OPINION: All signs point to tough times ahead

Published Oct 5, 2018


JOHANNESBURG - The policy response to the 2008 global financial crisis set in motion the geopolitical trends that would eventually see the pivot to the populism of Trump and Brexit.

Quantitative easing may have restored economic and market strength, but came at the expense of creating greater inequality, sparking rising populism and introducing major risks and uncertainty to the global economy.

These risks are most evident in economic trajectory of the US and Europe. Trump has become the poster boy for the movement from globalism to nationalism that has been building in Europe, with populist, anti-EU political parties gaining power in Hungary, Austria, Italy and more recently Sweden with immigration becoming a hot potato.

As a consequence of Trump’s “America first” approach and controversial trade tariffs, historical alliances are being upended.

Add in talks of trade wars, and this volatility in the geopolitical environment will likely act as a headwind against the global growth momentum in recent years, already sparking a sell-off of emerging market assets. This year has seen global economic growth decoupling with the US emerging as the winner.

US unemployment is at a 48-year low. This means employment cost is rising at 4% per annum - double the current rate of inflation at 2%.

Workers are benefiting from real wage increases, implying that inflation may rise, possibly triggering higher-than-expected interest rate hikes. As debt becomes more expensive, drawing liquidity out of the system, the cracks start to show.

Having said that, the US economy appears to be firing on all cylinders - Trump's fiscal stimulus as tax relief for corporates and individuals was economically unnecessary. But given the upcoming mid-term elections, this stimulus and Trump’s stand-off with other nations on trade tariffs was likely more about garnering voter popularity than strategic economic policy.

But increasing trade tariffs could inflate the price of goods and impact consumers’ pockets, losing Trump voter goodwill. On that basis, a full-scale trade war is unlikely, as most countries will come to some sort of deal with the US first.

Thus, Citadel’s global economic recession monitor indicates the likelihood for a global recession in the next 12 months remains below 25%, as US momentum should continue to support global economic activity. As the US retreats further into isolation, Trump is also paving the way for China to adopt the role of a much bigger global superpower.

Like the US, China is reviewing its income tax rates for the first time in seven years. But unlike the US, China can afford these tax cuts, boosting consumer spending.

Retail sales (9%) and industrial production (6%) have continued to grow year-on-year, while the government has reduced spending on infrastructure, slowing economic growth rates to a sustainable target of around 6.5%.

But reduced infrastructure development in China bodes ill for South Africa and other emerging markets. China slowing further this year will add more pressure to the current emerging market turmoil.

The worsening inequality, US isolationist tendencies, populist trends in the UK and recent emerging market sell-off point to tough times ahead.

Maarten Ackerman is chief economist and advisory partner at Citadel.


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