Monaem Sarker
(From previous issue)
Countries with large chunks of equities and bonds held by foreign investors also become increasingly vulnerable as markets turn more rocky. A rising dollar also pressures prices for commodities, which are denominated in the U.S. currency and become less affordable to foreign buyers when the dollar appreciates. That’s bad news for commodity exporters like Brazil, Chile and Russia. Meanwhile, commodity importers whose currencies have been battered, like Turkey, India and China, now have to pay up for oil and other raw materials.
There is reason to believe the rest of the year will be calmer for the dollar, meaning less risky for emerging markets and other volatile assets. Against major currencies like the euro, the dollar has stopped climbing. A good deal of divergence between growth and monetary policy in Europe and the U.S. already looks priced in. Where the dollar’s strength has exposed weak links in emerging markets, such as Turkey, it may continue to cause problems.
The bigger picture will be influenced a good deal by the trade dispute between the U.S. and China and whether the Chinese yuan continues to fall, raising depreciation pressures on other currencies.
The U.S. and Mexico have agreed on the key sticking points between the two countries that had held up renegotiating of the NAFTA for over a year. The deal still needs approval by the U.S. and Mexican legislatures and negotiators still hope that Canada will join as well.
The Trump administration has heralded economic strength as a source of leverage in its quest to force rivals to make concessions to the U.S. on trade. Those talks are entering a new phase, with an understanding with Mexico on the NAFTA, and an agreement to hold off on tariffs against Europe after a Washington visit by European Commission President.
The U.S. and China, meanwhile, are making little progress in behind-the-scenes efforts to restart formal trade talks. A trade war with the United States, should one come to pass, would weigh on Chinese economic growth, but it probably would not bring that economy completely to its knees.
Chinese real gross domestic product (GDP) rose by 6.7% (year-on-year) in the second quarter of 2018. Chinese authorities have already reacted to mitigate the negative impact of $265 billion in U.S. tariffs by easing monetary policy and allowing the renminbi to depreciate more than 6% against the U.S. dollar. Given China’s limited capacity to retaliate in kind to the proposed tariffs, Chinese authorities are likely to undertake non-tariff actions to impede U.S. business interests in the region, such as imposing more stringent customs controls targeting U.S. goods, and seeking out allies to help generate a global response to U.S. protectionism. Overall, we anticipate that protectionist actions by the U.S. administration will put about 0.5 ppts of Chinese growth at risk over the next six quarters, and may place downward pressure on the economic growth of its supply chain partners.
Emerging markets could become collateral damage in an escalating trade conflict where the U.S. is squaring off against China and Europe. Export-dependent Asian economies may be especially vulnerable, and major stock markets in the region have tumbled in recent months. A significant portion of U.S.-bound exports from countries like Malaysia, South Korea and Thailand pass through China, given its central role in the global supply chain. The trade conflict is also slowing a revival in global growth, stoking worries over demand for raw materials and hurting the economies of commodity exporters.
The first round of U.S. tariffs has begun to reverberate globally, and the economic effects are likely to become more apparent if they remain in place-and as other countries retaliate. But for many U.S. trading partners, the tariffs may be just one of many challenges they face.
In recent weeks, there has been lot of discussion with the Turkish economy spiraling into a volatile situation. Turkey is too small in the scope of the global economy to trigger a broader global crisis. Contagion risk via trade linkages is low, although Europe is most exposed. Similarly, financial contagion is limited, with Spanish, Italian, and French banks at risk to lose a tiny proportion of foreign loans.
Although concerns eased in recent days, Turkey is not out of the woods yet. It remains in the early stages of a balance of payments crisis. A sudden stop to capital inflows has occurred, and the next step for Turkey involves spending cuts and an emphasis on boosting exports to help generate foreign currency required to pay for its large external obligations. The medicine will be bitter, but the sooner Turkish authorities follow through with interest rate increases, capital controls, and fiscal spending cuts, the more likely they can mitigate the economic fallout.
That said, contagion to other economies can still occur through confidence and sentiment channels. That was evident recently with the turmoil in global financial markets that drove a selloff in risk assets and emerging market currencies, and a bid for developed market bonds. Further bouts of volatility are likely as emerging market economies with large imbalances are targeted one-by-one by increasingly discerning investors.
Looking forward, we expect that the global economic expansion will remain intact through at least the end of 2019. Although many central banks have started the process of slowly raising interest rates, monetary policy remains accommodative in most economies, which should continue to support the global economic expansion.
The tariffs and counter-tariffs imposed by the U.S. and their trading partners, respectively, remain a downside risk to the global economic growth outlook. Although the direct threat to the global economy from the tariffs enacted so far is relatively low, trade data are already showing signs that tariffs are affecting activity. In addition, the second-order effects, such as a potential decline in the stock market and corresponding fall in household net worth/consumer confidence, are another threat that could compound any direct effect on growth from a full-blown trade war.
We remain hopeful that such a scenario never materializes, and that ongoing discussions between the U.S. and its major trading partners prove fruitful.
30 August, 2018
(Writer : Politician, Columnist & presently Director General, Bangladesh Foundation for Development Research )
