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Negotiating Brexit

Chris Kuehl, Ph.D.

The British were arguably not ready for the Brexit vote. Both those that wanted to leave the EU and those that wanted to stay were shocked at the outcome of the vote. It swiftly became obvious that there was no real plan for what to do next. From the start, there were essentially three camps.

The ones that had opposed the exit wanted to swiftly approach the Europeans and find a way to cement some kind of ongoing relationship through concessions and adjustments that would appeal to the EU. These would mostly involve trade deals, but there would also be agreements that allowed migration into the U.K. This was the sensitive issue that provoked many to vote for the withdrawal, but it was also crucial to the Europeans, and they were not in the mood to be conciliatory. This position has not prevailed in the debate. The second camp was the hard-line group that wanted a complete break—everything from trade to regulation and migration. This was the dominant camp in the immediate aftermath, but as the damage to the U.K. economy becomes more obvious, there is less support. That leads to camp three, which is trying to weave a middle position between the two. It has been trying to gauge the attitude of the Europeans.

Prime Minister Theresa May has been in all of these camps at one time or another. She was not originally a supporter of Brexit, although she was something of a euroskeptic when it came to regulation and the impact of migration. She was of the opinion that these issues would be settled without the drama of withdrawal. Once she was made leader of the Tories, she adopted a more hard-line position in reaction to the very hard-line position adopted by the Germans and other European states. The defeat suffered by the Conservatives in the snap election that she called forced another shift. Now she has embraced camp three as she tries to develop a plan that preserves Britain’s trade patterns while acknowledging the continued opposition to migration and EU regulation.

The strategy now seems to be creating a kind of temporary arrangement that would provide some additional time to work out the “divorce.” This would involve a “transitional” deal that bridges the gap between the withdrawal in 2019 and a more comprehensive trade deal later. The fact is that tempers have cooled a little, and there is more evidence of how Brexit is affecting the British and European economies. The most significant damage has been done to the U.K. and that has softened some of the anti-European rhetoric. The EU, however, has seen its share of damage as well. There is more desire to work something out than was evident before, but the process will still be awkward and fraught with political controversy.

Euler Hermes: Not All Economic Engines Are in Sync

Overall global growth momentum remains good amid “a disappointing U.S. picture, a reassuring European outlook and stabilizing emerging markets,” according to trade credit insurer Euler Hermes.

Its latest economic insight report, A Breeze of Growth, shows global GDP growth forecasts remain at 2.9% for 2017 and 2018 as the seventh consecutive year at below 3% growth.

“Global GDP growth is accelerating with good, rather than great, momentum finally building at its fastest pace in two years,” said Chief Economist Ludovic Subran. “However, behind this positive picture lies a marked divergence in economic fortunes from country to country.”

Slight upward revisions in GDP forecasts for the eurozone, China and Japan were offset by similar downward revisions for the United States, Latin America, the Middle East and South Africa.

The firm identified five key growth boosters:

  • Inflation: Creating a nominal boost to confidence and investment, inflation is partially back with price recovery in 2017, essentially driven by commodity prices. Euler Hermes expects a moderate tempo to the reflationary trend.
  • Increased consumption and investment: Retail sales have accelerated globally, notably in the U.S. and China, while keeping a good pace in the eurozone where confidence levels are unprecedented. The investment cycle is also picking up.
  • Exports trade accelerator: Global exports continued to recover in the first half of 2017 in both volume and value terms, after two years of contraction in value. Global goods exports increased by 2.3% year-on-year in April 2017.
  • Supportive policies: As global liquidity reached record high levels (above USD19 trillion), monetary policy should remain broadly accommodative and abundant despite balance sheet adjustments.
  • Political risk: Perceived political risk has generally softened, except for the United States. Political “nudges” have arguably been underestimated in boosting growth.

Euler Hermes also identified five growth risks:

  • Reflation could create a jaw effect: While reflation is currently positive for companies’ turnover and household consumption, there is a risk that margins and purchasing power react negatively.
  • The investment cycle is largely debt financed: The return to normal business cycles brings risks in reaching peak growth sooner rather than later. In the United States, for example, record new orders and jobs combined with higher private debt levels could result in deceleration by the end of 2017 without a sizeable fiscal stimulus. Higher debt levels are also a concern in Europe (public debt) and in major emerging markets (private debt). Higher interest rates could jeopardize the investment cycle, particularly where debt levels are high already. Latin American and Asian countries are particularly at stake.
  • Protectionism: Protectionism is not receding although the number of new protectionist measures is stabilizing, including in the United States, Russia, India and Argentina. The trend toward shorter supply chains is, however, reinforced by financial balkanization as the global scale of total cross-border and local bank credit continues to fall despite increased import content in production.
  • A flat tire from a new crisis: Policymakers are focused on risks arising from not having sufficiently recovered maneuvering room before the next crisis. Additionally, a policy failure could create significant financial stress in Europe, particularly Italy, as well as the United States.
  • Political risk and markets could reconnect soon: After record political risk in Europe, the United States has now taken center stage. In Europe, no major political or financial crisis is expected although political uncertainty in the United Kingdom will continue to amplify financial volatility as Brexit negotiations continue. Euler Hermes expects U.K. GDP growth to continue to soften as consumers increasingly feel the loss of real purchasing power.

Qatar Holds Its Own

The Qatari economy and financial markets are continuing to adjust to the effects of the diplomatic rift in the Middle East, according to an International Monetary Fund (IMF) staff visit.

Although measures imposed by some trading-partner countries led to a sharp contraction in imports in June, with a slight recovery in July, “fiscal consolidation is proceeding, underpinned by current expenditure cuts and an increase in non-oil revenues,” the IMF’s report of the visit states.

“Efforts to diversify sources of imports and external financing and enhance domestic food processing are accelerating,” the IMF reported. The country rerouted some of its trade and found alternative sources of food supply. “The initial concern that trade disruptions could impact the implementation of key infrastructure projects has also been mitigated by the availability of an inventory of construction materials and of alternative sources of imports,” the organization added.

Non-oil growth is expected to remain moderate due to fiscal consolidation and trade diversion, and inflation remains subdued. “Over the longer term, the diplomatic rift could weaken confidence and reduce investment and growth, both in Qatar and possibly in other GCC countries as well,” the IMF said.

The IMF also reported that the country’s banking sector remains sound, with high asset quality and strong capitalization.“In the aftermath of the diplomatic rift, banks’ liabilities to nonresidents fell sharply. The impact on banks’ balance sheets was mitigated by liquidity injections by the Qatar Central Bank and increased public sector deposits.”

The current diplomatic crisis between Qatar and its Arab neighbors will likely take years—not months—to resolve, according to the white paper, No End in Sight: The GCC-Qatar Crisis, from The Economist Intelligence Unit.

Credit professionals who conduct business in Qatar recently pointed out in a July survey of FCIB’s Credit & Collections Survey on several Middle Eastern and North African countries that the current regional dispute has resulted in customers not being able to receive products or to pay for goods. “The Arab embargo is making the movement of goods and funds challenging,” one said. Another credit manager views Qatar as stable with little risk, absent the embargo.

FCIB members can access the complete survey results via the Knowledge Center. The current International Credit & Collections Survey covers France, Germany, the Netherlands, Russia and Turkey.

Election Calendar

Sep. 11 – Norway, Norwegian Parliament
Sep. 23 – New Zealand, New Zealand House of Representatives
Sep. 24 – Germany, German Federal Diet
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

Global Roundup

Kenya's Supreme Court declares presidential vote invalid, calls for new poll. Kenya’s Supreme Court nullified President Uhuru Kenyatta’s election win citing irregularities on Sept. 1 and ordered a new poll within 60 days after last month’s voting was followed by protests and sporadic violence that killed at least 28 people. The decision to cancel the result, the first of its kind in Kenya, sets up a new race for the presidency between Kenyatta and veteran opposition leader Raila Odinga. (Reuters)

Qatar cut to AA- by Fitch with no end in sight to Gulf dispute. Qatar’s sovereign rating was cut to AA- by Fitch Ratings, which cited little progress toward ending a Saudi Arabia-led embargo of the emirate. Fitch lowered the Gulf state’s sovereign long-term debt rating by one notch, putting it on par with Belgium and South Korea. The outlook is negative, the New York-based firm said in a statement Aug. 28. (Bloomberg)

NAFTA round two about to begin. A second round of NAFTA renegotiation convened in Mexico on Sept. 1, the first round having been completed in mid-August in Washington. The second round is scheduled through Sept. 5 before moving to Canada in late September and returning to the U.S. in October, with additional rounds being planned for the remainder of the year. (Global Trade Magazine)

Mexico dusts-off 'Plan B' as Trump revs up threats to kill NAFTA. Mexico sees a serious risk that the United States will withdraw from NAFTA and is preparing a plan for that eventuality, Economy Minister Ildefonso Guajardo said on Aug. 29. Earlier last month, Guajardo told Reuters a “Plan B” meant being prepared to replace items such as the billions of dollars in grain Mexico imports from the United States annually. (Reuters)

French President Emmanuel Macron lays out controversial labor overhaul. Macron’s government unveiled a contentious labor overhaul on Aug. 30, a pivotal step in the leader’s drive to revive France’s economy and shore up the European Union. The changes revise a thicket of rules and worker protections that businesses say discourage them from hiring and make it difficult to negotiate conditions with employees. (HSN)

Fitch downgrades Venezuela's rating to 'CC'. Venezuela's downgrade reflects Fitch's view that a default is probable given the further reduction in financing options, following the imposition of additional sanctions by the U.S. government on Aug. 25. The sanctions prohibit U.S. persons or entities based in the U.S. from a series of financial transactions with the government and PDVSA. (Fitch)

Brazil in push to bring EU-Mercosur deal to conclusion. Difficult bargaining lies ahead on bread-and-butter market access issues linked to EU-Mercosur trade negotiations, which both partners are aiming to conclude by the end of 2017. (EurActiv)

Shipping giant successfully completes blockchain pilot. Marine Transport International (MTI), an industry-leading freight forwarder based in the United Kingdom and the United States, has announced a successful blockchain pilot which demonstrated that the technology will lead to improved connectivity, efficiency and security in the logistics industry. (EconoTimes)

New fintech solution brings AI to accounts receivable. Bank of America Merrill Lynch has launched a new fintech solution that brings together artificial intelligence (AI), machine learning and optical character recognition to help companies match incoming payments with invoices. (Global Trade Review)

Free trade is being deferred but not reversed. Is protectionism on the rise? Moving into 2017, the conventional wisdom was “yes.” The G20 warned about it in 2016. The annual January conclave among global CEOs in Davos took up the chant. Brexit was (wrongly) cited as evidence of rising protectionism. The media dubbed Donald Trump's cavalier trade policies as rising protectionism. The analysts got that half right. (Interpreter)

The U.S. dollar is in its worst losing streak in 14 years and the data aren’t helping. The U.S. dollar index has fallen every month since February. This is its longest losing streak in 14 years. At some point, a correction is to be expected, especially given that the economy seems to be humming along nicely. Recent data show U.S. GDP grew at its fastest rate in more than two years in the second quarter of 2017. The Sept. 1 jobs report could have been the day it turned around. But it didn’t. (Quartz)

Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations