December – after the final treaty is approved at the EU summit.
In order to be able to sell the treaty to Parliament better, May was making an effort in the last few days before the EU special summit to secure extensive support from the other members regarding the future economic partnership. However, the EU is unyielding and unwilling to open a back door to its internal market for the British.
May is backed by businesses and the central bank
However, support for May for the draft comes from the British industry. The head of the Confederation of British Industry (CBI), Carolyn Fairbairn, greenlighted the previously negotiated contract on Monday. “It's not perfect, it's a compromise, but it’s hard-won progress,” she said. The deal, and above all its transition period, takes the UK a step away from the “nightmarish abyss of a non-treaty”. The CBI particularly welcomed the transitional period until the end of 2020, during which Britain will remain in the EU internal market and customs union in order to prevent a hard cut for the economy.
Supporting signals are also coming from the Bank of England (BoE). According to central bank chairman Mark Carney, an agreement with an interim solution will help the economy and facilitate EU withdrawal.
The markets are closely following the dispute over the Brexit paper. The British pound lost ground briefly in mid-November after the numerous ministerial resignations, but recovered somewhat shortly afterwards. By contrast, the sentiment on the stock markets has been restrained for some time now, not only due to the Brexit-related trials and tribulations, but also because of the budget dispute between the EU and Italy and disappointing results from US companies, particularly in the technology sector.
The outcome of the US Congressional election on Tuesday has caused some relief in the international financial markets. In the election, the Democrats won back the majority in the House of Representatives, the lower chamber in the US Congress, while the Senate remains in Republican hands.
Congress is the supreme legislative body of the United States and consists of two chambers, the House of Representatives and the Senate. Parliamentary work takes place through the interaction of the House of Representatives and the Senate, with the entire Congress being the government’s opponent in accordance with the Constitution.
The results of the Congressional election were as expected. According to analysts, this takes a lot of uncertainty out of the markets, which investors accordingly acknowledged with new entries, causing a 2 per cent rise in the leading US indices on Wednesday. Prices also recovered in Asian and European stock markets following the election. The US dollar, on the other hand, lost some ground against the euro, which temporarily climbed to just under 1.15 dollars on Wednesday.
US bond markets did not show much movement on Wednesday, although yields for medium and longer maturities pulled back a little. This is due to US President Donald Trump’s now somewhat less solid position in Congress. As the House is now dominated by the Democrats, the market expects a tighter rein on budgetary and fiscal policy. This could conceivably slow or halt new fiscal impulses, which in turn could not only slow economic growth in the country, but also the speed of the Fed’s interest rate hikes in the medium term. This outlook puts pressure on US bonds, reducing yields.
No trend reversal expected in US economic and interest rate policy
However, even though Trump’s policy is coming under stronger Democratic control, analysts do not believe that there will be a major turnaround in US economic and foreign policy. With regard to the US’s international trade conflicts, Trump is likely to continue as before. According to experts, he won’t have to face much resistance, as there are supporters of his protectionist tendencies in the democratic camp – especially in the conflict with China.
The US Federal Reserve policy is not expected to change much after the election either: according to experts, the Fed’s course will probably remain unaltered. At the interest rate meeting on Thursday evening the Fed left the key interest rate unchanged, as expected, but signaled a further hike for December. The last increase took place in September, with the interest rate range was raised to 2.00–2.25 per cent.
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