This time last year stock exchanges around the world took a tumble. Admittedly they recovered and went on to register significant gains during the year. We have also had a softening of tones in the tariff war between the US and China, even though the US has imposed tariffs on products imported from the European Union. Both the Federal Reserve and the European Central Bank have stated they are keeping interest rates at current levels.
These developments are a proof that very often the year ends in a different way to how we would have thought it would end when it had started. We seem to be getting some form of sobriety in economic pronouncements and decision making.
The US and China recently announced they reached a preliminary trade agreement. The so-called phase one deal will see billions of dollars in tariffs removed or delayed. There are hopes that there will be a continued softening of trade tensions between the world’s two largest economies.
A fresh wave of US tariffs on Chinese imports were due to take effect last Sunday. However, they have been cancelled for now. There were fears that the new tariffs would have dented business confidence and consumer confidence further, as estimates of the International Monetary Fund showed that the US-China trade war could have caused around one per cent in terms of global economic growth. A softening of tones and some sobriety were therefore called for.
Political expedience may dictate less sobriety – but the economy certainly needs more of it
Last week there was also the first press conference of Christine Lagarde in her role as European Central Bank president. Up to a certain extent the policy of the ECB had been pre-determined by Lagarde’s predecessor, Mario Draghi. On the other hand Lagarde needed to assert her position and she did this in a most sober fashion.
Interestingly, she stated that elected officials, academic experts and members of public interest groups would be consulted as the bank reviewed the way it conducted monetary policy. In another part of the press conference she said: “I will have my own style. Don’t over-interpret. Don’t second guess.”
The Governing Council of the ECB voted to keep the main deposit rate at the historic low of -0.5 per cent, in line with market expectations, while the marginal lending facility remained at 0.25 per cent. The annual real gross domestic product in the eurozone is expected to be 1.2 per cent in 2019 and 1.1 per cent in 2020, a slight revision when compared to the projections published last September. There is certainly no reason for euphoria in these figures.
Turning to the Federal Reserve, in spite of the fact that the US economy is experiencing record expansion and unemployment at a 50-year low, the US central bank kept interest rates low after the cuts in recent months, and there are no signs of them rising, with inflation being well below the two per cent target. The lack of a gung-ho approach is evident as the global economy seems to be trying to realign itself.
I have stated earlier on that we seem to be getting some form of sobriety in economic pronouncements and decision making. Whether this will remain so in the coming year is to be seen. One needs to keep in mind that during 2020, we shall be going through the presidential campaign in the US.
There will also be the negotiations on the implementation of Brexit after the United Kingdom would have left the EU on January 31, 2020. The political and economic situation in Europe will continue to be fraught with uncertainty and the economy of China will continue going through its adjustment process. As such political expedience may dictate less sobriety – but the economy certainly needs more of it.