Uncertainties in global markets

The annual World Economic Forum (WEF) held last week in Davos, a small town in the Swiss Alps, ended on a not-so-positive note.

More than a thousand thought leaders had attended the four-day summit that is committed to bringing progress in the world, but the statement of Christine Lagarde, managing director of the International Monetary Fund (IMF), warning of rising risks in the global economy set a more somber tone.

Just when the world was starting to enjoy some solid expansion, Lagarde reported that new factors last year have contributed to a drag that has slowed down global economic growth, and led to the second downgrade to 2019’s forecast of 3.5 percent.

In October last year, the IMF revised its 2019 outlook by 0.2 percentage point to 3.7 percent on the onset of the trade war between the US and China. Just before the start of the WEF, IMF announced another downgrade of 0.2 percentage point, both issued within a span of three months.

In addition to the escalating trade war between the two super economies, the IMF mentioned tightened global financial conditions as well as more volatile risk asset markets, all of which would impinge on world growth this year.

The current impasse in the UK on Brexit is adding too to the growing uncertainty in global markets, and the March 29 deadline is throwing companies doing business in the UK on tenterhooks with the possibility that there will be no agreement on how future trade with Europe will proceed.

Even as some US economists are downplaying the IMF forecast, citing the United States’ strong fundamentals, there are just too many other factors at play in the world, foremost being the risk of China going deeper into a slowdown.

Growing risks in trade war

The biggest threat to the global economy, however, lies in the possibility that ongoing talks aimed at sorting out the tit-for-tat tariff threats on Chinese and US goods will erupt into a full-blown war.

Even the IMF has not even been encouraging in its view that an agreement between the US and China on trade tariffs will be ready by March, when the current 10 percent tariff rate on $200 billion worth of Chinese goods will be hiked to 25 percent.

Defensive moves initiated by the two countries are not helping either, and have only added another layer of tension to an already explosive situation. The Chinese had filed a trade dispute with the World Trade Organization; the US then filed a criminal case against Huawei, the largest technology company in China, for bank fraud, IP theft, and about everything else.

It’s like a big messy divorce proceeding where no one will end up on better ground. Both countries have built an intricately intertwined relationship over decades that an extraction process will definitely hurt each one – and unfortunately, all others dependent on their well-being.

Disruptive actions

Perhaps, and just perhaps, US President Donald Trump will call a truce that could salvage the situation and start a process that would repair most of the damage that’s been done. But let’s not bet on that – because Trump has increasingly been pointed to as the root of some of the most disruptive and costly damages happening in the world today.

The ongoing trade war is the result of a unilateral action by Trump as US President to impose tariffs on China for being deemed as unfairly harming US interests. In this case, the US has filed a protest with the WTO against China for violating intellectual property rights.

Hurting business

Despite growing evidence that the ongoing trade war is deeply hurting American companies like Apple, Intel, Ford and recently, Caterpillar whose earnings are considered as an American bellwether, Trump remains unmoved.

In fact, US economic growth is forecast to slow down to 2.5 percent this year, and further dropping to 1.9 percent in 2020 because of the trade war with China, as well as Trump’s tax cuts and higher interest rates.

In other parts of the world, all is not well. The German economy, deemed as the “locomotive” of Europe, reported a contraction in industrial output during the last quarter of 2018. Italy and France have likewise been showing lackluster performance.

Rising global debt, now estimated to have ballooned by another $75 trillion since the last recession, is regarded to be highly leveraged, and therefore largely junk. With a third of this debt in the corporate sector, there is fear that this could implode should the current shaky situation snowball to a full-fledged crisis.

Not in the firing line

Last year, National Economic and Development Authority director general Ernesto Pernia said that an all-out trade war would have a positive net effect on the Philippines with stronger exports of electronic goods to the US making up for any potential loss of imports by China.

Taking advantage of any opportunity that would arise from an escalated trade war would be a matter of quickly repositioning the country’s policies. Not being in the direct line of fire, the Philippines has the advantages of not suffering significant damages, unlike developed neighbors like Malaysia and Singapore which have higher exposures.

All the global uncertainties have come at the right time for the Philippines when our fledgling economy is still not significant enough so much so that the big blows just gloss over our heads.

The Philippines has managed to survive the last global financial crisis, and with much luck, will be able to do the same again should the next feared depression happen.

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