As the holiday season starts, it’s time to reflect on what 2018 brought to us, and what 2019 holds in store. Looking back we can see the end of synchronization, more populism, selectivity in a volatile environment, and the end of easy money. For me, there are three lessons I learned from 2018:
- Trumponomics did wake up the US – at a high cost. With a massive fiscal stimulus and financial deregulation, President Trump managed to deliver +3% growth for GDP and wages, and +6% growth for markets and investments. That is an OK performance compared to the rest of the world. Still, when taking into account widening imbalances (twin deficits), and mounting risks (corporate debt, pressure on the Fed), this is a costly awakening.
- Emerging markets are back in the spotlight – for good. Trade threats (average tariffs at 5.2%, from 3.5% end of 2017) and tightening monetary and financial conditions (stronger dollar and higher US treasury rates) created uncertainty and balance of payment crises in already-weak emerging markets (Argentina and Turkey). In addition, large emerging markets (Mexico, Brazil, e.g.) opted for strong political leaders with unorthodox policy approaches.
- Europe and China started to feel the heat – in a different way. As growth slowed down, China had to react with strong policy measures (subsidies, liquidity support, economic patriotism) and more risk piling as internationalization efforts stalled (financial liberalization, Belt and Road). In Europe, the difficult coordination of fiscal and structural efforts, and already supportive monetary policy made it hard to react. Political risk increased as a result: From Italy and Brexit to France and Germany.
Looking forward, what does all this mean for companies in 2019? The question is essential especially when it comes to businesses' transformation and growth agenda, as well as risk management:
- The rules of the games are changing fast. In our economic scenario, we have penciled in positive outcomes for most political and policy-related risks (trade war, Brexit, Italian crisis, changing leadership). However, the news, especially in Europe, call for cautious optimism. Rapidly changing business conditions – and limited multilateral safety nets – are the new normal. Businesses must nimbly optimize their supply chains (trade diversion), financing and balance sheets.
- The price of risk is increasing. In particular, the costs to grow, to trade, and to invest are growing. This takes place as we observe a soft landing across borders, financial conditions tightening, and conditional trade opportunities. Markets have become more volatile and the search for hedging increases. For companies with large refinancing needs, this is a pivotal year, and credit risks should pick up as insolvencies may be on the rise for the third consecutive year in 2019. The construction, retail, and services sectors are to be watched.
- Will businesses invest more or less next year? The real question is whether prolonged uncertainty will stop the business transformation. Though demand should remain strong as purchasing power continues to increase in 2019, precautionary savings and risk intolerance, prevalent from 2012 to 2016, could very much make a comeback. This slowdown may provide little incentives for businesses to do the heavy lifting in 2019. Digitalization, internationalization, and sustainability, however, call for substantial and costly investments by companies.
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The View November-December 2018