Monday 28th January 2019
Brexit unease in Davos
As the late comic Victoria Wood once noted, “Life’s not fair, is it? Some of us drink champagne in the fast lane, and some of us eat our sandwiches by the loose chippings on the A597.” Many of the former group could be found on the guest list of the first big international gathering of the year, the annual World Economic Forum in Swiss ski resort, Davos. Donald Trump and Theresa May, however, were two notable absences, with domestic dilemmas keeping them away from the slopes and the champagne last week.
The Brexit debate continues to rumble on, explaining Theresa May’s absence from the forum. Chancellor Philip Hammond stood in, holding meetings with business chiefs with the aim of emphasising that while the ‘leave’ result had to be respected, the government was doing all it could to avoid a no-deal Brexit.
Last week there was a suggestion that some Brexiteers and the DUP would consider backing May’s deal if she can time-limit the Northern Ireland backstop. These fresh hopes helped the pound climb over 1% against the dollar to a three-month high. The words of business leaders may be on the minds of politicians, with Airbus, Goldman Sachs and Sony all announcing strong opposition to a no-deal Brexit. But the week saw yet more confusion: Commons leader Andrea Leadsom said the EU would agree to a short extension of Article 50, while Downing Street stated that it was not considering an extension. Moreover, Simon Coveney, Ireland’s Deputy Prime Minister, said the backstop plan was “not going to change”.
Despite the ongoing turmoil, the PM would have been encouraged by employment reaching a new record, while average earnings increased by 3.3% (annualised) to the end of November – the biggest gain in 10 years; moreover, wage rises outpaced inflation. Andrew Wishart of Capital Economics said the figures were “reassuring, showing no sign of any hit to firms’ hiring ambitions due to Brexit”.
The US government reopens
Attending Davos was not to be for Donald Trump, either, as he had to contend with an equally draining domestic stalemate. The longest-ever government shutdown eventually ended after 35 days – longer than the entire presidency of William Henry Harrison, who died after just 31 days in office in 1841.
Trump was also forced to postpone his State of the Union Address before he eventually backed down on Friday and agreed a short-term funding solution to reopen the government. It has been estimated that the shutdown reduced economic growth by 0.13% for every week it lasted. The Dow Jones, Nasdaq and S&P 500 indices all regained ground following the end of the shutdown and on the back of strong earnings figures, having suffered losses earlier in the week. The Dow crossed 24,800 for the first time this year, hitting a level last struck in early December.
Concern over slow growth in China
Unease over Brexit and global recession defined the Davos summit, as attendees reflected on some gloomy figures released by the International Monetary Fund. It has cut global growth forecasts in 2019 to 3.5% – down from the 3.7% it had predicted at the end of October. However, despite this concern about the recent weakness of the global economy, it does not compare to the panic of the 2009 summit.
One of the biggest strains on the global picture is China, where growth of 6.6% in 2018 was the lowest rate since 1990. Although this was in step with forecasts, lethargic growth could mean China finds it hard to reduce its huge domestic debt. There was a bright spot though, as retail sales are predicted to reach more than $5.6 trillion in 2019; about $100 billion more than the US.
Alistair Thompson of First State Stewart Asia, Manager of the St. James’s Place Asia Pacific fund, said: “On a longer-term basis, we believe that China’s growth story remains intact. Chinese companies have been focusing more on research and development, and product innovation, in order to compete with global peers.”
The Trade War rumbles on
Meanwhile, the World Bank has expressed fears over the impact China could have on other Asian markets, due to “deep regional and global integration”. To this end, the ongoing trade war with the US is making markets uneasy, particularly in Taiwan, Singapore and Korea, which are net exporters to China. China and the US are keen to agree a deal before 1st March when tariffs on $200 billion of Chinese goods will rise from 10% to 25%.
A high-level delegation will travel from Beijing to Washington this week to hold talks to attempt to resolve the dispute, amid signs that the weakening economy is putting pressure on the Communist Party of China to ensure it delivers the ‘Chinese dream’ to its people. Rising unemployment is seen as a near-term risk, compounded by a growing trend of foreign companies diversifying their sourcing and production away from China. However, in an interview last week, US Secretary of Commerce Wilbur Ross dulled previous optimism, stating that “we’re miles and miles from getting a resolution”.