The numerous uncertainties plaguing the current political and economic situations in Europe and the US, such as the see-sawing “Brexit” negotiations between the UK and the EU, the endless controversies since US President Donald Trump took office, and the undercurrents in Italy’s election, are posing challenges for the global economy.
Daniel Poon: Risks and Opportunities in Europe and US
Amidst the repeatedly emerging undercurrents in Europe and US, the market has certain concerns over how events will unfold. While Daniel Poon, Principal Economist (Global Research) of the Hong Kong Trade Development Council, understood why the market is anxious, he also reckoned there is no need to be overly pessimistic after assessing the present situation of the two economies.
Negative impact from Brexit continues to diminish
“Let’s first take a look at the European side. The vote for ‘Brexit’ was a surprise and it did cause immediate shock to the European and even the global economy, which also affected investment confidence. However, as the situation evolves, development in different aspects is not as bad as expected.” Poon quoted a tracking survey conducted by TDC on Hong Kong manufacturers regarding the impact of “Brexit” to export. In Q3 last year, i.e. one month after the “Brexit” vote, survey outcomes showed that about 17% of the manufacturers were worried about the emergence of negative impact. In this year’s Q3 survey, the relevant percentage has dropped to 8%, demonstrating a recovering confidence amongst manufacturers.
Meanwhile, “Brexit” negotiations between the UK and the EU have commenced, albeit still at a see-saw stage. Many sizeable banks and organizations that are now headquartered in the UK have indicated their intention to relocate their headquarters to other EU countries if the talks break up. Poon stressed that if matters developed towards the bad direction, it would not only cause concussion to the British economy, but also affect EU countries that have closer economic and trade relationship with the UK, such as the Netherlands and Ireland, etc. It may even affect countries and regions where Europe is their major export market.
Overall sentiment stabilized by elected Pro-EU administrators
Market responses are gradually stabilizing. Poon believed that this has much to do with general elections settled in many European countries this year. Pro-EU administrators will continue to govern the Netherlands, France and Germany. As the European economy is also steadily recovering, consumer confidence is also seeing continual improvement.
As for the medium-to-long term development in Europe, Poon reckoned that the market will focus on the general election of Italy to be held early next year. Comparing to the many EU countries which held their elections this year, Italy has a much higher debt and a fragile banking system; its economic situations are relatively bad and it has low recognition to Euro. All these may add variables to the outcomes of the election.
Chinese-US economic and trade relationship going steady and positive
Poon said that while Trump may be making unconventional comments since his presidency began, he has been rather pragmatic in China-related affairs. He even met with Chinese President Xi Jinping in April. “Trump emphasized that he would drive trade protectionism. After he took office, Trump has also applied many trade laws and conducted investigation on a large selection of import products; yet, these were not targeted at China. The major progress achieved in the 100-Day Action Plan on China-US economic cooperation earlier on is showing signs of amicable collaboration.”
US exit from TPP favorable for the “Belt and Road”
Yet, Poon added that there are still undercurrents in the Chinese-US relationship. It is worth to note that the US has recently applied Section 301 to investigate intellectual property matters in China, which could lead to trade friction. In the past, majority of such investigation ended up with agreements after negotiations. It is believed that the same could also be smoothly resolved this time. On the other hand, North Korean provocations have been causing heated tensions in the Korean Peninsula. US bombers, which have recently flown off to the sky above the eastern shore of North Korea, have triggered a series of mudslinging between the US and North Korea. In fact, the North Korean crisis is an opportunity to maintain the good relationship between China and the US. Understanding fully about the deep trade and economic relationship between North Korea and China, the US must work with China to handle the North Korean crisis; therefore, it must strive to maintain close cooperation with China politically and economically.
Regarding the exit of the US from the Trans-Pacific Partnership (TPP), Poon said that it would be good for China in the long term, as it does not need to worry about the potential rise in export competitiveness of member countries such as Vietnam, which would affect the export industry of China. On the other hand, the exit also creates a golden opportunity for China to formulate its international route maps of the future, which is favorable for the development of the “Belt and Road” initiative. He continued to explain that the exit of the US from the Paris Agreement has given China the opportunity to formulate climate and green economy targets, from which the country is likely to take up a more important leading role and augment its global influence.
Responding to challenges through market diversification
Due to the considerable uncertainty in Europe and the US, the world’s economic epicenter has been shifting from the two economies to emerging markets in Asia in recent years. Poon suggested that Hong Kong manufacturers can consider responding to the situation by expanding into emerging markets. “Manufacturers could diversify their manufacturing bases and sourcing locations. For example, the production centers could be moved to other Asian countries, such as Bangladesh, Myanmar, Indonesia and Vietnam, etc. Another feasible way is to enhance the added value of products, i.e. to work on value adding in all aspects, including quality, design, function and service. By doing so, it could reject the US’s excuse that goods are dumped to the country at an unfair price, or even the charging of anti-dumping duties.”
Law Ka-chung: Economic impact of Europe and US situations is cyclical
The UK will leave the EU by the end of March 2019 after the “Brexit” referendum last year. Law Ka-chung, Chief Economist & Strategist at Bank of Communications Hong Kong Branch, said that while “Brexit” is now a fact, its impact on the global economy is limited. He pointed out that as a new trade model will inevitably emerge after “Brexit”, the key lies in how much the outcomes will differ from expectations. “Britain and the EU are unlikely to abruptly cut off trade with each other since mutual trade volumes are huge.” According to statistics, the UK buys more from the EU than the EU imports from the UK, so the EU will not benefit if both parties cut off trade, in Law’s view.
“Brexit” has limited impact
The UK-EU Brexit negotiations, which began in July, focus on three major issues: 1) post-Brexit citizens’ rights; 2) the exit fee that the UK must pay the EU; and 3) post-Brexit border arrangements. What are the uncertainties surrounding Britain and the EU at this stage? In Law’s view, most of them centered around negotiations over money. Although UK Prime Minister Theresa May did not mention the exact amount of the “divorce bill” during her speech on the “Brexit” plan, there are some suggestions that the UK is prepared to pay 40 billion euros as the “Brexit” fee. He added that although the two sides had set a deadline on the negotiations, there is no immediate threat to the global economy as the overall process is slow.
Italy’s economic roadmap expected to be stable
At the other end of Europe, many people are worried that the undercurrents in Italy’s general elections are creating headwinds for the eurozone’s economic outlook, resulting in internal and external economic downturn risks. Among them is the support for the Five Star Movement, an anti-euro Italian political party. In this regard, Law does not rate the Five Star Movement highly: “The unsatisfactory “Brexit” and Marine Le Pen’s recent defeat in France’s elections show that the rise of and support for the left wing are not as strong as claimed. Moreover, unlike the UK, Italy has little incentive to exit the EU as it is a beneficiary state in the union.”
Although there are uncertainties surrounding Italy’s elections, Law said that the results will not constitute a significant pressure on the eurozone’s economic outlook no matter which party comes into power: “I believe Italy’s political parties do not differ greatly in economic or financial policies, and regardless of which party is elected, it must evaluate the different objective economic factors.” He stressed that the Italian economy has reached a state where it is difficult to significantly change its established roadmap overnight whichever party is in power.
No major move yet in US economic policy
Regarding the US economic powerhouse, academics are generally worried that Trump’s actions will do more harm than good to the US economy. However, Law noted that Trump has yet to make any substantial changes in major policies since taking office, especially on tax and health care reforms, which may not lead to material impact on America’s long-term economic performance as the direct effects of both reforms on the country are in the long term.
As to the short- and medium-term prospects for the European and US economies, the impact of global policy tightening may trigger a major change in the global investment climate. Law said that the property and stock markets were red hot after the implementation of the first round of quantitative easing in 2009, creating a favorable market atmosphere. At present, with global policy tightening progressing slowly, many central banks have begun to levy taxes, which will inevitably affect the investment climate. In view of the debt risks in Asia and other emerging markets, Law envisaged a bubble burst crisis in some parts of Asia in the next six to twelve months.
Changes in Europe and US situations are cyclical
Law stressed that changes in Europe and US economic and political situations are cyclical and do not have a big impact on the global economy. He also said that after the financial tsunami and Trump’s taking office, more and more people across the world are calling capitalizm into question, along with gradually rising trade protectionism: “As early as three to five years ago, trade data started to weaken and xenophobia began to appear in immigration or trade policies not only in the US, but also many other countries. Foreign trade currently is not as huge as before, with its impact on global economic growth slowly emerging.”
Meanwhile, many people are worried that the European and US political situations will be a source of risks to the stock market. For long-term investment, with the property and stock markets showing signs of being a little overheated, Law reminded investors to keep an eye on objective factors such as global economic health and market supply and demand, as well as capital factors. “The nominal prices of assets such as properties and stocks will surely be affected when a monetary policy is adopted.” He said investors can rest assured that even if the stock market declines, the decline will not be too severe as there is no sign of a bubble forming in the US stock market yet and the US has no recessionary pressures. Nevertheless, he advised against investment turning into speculation, and speculators who want to profit from price differences should pay more attention to risk management.
