A shift or slowdown of the current expansionary cycle is inevitable. The big question is when and how severe it will be.
At the Spring Meetings of the IMF and World Bank Group in April, finance ministers and central bank governors welcomed the strong growth of the international economy and maintained their 3.9% growth forecast for 2018 and 2019. The eurozone sovereign debt crisis may formally end when the Eurogroup certifies the end of Greece's bail-out in June. Greece has been placing its debt in financial markets for some time, with its 10-year bond yielding 4.06%. Portugal pays less to place its ten-year bond (1.67%) than the US does (2.96%).
No major economy is on the brink of a crisis caused by capital flight due to an unsustainable current account deficit, as was the case with South-East Asia in 1997 and a number of emerging countries in 2014-2015 when hydrocarbon and commodity prices plummeted. The Federal Reserve was able to keep interest rates at historically lower levels until 2018 despite full employment and growth of close to 3% because inflation in 2017 came in at a subdued 2.1%. The sharp correction in the stock market in February came about as a result of rising hourly wages in the US and hence a fear that inflation would therefore finally rise.
Stability in the stock market after the sharp sell-off in February seems to indicate that investors are accepting the end of the era of low interest rates and low inflation. But the complacency that some international organizations and governments display ignores worrying trends. We are approaching the end of an expansionary cycle. The current US economic expansion began in 2009 when the country emerged from recession and is the third-longest in history. Business and economic cycles have not disappeared. The question is when will the slowdown begin and how severe will it be.
On the political front, headlines predicting president Trump's political demise before 2020 are very premature. They overlook the crucial fact that the US president has unfettered power to dismiss any member of the executive branch and to grant pardons to witnesses or indicted or convicted persons, as long as these decisions are not an attempt to conceal criminal acts or involve a quid pro quo. The president's legal team can appeal Special Prosecutor Robert Mueller's subpoena to testify all the way to the Supreme Court, a process that could take up to a year. The Republican Party establishment will not abandon the president unless it suffers a major setback in November's mid-terms, such as losing their majority in the House of Representatives. The Democratic Party’s optimism for a “blue wave” in November must be tempered by the fact that unemployment has fallen to its lowest level in 70 years, and 40% of the population continues to support the president. Unfortunately, it is very likely that by the end of 2018 more populists will come to power in major economies. A former member of the M-19 leftist guerrilla group and former controversial mayor of Bogotá, Gustavo Pietro, leads the polls for the Colombian presidential elections in May. Left-wing firebrand López Obrador leads Ricardo Anaya, the PAN candidate, by more than eight points in surveys for Mexico's July presidential elections, although López Obrador introduced a shadow cabinet mostly made up of well-qualified and moderate professionals. Right-wing extremist congressman and ex-military officer Jair Bolsonaro, nicknamed the Trump of the tropics, may be the beneficiary of the citizenry's weariness with traditional politicians in the Brazilian presidential elections in October. The 5 Star Movement, which will lead the next Italian government, rejects the deficit targets set by the European Commission. The favorite to become the premier of Ontario, Canada's most populous province, in elections in June is Doug Ford, who promises to implement populist measures.
After eight rounds of negotiations during the past year, the outlines for a preliminary agreement that preserves NAFTA (14 million US jobs depend on it) are clear and are within reach. But Canada and Mexico continue to reject the Trump administration’s insistence on a sunset clause of five years, the repatriation to domestic courts of investor-country disputes and the rules of origin for vehicle components. On May 1st, president Trump granted the EU a temporary extension of the exemption on steel and aluminum tariffs. But transatlantic cooperation on trade matters is conspicuously absent. The Trump administration could coordinate with the EU a strategy and a traditional approach -- through the WTO -- to pressure China on legitimate concerns such as the forced technology transfers required by Beijing from some foreign companies investing in China, as well as intellectual property infringement. The European Commission shares president Trump's agenda for China, but not his methods. During the Obama administration, a series of vetoes began on Chinese investments or acquisitions of US or Western technology companies. Between presidents Obama and Trump and acting on the recommendation of the Committee for Foreign Investment in the US (CFIUS), the purchase of Lattice Semiconductor, Aixtron, Qualcomm and NV Here by Chinese or Asian companies were banned. All of the aforementioned companies are at the forefront of the development of 5G and other cutting-edge technologies. The Trump administration recently banned US companies from doing business with the Chinese telecommunications giant ZTE, and AT&T has announced that it will not sell Huawei smartphones in the US. A rivalry for digital supremacy between the West and China is already under way. In 2015, the Chinese government published its “China 2025” blueprint with the aim of being very competitive (by 2025) and dominant (2050) in ten advanced industrial and technology sectors.
Some regulation of the US technology giants appears inevitable, especially after the EU’s approval of the General Data Protection Regulation, which all tech companies will have to comply with. Facebook, Amazon, Alphabet (Google), Apple and Microsoft generate approximately 10% of total U.S. corporate profits but have acquired 329 companies since 2013, thus hampering competition and possibly innovation.
The US should approach negotiations with China with the confidence that its technology companies are still the world’s titans. The EU, for its part, must continue to negotiate free trade agreements and conclude the ones with Mercosur, China and Asean while it bolsters international institutions and economic integration. Economic populism will hopefully be overcome, and the EU remains the first trading partner of 59 countries.
Dr. Alexandre Muns Rubiol
Professor at OBS & EAE Business Schools
