José Ramón Díez Guijarro (Bankia Estudios) | The end of the year has served to dismiss some of the doubts that have distorted the decisions of the economic agents during the last months, ballasting the growth rates of the activity.
Visibility has improved in the short term, yet uncertainty is here to stay. More time and resources will be required to try to understand its influence on consumption and investment decisions in a world in which information flows through very different channels. But, for now, we know two things that clarify the scenario for the first part of 2020:
i) the two large central banks consider that the activity has entered a stabilization stage after the alarms of last summer;
and ii) the intensity of the commercial conflict decreases, both by the certification of the USMCA (former NAFTA) by the United States House of Representatives, and by the signing of an armistice in the commercial conflict between the United States and China (phase 1 of the agreement ). That is to say, until the US presidential elections the tariff distension could be maintained, which will include some reductions of the tariffs applied in the last 18 months, limiting the damages in the value chains and encouraging some investment decision that had been postponed before the noise transmitted by tariff uncertainty.
The two large central banks do not seem to lower interest rates again, in the absence of negative economic surprises. In the case of the Fed, because the preventive movement of interest rate cuts is closed, once the US economy continues to show solidity.
In the case of the ECB, because, in addition to some stabilization in the activity data (recognized by Lagarde in her first press conference as head of the bank), evidence of the negative side effects that would deepen the negative interest rate zone will accumulate. In this sense, the central bank of Sweden finalized the negative interest rate policy (NIRP), by placing the repo rate at 0%, not because of an improvement in the economic situation, but because of the threats to financial stability that negative rates pose, especially, when they last for a long time. In addition, we must consider the difficulties of explaining the benefits of such an anomalous situation, penalizing savings for so long.
Awaiting the last sessions of the year and once the last obstacles have been saved, the behavior of the financial markets in 2019 has been very positive, with practically all asset categories presenting returns above the historical average (in some cases doubling it). It is evident that part of the good behavior responds to the compensation of 4Q2018 losses and, therefore, the starting point for next year is more challenging for the market, since valuations are much more adjusted.
Even so, in an environment of wide geopolitical noise and mediocre growth data, the results have ended up being similar to those of 2017, when the growth rates of the world economy were much higher and, in addition, they were distributed in a much more homogeneous among large economic regions.
For the moment we are talking about expectations of an improvement in the first quarters of next year, as we do not forget that in the last quarter of this year the world economy would have grown at the lowest rates of the last four years (2.2% / 2.3%), reflecting the deterioration of world trade, the atony of industrial sectors and the effect of uncertainty on consumption and investment decisions. That is, activity still does not reflect the generalized drop in interest rates since the summer, the change in tone in expectations and the wealth effect encouraged by market increases. But the “risk on” movement and, therefore, the improvement of investors’ perspectives is perceived in which high-risk segments, such as the American corporate bonds with CCC rating, have had a revaluation in December 4.5%.
In the last weeks of the year, the confidence that the global expansion is prolonged has increased, while the probabilities assigned to a recession have been decreasing. World growth in 2020 may be similar to this year, but with a more balanced distribution, less contribution from the United States and improvements in emerging economies, especially Latin America and Emerging Europe. Stabilization is the new buzzword to refer to the behavior of the main short-term economies, but being aware that the balance of risks remains biased downwards. In this sense, Robert Lightizer, the highest commercial representative of the United States, warned that Trump’s next focus on the trade conflict is going to be Europe.