MARKETPLACE – It’s not often that a year is riven with so many momentous economic changes. But 2018 was full of them: big ones — a large increase in government spending, low unemployment levels not seen in decades, trade conflicts, interest rate uncertainty, recession fears. Here’s a look at what 2019 inherited from 2018, and the issues to watch for as we start the new year.
1) Don’t say we didn’t trade warn you
The president’s many trade conflicts started taking their toll on American businesses, consumers, and investors in 2018, and there’s more to come in 2019.
UBS Chief economist Seth Carpenter said the trade disputes have been rough on the stock market, “clearly underpinning a huge chunk of the stock market’s anxiety right now.”
“The stock market is essentially flat to slightly negative on the year, and a huge chunk of that is people worrying what’s going to happen with this trade war,” Carpenter said.
“We are still in a fairly hostile trade situation with China,” said Carl Tannenbaum, chief economist at Northern Trust. “While the U.S. took steps to ameliorate trade tensions with a lot of other countries, most recently Canada and Mexico, the situation with China has not gotten better and may get worse before it improves.”
“The outcome will affect not just the two countries involved but also the ones that supply them, and the ones that are caught in the middle of these two titans,” Tannenbaum said.
The problem isn’t just that tariffs have already started to raise prices on things ranging from water purification chemicals to air conditioners — tariffs are taxes after all. It’s that companies with international links are having a hard time figuring out how to maintain their supply chains when barriers and walls can start to go up at any moment. Global supply chains are delicate webs of relationships, and they are being destabilized. That means investment decisions are being delayed, and production moved around.
U.S. tariffs on $200 billion worth of Chinese goods could go from 10 percent to 25 percent on March 1, 2019, ninety days after President Donald Trump and Chinese President Xi Jinping agreed to a temporary halt to further escalation.
The U.S. is still imposing blanket tariffs on steel. Twenty five percent tariffs went into effect on $34 billion worth of Chinese imports back in July, they went into effect on another $16 billion worth in August, and then 10 percent tariffs went into effect on $200 billion worth of Chinese goods in September.
The U.S. is also still considering tariffs on automobiles and auto parts from most countries.
2) Brexit or Wrecksit?
On June 23, 2016, a majority of Britons voted to leave the European Union. Two and a half years later, there is still no agreement on how they’ll actually do it.
But whether there’s agreement or not, it will happen in March.
“I think one of the underestimated risks to the global economic outlook in 2019 are those associated with a hard Brexit,” warns Joe Brusuelas, chief economist at RSM.
“At midnight on March 29, if the U.K. chooses to exit the EU without an agreement that keeps it in the EU customs union and maintains the status quo at the Irish border, essentially walls will go up all around the island economy,” he said, referring to the automatic return to pre-EU tariff levels and import standards. “It will affect everything from transportation including air, shipments of food fuel and medicine. In addition, the derivatives clearing house in London includes up to $11 trillion in derivative trades that would have to be directly settled via SWIFT [the international bank transfer system] and the city of London and all of these things are at risk should there be a hard Brexit.”
The United Kingdom is the world’s fifth largest economy. If it trips, it’s sure to have ripple effects around the world.
3) Debt-stiny’s Child: The government spending album
At the end of 2017, Congress passed tax cuts worth $1.5 trillion. Then, in February of 2018, it passed an increase in federal spending of $300 billion. That spending kicks in about now.
“The bulk of the ramp up in spending should be hitting now and going into the first half of 2019,” explained Mark Zandi, chief economist at Moody’s Analytics. “There’s always a lag and this time the lag is pretty long. If history is any guide, we should see a big pickup in the first half of 2019.”
The question is: What will that do to the economy? Will it push the Federal Reserve to raise rates further?
That could affect loans, savings, and mortgages.
Another question: Will political gridlock cause sudden decreases in spending? Joe Brusuelas, chief economist at RSM thinks it will.
“I’m expecting growth in the United States to decelerate back towards 2 percent,” he said. “Due to the political polarization in D.C., we’re likely to run into what I call a fiscal cliff at the end of 2019, where roughly $126 billion in temporary tax expenditures and overall spending will fall off. What that means you will see residual slowing at the end of 2019 and into 2020 because you’re just going to see the government spend quite a bit less than they have the previous two years.”
4) Don’t [Federal Reserve] bank on anything
Central banks in some of the world’s richest countries are starting to get on the same page with regard to easing up on the gas pedal or tapping the brakes of their respective economies. While Japan continues to lay on the gas, Europe is easing up a little, while the U.S. Federal Reserve has been verging on tapping the brakes.
In 2019? Well … we’re not sure.
“For the past two years the federal reserve has been a metronome, with its regular pace of quarter point interest rate increases which they signaled to the marketplace were forthcoming, they used the word gradual. That’s over now,” explained Richard DeKaser, corporate economist with Wells Fargo. “They’ve been singing a different song, they’ve said the pace of gradual tightening is no longer with us and they are using the phrase ‘data dependent,’ meaning we will respond to circumstances as they evolve – which in itself adds uncertainty.”
Remember that interest rate changes affect credit cards, car loans, mortgages, and corporate debt loads. And that can mean the difference between a calm economy and a recession.
What the Fed does will both depend on and influence how the U.S. economy does in the coming year. Predictions are all over the map, from “we’ll be okay” to “we’re in for a recession.” The performance of the U.S. economy will affect the global economy. The IMF predicts global growth will be around 2.5 percent in 2019, 0.2 percent less than it predicted a year before.
5) Emerging market emergencies
2018 was rough on emerging markets. As interest rates in the U.S. crept up, financial flows began to drain funds out of a number of countries, particularly those with pre-existing conditions like high debt and economic mismanagement. Currencies fell to crisis levels in Argentina and Turkey, among others.
Argentina managed to secure help from the IMF, but the outlook isn’t clear for developing countries as a whole.
“I think some emerging markets will continue to be troubled in 2019 to a large extent because they haven’t dealt with their problems of 2018,” said Wells Fargo’s DeKaser. “In particular, large deficits in some countries which will become very difficult if not unsustainable if domestic interest rates go up as they have to compete with places like the United States.”