What does 2019 hold? — New Year Note
2018 was one hell of a year. 2019 might prove to be not much better, here’s a list of all of the political and economic challenges that could take place this year.
Brexit no deal
With just months before the United Kingdom leaves the European Union there is still lots to be agreed. Over the weekend Trade Secretary Liam Fox came out and said that is ‘50–50’ on whether Britain would leave in March 2019 unless Theresa May’s deal was passed in Parliament in January. There are a range of possible scenarios that could follow (covered in the last note) but by far the most damaging would be a no deal outcome. Don’t be fooled into thinking that it could be managed, it cant and the fallout from such an event would damage the country greatly.
Trade war ramps up
News coming from Washington and Beijing has been largely positive over the past few days with Donald Trump tweeting:
But this is no normal president, just as quick as progress can be made, it can be halted. A continuation of the confrontation and escalating tariffs from the tariff man himself would act as further headwind to the world economy. The Americans and Chinese would face the brunt of the impacts, however the global importance of both economies would weigh down on the rest of the world too.
The destiny of the trade war depends on ongoing diplomatic conflicts including American attempts to extradite Meng Wanzhou, the chief financial officer of Huawei to face charges of breaking US sanctions against Iran. Expect this issue to rumble on well into 2019.
The eurozone slows
Both Germany and Italy’s economies contracted in the third quarter of 2018, a continuation of this trend could create another crisis in the continent. For Germany the largest negative contributions to the GDP growth came from foreign trade (-1%) according to Trading Economics. This comes at a time where the German Government is downgrading its economic forecasts for growth over the next year.
When the next recession comes there will be less monetary stimulus available to revive the economy. The ECB’s base rate is at 0%, it cannot be cut any further due to the zero lower bound so it will fall to Governments to begin a series of fiscal stimuli. For eurozone countries this isn’t always easy, due to the stability and growth pact which limits fiscal deficits to 3% of GDP and debt/GDP ratios to 60% of GDP. The European Commission can allow countries to exceed these limits, but this is often down to politics rather than economics.
Markets become more volatile
The past week has seen wide moves in the market, with the biggest one session rally in history recorded when the Dow Jones gained over 1000 points. This came after days of declines and volatility amid a year where businesses suffered badly in the markets. The German DAX30 was down 18.26%, the British FTSE 100 down 12.50% and the French CAC40 down 11.44%.
Its important to remember that the stock market is not the economy and individual company performance will be a factor in determining the value of the index (Deutsche bank fell 55.65% in the last year alone). But the stock market reflects business performance which is often a reflection of the economy. A falling stock market can reflect a falling economy.
This article is by no means a prediction of what I think will happen in the next year, but more an outline of what could happen in the future. I hope none of this comes to pass and the world sails calmly through 2019, I wont hold my breath.
Best wishes for the New Year,
Matt
You can contact me on twitter @mattallen001
All feedback appreciated
