Don’t Look Now, but European Economy is Growing
Chris Kuehl, Ph.D.
All eyes have been focused on the U.S. of late for the most logical of reasons. There seems to have been a shift in the fortunes of the U.S. economy with higher growth numbers (3.5% in Q3), lower rates of unemployment and more confidence as expressed in surveys like the Purchasing Managers’ Index (PMI), Credit Managers’ Index and the consumer surveys that come from both the Conference Board and the University of Michigan. The press has been all over the notion of “animal spirits” in a business community that has been setting aside the more bizarre acts of the Trump administration to focus on plans for infrastructure development, tax reform, regulatory reform and changes in the Affordable Care Act. What has not been as noticeable is that the economy of the European Union has been surging along as well. It has sported the best year of growth seen since the recession started. Thus far, the numbers have not been as good as they have been in the U.S., but the progress has been just as real.
Overall, the eurozone economy has now posted 14 consecutive quarters of growth, although it is true that some of these have been anemic. The Markit version of the PMI is now sitting at 54.4, very close to the reading the latest PMI had for the U.S. at 56. Most importantly, the European PMI has been in expansion territory for 43 straight months. Most of these have been strongly in the growth category. The rate of unemployment remains significantly higher than it is in the U.S., but there has been a great deal of progress with average rates across Europe in the single digits now. The rate of job creation hit a nine-year high in 2016, and overall growth in Europe was actually faster than in the U.S., 1.7% vs. 1.6%.
The data does not reflect the common perception of Europe as somehow flattened and still in deep recession. Even the countries that became the very symbol of decline and earned the nickname of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) have been on a stronger upward trend with Spain projected to see growth of 2.5%, France at 1.8% and Italy at 0.7%. The big shocks that were supposed to send the whole of Europe crashing did not. Thus far, the Brexit decision has had little impact, but to be fair, the process has not really started as yet. Most of the damage will be done in the next several months. The issues within the financial community have been less of an immediate concern. Most of all, however, it seems that the European Central Bank (ECB) efforts to bolster the economy with a very loose monetary strategy have been paying off. The majority of the growth that has been driving the gains in the eurozone has been due to a resurgent consumer and not just in the wealthier states.
The most peculiar aspect of the European growth has been the perception that there hasn’t been any. The criticism of Europe has been withering, and assertions have been made that nearly every decision made by the ECB has been too little and too late. Germans have been singled out as having pursued policies that favor them at the expense of the rest of Europe, but that has not really been the case. The social issues such as the decision to allow millions of refugees to arrive were thought to have been an economy killer for the Germans and Europe as a whole, but that has not been so.
There are no shortages of future challenges ranging from an aging workforce to a weak euro that makes commodities expensive. The banks in the poorer states are still in trouble and the region continues to see the rise of populism. The polls today would have Marine Le Pen winning a narrow victory in France, which would set off alarm bells throughout the European Union. A Brexit is one thing as the U.K. has always had an “arm’s length” relationship with Europe, but a Frexit changes Europe forever.
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Surveys Fill in Information Voids
Results from FCIB’s most recent Credit and Collections Survey show that nearly all of the participants sell to their existing customers in the countries that were surveyed. While data collected from their responses will clearly benefit novices to the credit field, even more seasoned credit professionals have noted that the information gathered helps them sell into countries where they don’t typically do business.
“We are in construction,” a credit manager said. “Many of our clients are one-time customers. We want to do what we can to support sales, so I use these reports for countries we may not have a lot of business in. They are a reference for me.” To return the favor, she participates in the surveys where her firm regularly does business so that other credit professionals can benefit from her experiences.
Each month, the survey asks credit and risk management professionals to share their real-time credit and collection experiences with a particular region of the world. The survey’s findings benchmark payment trends and collection experience. Monthly results, in conjunction with archived survey data, give members insight into current and past global credit practices. Although all participants receive the results of the survey in which they participate, only FCIB members can access archived data via the Knowledge and Learning Center.
The latest survey covered Bolivia, Ecuador, Paraguay, Uruguay and Venezuela. Of those, 73% extend credit. The bulk of credit professionals who extend credit in these countries ranged from 64% (Paraguay) to 77% (Ecuador), with Venezuela the exception at only 20%.
Payment terms ranged from zero to 90 days, with the majority falling somewhere in the middle. The top three methods of payment included wire transfer (90%), letter of credit (19%) and cash against documents (14%). About a quarter of the credit professionals noted an increase in payment delays, while less than half (43%) reported no change, 28% no delays and 5% a drop. In most of the countries, wire transfer was the preferred payment method followed by letters of credit and cash against documents. Ecuador saw the greatest use of credit cards (26%).
To aid collection efforts in Bolivia, a credit professional said his company sends payment reminders prior to an invoice’s due date, such as 10 days before, “which helps in getting paid on time.” Another acknowledged banking problems in Paraguay. “We are having issues in this country with the banks not having a corresponding bank relationship with a U.S. bank; therefore, [we are] not able to transfer money.” Members can access complete and archived survey results here.
Brazilian Economic Outlook Tempered
Dr. Hans Belcsák
Brazil’s economy should return to positive numbers this year after an estimated 3.5% contraction of real gross domestic product in 2016, which followed one of 3.8% in 2015. Whatever growth it will eke out, though, will not be much to write home about. A number of influences will constrain the expansion so tightly that Brazil will do well if the real GDP gain comes even close to 1% this year.
An important factor is the government’s attempt to narrow the yawning fiscal deficit with a cap on public spending. The deficit together with an exploding national debt has already prompted three leading credit agencies to downgrade Brazil’s rating to junk. The cap has come in the form of a constitutional amendment that limits the increase in the country’s annual outlays to the preceding year’s inflation rate. It applies to spending in the current fiscal year, except for education and health costs, which will become subject to the limits starting in 2018.
Michel Temer, who became president last August after Dilma Rousseff was impeached, brushed aside fierce opposition from politicians, labor unions and Brazilians worried about the already-troubled health care and education systems to shepherd the amendment through the fractured legislature. Internationally, Brazil will find business conditions a bit better this year than they were last year, but China will remain a long way from the breathtaking growth that proved to be such a boon to the Brazilian resource sector before commodity prices, especially those of iron ore, collapsed.
A new law giving foreign firms easier access to deep-sea oil fields is not going to help much while global petroleum markets anticipate a strong U.S. push for energy self-sufficiency and the Organization of the Petroleum Exporting Countries struggles to keep a lid on oil production. Brazil will also have to continue coping with self-inflicted handicaps such as its notoriously labyrinthine labor code, which has been on the books since the 1930s and has, since its inception, been a factor scaring off long-term investors worried about its complexity and legal risks.
Above all, President Temer, troubled by dismal popular approval ratings in the low teens, will continue to be plagued by political fallout from the probe into the Petrobras corruption scandal, which is popularly known as “Operation Car Wash.” This affair, with the construction firm Odebrecht at its center, is sending out still-widening circles. It has already caused political tremors in, among others, Colombia, Panama, Peru and the Dominican Republic. At home, it will continue to shorten political lives, with charges said to be pending against scores of congressmen and several ministers. Battling the scandals, Mr. Temer will, perforce, give economic policy shorter shrift than he might otherwise. One effort currently underway is a massive privatization drive, involving railways, airports, power plants and highways, which is being undertaken to raise cash for such entitlements as pensions. Many in Brasilia are already fighting it, though, arguing that it is a national “fire sale” in which the public is being stiffed because state properties are selling for pennies on the dollar.
‘Death spiral’ looms for Zimbabwe’s economy as cash runs out. Zimbabwe’s crippling cash shortage has left a black hole in the financial system that’s crushing the rest of the economy. The liquidity squeeze has left companies unable to pay their workers in cash or their foreign suppliers, driving many out of business, adding to the ranks of more than three million people who’ve become economic exiles. The economy probably shrank 0.3% last year and is set to contract 2.5% this year, according to the International Monetary Fund. (Bloomberg)
Brazil, Argentina push for closer trade with Mexico in Trump era. On Feb. 7, the leaders of Brazil and Argentina said they would pursue closer ties with Mexico and other Latin American nations alarmed by U.S. President Donald Trump's promises to tear apart trade deals and build a wall to protect American jobs. In a state visit to Brasilia, Argentine President Mauricio Macri said that South American regional trade bloc Mercosur would focus on strengthening its relationship with Mexico, Latin America's second-largest economy after Brazil. (Reuters)
Brazil: Country of the future no more. 2016 was a year full of political crises, and there were few places where the trouble ran as deep as it did in Brazil. After order broke down last year, Brazil is now about to reverse decades of progress. (Global Risk Insights)
U.K.’s Brexit bill overcomes another hurdle. British MPs overwhelmingly backed on Feb. 8 a bill empowering Prime Minister Theresa May to start negotiations on leaving the European Union, bringing Brexit a significant step closer. (EurActiv)
Trade finance falls victim to China’s capital controls. Cross-border trade finance between Hong Kong and China is being hit by Beijing’s capital controls, with government intervention making it “impossible” to get money out of the country. The Chinese government has made both formal and informal moves to limit the amount of foreign currency that can leave the country in an effort to protect foreign exchange reserves and to prop up the renminbi (Rmb). (Global Trade Review)
Chinese clampdown reveals a fundamental problem with bitcoin markets. China used to dominate global bitcoin trading, but not anymore. After a series of interventions by the Chinese central bank and self-imposed restrictions by Chinese exchange operators, the share of the global bitcoin trade denominated in yuan has plummeted from more than 95% to about 20%. (Quartz)
East Africa: Sign the economic partnership agreement. Economic experts have advised the East African Community (EAC) and Uganda, in particular, to consolidate regional markets and forget about signing the EAC-European Union Economic Partnership Agreement (EPA). Civil society organizations in Uganda say EAC countries are better off improving trade within the region than signing a trade agreement with European Union. They claim the pact is unfair to the EAC. (AllAfrica)
What U.S. will be missing without TPP. President Donald Trump made it clear on the campaign trail and since taking the oath of office that he does not favor multilateral trade deals. His intention, he said, after withdrawing the United States from the Trans-Pacific Partnership (TPP), was to negotiate bilateral trade deals with the other TPP nations. His rationale: It’s easier to fix or exit bilateral trade agreements if something goes wrong. That may be true, but it misses the chief virtue of multilateral trade deals, especially the TPP: They focus on how commerce is conducted today. (Global Trade Magazine)
Rising political risk in Asia. Several pivotal countries hold the key to how political change manifests itself in Asia in 2017 and beyond. Apart from the obvious influence of China, India and Indonesia, some of the smaller and hitherto less influential nations may hold the key to just how dynamic political change in the region becomes. The Philippines has already proven that it can punch well above its weight by dramatically altering its political, security and military status quo. Its embrace of China has already succeeded in upending decades of bilateral and multilateral norms. (Huffington Post)
The U.K. and EU face off over Middle Eastern trade. With Brexit looming, Prime Minister Theresa May became the first leader to make an official state visit to the Trump White House; she also became the first Western leader to visit Turkey since last year’s attempted coup. The trips to Washington and Turkey have made one thing very clear: The U.K. and EU are no longer on the same page when it comes to foreign relations, and Britain has launched the opening salvo in what will be a running competition for trade and political allies in other areas of the globe. (Global Risk Insights)
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations