This week’s briefing looks at some of the big economic events of the last month or so. As a result we have dropped our usual news section this week. We will release our full year-ahead view for the UK and global economies next Monday, 13 January.
Equities ended the year in euphoric form, with the global equity market returning almost 4% in December. The rally was assisted by hopes of an easing in trade tensions between the US and China following a ‘phase one’ trade deal between the two countries.
The US has agreed to cancel some planned increases in import tariffs and roll back some others. In return China has said it will increase imports of US agricultural produce and open its economy to greater international competition. The deal went down well with financial markets but at best it is the first step towards a reduction of trade tensions between the two countries. Assuming both parties stick to it – which is by no means certain – the agreement would not substantially unwind protectionist measures put in place in the last two years. Nor does it address more fundamental geopolitical sources of conflict, for instance over technology.
Markets also took heart from the passage through the US House of Representatives of a revised trade agreement with Canada and Mexico. Rather than upending the existing NAFTA agreement, as Mr Trump had earlier suggested, its replacement is seen as only marginally increasing trade frictions within North America.
One piece of unalloyed bad news on the trade front was the appellate body of the World Trade Organization (WTO) ceasing to function following the US exercising their veto to block the appointment of new judges. The appellate body is analogous to an international supreme court for trade disputes and is a vital part of the architecture of world trade. Putting the appellate body out of action increases the risk that trade disputes will escalate.
In the UK, the most consequential development following the Conservative’s General Election victory was the announcement of legislation that rules out an extension of the Brexit transition period beyond the end of 2020. This is widely seen as increasing the chances of the UK leaving current trading arrangements with the EU without a trade deal and on WTO terms.
Last Friday the oil price surged by almost 4% after the US killed the head of Iran’s overseas military forces in a drone strike. The action marked a major escalation in the conflict between the US and Iran and accentuates the geopolitical risks facing the global economy. Those risks are transmitted from the Middle East to the rest of the world most immediately through the oil price. Sharply higher oil prices, sometimes driven by Middle Eastern politics, have been a harbinger of all the major economic downturns since the 1970s. However, the strength of the relationship between oil prices and global activity has loosened as the oil-intensity of output has fallen and US oil production has soared.
Chinese economic data published in the last month showed an unexpected resilience in retail sales and industrial production. In a move which added to equity market optimism, China’s central bank last week eased monetary policy with the aim of bolstering growth.
The announcement last month of a merger between French carmaker PSA and Fiat Chrysler underscores the pressure for consolidation in a weakening global auto sector. The merger will create one of the world’s biggest car makers and will help the new group manage the costs of developing electric and autonomous vehicles.