Dr. Hans Belcsák
The French business community and France’s eurozone partners alike were able to heave a sigh of relief when Emmanuel Macron won the presidential run-off election and did so quite handily, to boot. His opponent, Marine Le Pen, routinely (if wrongly) referred to as “hard right,” had vowed not only to place severe limitations on immigration, but also to tax foreign workers, impose trade barriers and promote a greater role for the state in supporting French companies. She had proposed to abandon France’s traditional Atlantic orientation and instead cozy up to Russia’s Vladimir Putin, shun the European Union (which France had helped found) and quit the eurozone. Her plans included reintroducing the French franc as the national currency and effectively defaulting on the bulk of the nation’s bond debt by redenominating it in the new legal tender.
By contrast, Macron, a former Socialist economy minister and Rothschild banker who had never before held elected office and ran as an independent and the candidate of “En Marche,” a party he founded barely a year ago, won on a pro-EU, pro-Euro and pro-business platform that included a pledge to sell off government stakes in French companies. He aims to take a leaf out of the German and Scandinavian playbooks and overhaul the labor market. His proposals include reforming the wealth tax to exclude financial investments, cutting the corporate tax rate to 25% (the EU average) from 33.3%, reducing payroll taxes on lower-paid workers, limiting the cost to businesses of laying off employees, pressing unions to agree to flexible labor terms at the company level, reining in the unions’ control of the country’s generous welfare system, and shrinking the civil service.
Business leaders have been quick to urge him to put labor reform topmost on his agenda to reduce the cost of workers and simplify laws “so that firms are not frightened to hire people.” Francois Hollande has stepped down as the most unpopular president in recent French history, mainly because of his failure to deliver on promises to revive the economy, bring down unemployment and curtail public spending. These are likely to be the issues that will make or break Macron’s presidency. But now that he has won tenancy in the ÉlyséePalace, he faces a number of daunting challenges. The first will be political as he goes about forming a government, nominating a prime minister and launching his campaign for the legislative elections on June 11 and 18. He has, as yet, no members of parliament and cannot ignore the fact that France’s mainstream parties virtually collapsed in the presidential poll and are now in total disarray, while Marine Le Pen won 34.9% or almost 11 million votes, more than double the total ever garnered by her father, Jean-Marie.
She and her National Front will be a strong opposition force in parliament. Moreover, one-fourth of the electorate stayed home and a large number opted to spoil their ballots, underscoring the depth of the disillusionment and disaffection French voters feel toward the political elite. Yet, Macron will have to gain the support of at least some of the Socialists and Republicans to build a power base that allows him to govern. The legislature has 577 members and the president will need the support of 290 for a workable majority. His problem is that the country is deeply divided and polarized and that his support has come mainly from the economically better off while Le Pen has been attracting those who feel left behind, the ones she calls “les oublies,” the forgotten ones.
Fortunately for Macron there are indications that some members of the mainstream parties are willing to join his drive rather than concentrate on obstructionism. The best known to date is Manuel Valls, the former Socialist prime minister, who has declared the Socialist Party “dead and gone” and has promised to fight in the National Assembly elections under the banner of En Marche. If Macron gains a workable majority, he should be able to start fulfilling his pledge to overhaul France’s labor code—not by challenging the standard 35-hour work week, which for many French has become sacrosanct, but by lifting restrictions on hiring and firing and making it easier for companies to negotiate directly with their employees. His proposals are rather modest, intended to address the fact that the country has a two-tiered labor market in which, last year, 86.4% of the hiring was for temporary jobs (and of those, 80% were for contracts shorter than a month), while workers with full contracts are coddled and virtually impossible to fire, costing companies an arm and a leg when dismissals do succeed.
Not surprisingly, roughly 43% of the unemployed have been idle for more than a year, with the most vulnerable being the young, immigrants and those without skills. Macron will have to hope that acceleration in economic growth will bail him out, since any failure on his part to overcome the widespread sense of malaise could reawaken with a vengeance the popular discontent Mrs. Le Pen managed to tap into. The leading labor unions will be quick to attack his reform drive. And France’s EU partners have already made it clear that they will not give him much leeway. Germany’s Chancellor Angela Merkel has indicated that he will be expected to deliver the spending cuts that are to ensure a fiscal deficit under the EU limit of 3% of GDP. And the European Commission President Jean-Claude Juncker is already admonishing him that he will have to reduce France’s public debt—currently, net, at 88% of GDP (Germany’s ratio is 45%).
In short, there will be no honeymoon for President Macron. In fact, if he fails to gain a supportive majority in the upcoming legislative elections and has to work under conditions known in France as “cohabitation,” when a prime minister from an opposition party runs the government, he can pretty much kiss his economic agenda goodbye. But business has to be grateful that Le Pen did not become president, since under her policies no one would have invested in France and banks would have had to shut down as people withdrew their money and sent it abroad. And France’s EU partners should bless their good tidings as well, given that of the countries that have now successfully sidestepped anti-EU populists—Spain, Austria, Holland and France—the last mentioned is, for the continued well-being—indeed, existence—of the Union, by far the most important one.
Antje Seiffert-Murphy, CFA
Sometimes medicine makes the patient feel sicker before getting better. Argentina has had a lot of medicine recently. After a decade of polarization and global isolation under the Kirchner era, the country only quite recently turned its face back to the world under the leadership of President Mauricio Macri, who was elected in late 2015. The economic and political challenges the country must tackle are large, but the restoration of institutional and economic stability could be a gateway for Argentina to rejoin the global community as one of the largest economies in the world.
The new government was quick to address the legacy 2001 defaulted bond obligations to regain access to the global capital market. This helped to improve the business climate and liquidity, not only for public but also private entities and to attract foreign direct investments (FDI). Argentina’s foreign exchange reserves are on the rise again.
Macri started to take significant measures to put the economy back on track for sustainable growth on the back of economic policy changes, including liberalizing capital controls, floating the peso, removing export controls, lifting tariffs and imposing austerity measures. But economic challenges are large, partly caused by the measures taken. Significant inflation eroded purchasing power, consumption and consumer sentiment and caused a rise in poverty levels. The goal of trade liberalization and rising imports would provide challenges to currently well-shielded local manufacturing, likely resulting in rising corporate insolvencies and impacting unemployment levels.
The key statistics for inflation and growth are weak but projected to head in the right direction. Inflation hit an estimated 40% in 2016. Argentina statistics agency Indec’s published 12-month inflation rate through April was 27.5%. S&P projects inflation to decline to 20% in 2017 and 15% in 2018. The economy contracted 2.3% in 2016. S&P forecasts a growth of 3% in 2017–2019. The current year started off slow, with a drop in the economy in January and February but with an anticipated recovery in March. The IMF cut its forecast for 2017 GDP growth to 2.2% but sees growth supported by an increase in consumption and public investment, as well as a recovery in exports and private investment.
The long-term outlook implementing economic changes is bright, but in the interim, people and corporates are feeling the pain, and hence there was a social and political challenge to Macri, whose supporting poll numbers dropped to the lowest since his election. Argentina reports unrest, which is expected to continue in the run-up to the fall elections. It is on Macri to build on macroeconomic achievements, balance reforms and determine the impact on the most adversely affected parts of the society. This is to ensure a continuing long-term political mandate to bring Argentina fully back to its potential as part of the global community.
Antje Seiffert-Murphy, CFA, is vice president of credit and political risk for New York-based trade credit insurer Equinox Global. This Thursday, FCIB will offer the webinar “Doing Business in Argentina” from the perspective of a country-based attorney and a credit professional who does business in the country.
This Week’s New Postings
News & Updates from Credit Risk Insurers & Banks
Atradius: Market Monitor on Steel and Metals 2017
Euler Hermes: Weekly Export Risk Outlook
Wells Fargo: Weekly Economic & Financial Commentary
Strategic Global Intelligence Briefs
Chris Kuehl, Ph.D.
The latest report from the Organisation for Economic Co-operation and Development (OECD) is not exactly negative, but it is less upbeat and positive than it has been in the fairly recent past. At the start of the year, the opinion of OECD analysts (and many others, from the likes of the International Monetary Fund, World Bank and more) was that this was a year that would finally see dramatic growth.
Global expectations were high, not just for the U.S. The Chinese economy was starting to show some signs of its old growth patterns. Europe was considerably less sclerotic than it had been, and the U.K. was handling Brexit better than had been anticipated. All of this led to the conclusion that global growth would get back to its more robust ways sooner rather than later. Now, the OECD and others have started to temper their assumptions. The current assessment is that global growth will be more tepid.
At the heart of this reduced set of assumptions is a reevaluation of the U.S. and Chinese economies. Both are expected to grow at a steady pace. That is certainly good, but it is not enough to pull the global economy along very far. The U.S. started the year poorly again, with a GDP of just 0.7%. This has become a familiar pattern. In past years, the economy perked up in the second quarter, and then really robust growth occurred in the third quarter, with a slight reduction in the fourth. It all adds up to growth at around 2.5%. That is not bad, exactly, but it is a far cry from the 3.5% to 4.5% that has been promised and would be necessary to break the global economy out of its funk.
The same situation seems to be facing China. The country is seeing better growth than was the case a year or so ago, but it is still far from the numbers that were seen prior to that. This is a country that will likely hit 6.5% growth this year, but this is the same country that was in double digits not that long ago. The Chinese growth remains dependent on several factors that are beyond its control, notably the health of those economies that import from China. The Beijing leadership has pushed hard for the country to be more internally focused and more attuned to the domestic consumer, but this is a slow process. China remains an export-driven nation where these overseas sales account for almost a third of the national GDP. (The U.S. is 14% dependent on exports, Japan is 14.7% dependent and Germany is 52% dependent.)
The assessment of the U.K. has weakened as well. Early on, there was some hope that Brexit would not be so divisive, and many talked about the role of those cooler heads. Surely, the Europeans would not carry a grudge and surely the British would see reason and demand less. That has not happened. It looks like this will be a bitter divorce, even if that means bad news for everyone concerned. The U.K. economy is going to be hit far harder than many assumed at the beginning. Now, the OECD has reduced its expectations.
The good news in the OECD report comes from Europe, with the hope that growth will exceed the expectations set at the start of the year. The big news has been the blunting of populist movements that were threatening to severely distort trade relations and possibly lead to the destruction of the EU altogether. France dodged a bullet with the defeat of Marine Le Pen, but it now has a very young and untested president with not a single member of his own party in the National Assembly. Lately, the news from France has been better than expected, but big challenges lie ahead. The Germans are growing at a respectable pace, however, and it looks better and better for Angela Merkel. That suggests economic stability. Even the struggling peripheral countries have started to see light at the end of the economic tunnel.
May 24 – Cayman Islands, Cayman Legislative Assembly
June 11 – France, National Assembly of France
June 18 – France, National Assembly of France (second round, if needed)
June 24 – Papua New Guinea, National Parliament of Papua New Guinea
June 26 – Mongolia, President
July 2 – Senegal, Senegalese National Assembly
Aug. 4 – Rwanda, President
Sep. 11 – Norway, Norwegian Parliament
Sep. 23 – New Zealand, New Zealand House of Representatives
Oct. 10 – Liberia, President
Oct. 10 – Liberia, Liberian House of Representatives
Nov. 19 – Chile, Chilean Chamber of Deputies
Nov. 19 – Kyrgyzstan, President
Nov. 19 – Chile, Chilean Senate
Nov. 19 – Chile, President
Nov. 26 – Honduras, Honduran National Congress
Nov. 26 – Honduras, President
Mexico warns U.S. of alternatives on trade, points to China. Mexico sent a stark message to U.S. President Donald Trump on May 11, saying an upcoming visit by Mexican officials to China showed Latin America's second largest economy had other places to export to if he tore up the NAFTA trade deal. Trump indicated in an interview with The Economist that he wanted to get the U.S.-Mexico trade deficit down to about zero. (Reuters)
China champions globalization with new Silk Road summit. On May 11, China hosted a summit showcasing its ambitious drive to revive ancient Silk Road trade routes and lead a new era of globalization, just as Washington turns inward in favor of “America First” policies. Leaders from 28 nations, including Russian President Putin and Turkish President Erdoğan, were scheduled to attend the two-day meeting at Yanqi Lake, located in a Beijing suburb near the Great Wall. (EurActiv)
Mnuchin at the G7: Don’t expect much on international trade. US Secretary of the Treasury Steven Mnuchin is front and center on the world stage May 12 and May 13 as he attends two days of G7 finance minister meetings in Bari, Italy. In March, Mnuchin met with G20 leaders in Germany. The joint communiqué after the talks deleted the usual pro-trade language. Expect more of the same at the G7 meeting. (Global Trade)
What does Turkey’s referendum result mean for the country’s future? The narrowness of Turkey’s referendum result is arguably the worst outcome possible, denying the country the political stability many had predicted from a decisive result. (Global Risk Insights)
Macron and the uprooting of France. For months, the world has waited with bated breath for Emmanuel Macron to save France, Europe and democracy by succeeding in his outwardly improbable campaign to become the next French president. Now that he has, it is time to ask: What, with the 'Far Right' duly slain, does he actually have a mandate for? (The Interpreter)
Korean election: stability could boost trade. The election of Moon Jae-in as the 12th president of South Korea is unlikely to have a dramatic effect on trade, but should bring economic stability to a country that is at the epicenter of a geopolitical crisis. With neighboring North Korea growing ever more confrontational, Moon has vowed to take a more diplomatic approach to relations. (Global Trade Review)
South Africa set to avoid recession as mining, manufacturing jump. South Africa is set to avoid slipping into a technical recession this year following surprise improvements in mining and manufacturing output, although the economy remains under pressure due to recent credit downgrades to junk. The economy contracted 0.3% in the final quarter of 2016 and a second consecutive contraction would have pushed the economy into recession for the first time since the global financial crisis of 2009. (Reuters)
Loonie, bank bonds drop as Moody's downgrades Canada lenders. Canada’s dollar and bank bonds declined after Moody’s Investors Service downgraded the nation’s banks for the first time in more than four years, signaling that soaring household debt combined with runaway housing prices leave the lenders more vulnerable to losses. (Bloomberg)
Central and Eastern Europe: A broader recovery, but slower catch-up with advanced Europe. Economic growth is broadening in Central, Eastern, and Southeastern Europe (CESEE). Further ahead, however, growth prospects will be tested by a dwindling workforce and weak productivity. Reaching Western European income levels would thus take longer, says the International Monetary Fund in its Regional Economic Issues update on the region. (IMF)
Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations