2016 has been a roller coaster of emotions and sweat. First we have Brexit and China’s growing debt problem, followed by OPEC’s agreement to cut oil production for the first time in eight years. As the year comes to a close, Trump’s presidency victory surprised everyone else and we saw Fed rose interest rates for the second time ever since the U.S. central bank dropped its key lending level to ground zero during the financial crisis. These might actually be a good predictor of what may happen in the next 12 months and what investors can expect.
Moving towards a self-sustained America?
When it was announced that Donald Trump had won the US presidential election, Asian stocks fell sharply. No doubt, a Trump victory has been widely seen as negative for Asia’s economies because of his anti-globalisation mantra. Come January 20, 2017, Trump would officially take over the presidency status of the United States and he has mentioned through a video that one of the first action he would take on the first day in office would be to withdraw the US from the Trans-Pacific Partnership (TPP) trade deal.
The TPP is the world’s largest regional trade agreement, involving 12 of the Pacific Rim countries with a population of 800 million and covers approximately 40 per cent of the global economy. It was a trade agreement that took seven years of negotiations and was finally established only in October last year. With Trump’s declaration on the US withdrawal, it is clear that they are rejecting globalisation.
It is likely that goods and services trading or by-passing American’s shores would see an increase in tariffs, causing imported goods and services to be more expensive. With lesser demand for imported goods, the demand of domestic goods and services would increase on the contrary and so would there be a rise demand of labour to produce these goods and services. Such a move would indeed be in aligned with Trump’s calling for “America first” as this may create more domestic jobs and increase wages in the country. For Trump’s supporters, Trump signifies an opportunity to shake up a system away from increased inequality and compromised living standards that many Americans have felt. Of course, to ensure that there remained competitiveness in the economy, Trump said that he would negotiate fair bilateral trade deals only if it can bring jobs and industry back. How far would that affect the whole world, it is still uncertain as of now.
Trump vs Yellen
Trump has also planned to stimulate economic growth with tax cuts and infrastructure spending to boost interest rates – in other words, an implementation of a contractionary fiscal policy. However, this could bring about a higher and/or faster than expected inflation and it is no surprise why the Fed has to usher in a tighter monetary policy with a rise in interest rates for the second time ever. Even so, Trump is still displeased at how the Fed has taken a dovish approach to interest rates for such a prolonged period, and aims to appoint a more hawkish head of the Federal Reserve when Yellen’s term expires in early 2018. This again, would be in line with Trump’s desires of pushing growth so as to boost inflation and consumer spending.
The unleashing of Trumponomics may very well bring about a new era with higher rates and a stronger US dollar which could ended up hurting the global economy more than benefitting them. Then again, it is clear that Trump is rejecting globalisation.
Oil Price to Rebound?
Two years ago, the world started pumping oil to gain a share of the large pie of profits that oil can provide. What they did not foresee is that oil prices began falling into a vicious downward spiral as major economies started slowing, demand stagnated, increased U.S. domestic crude oil and OPEC’s decision to maintain oil at current export levels.
Having lost billions in revenue, today, OPEC finally decided enough is enough. It has reached a deal to cut their oil production by 1.2 million barrels per day in order to raise global prices. That means bringing down oil production levels from 33.7 million barrels a day to 32.5 million barrels a day. This has caused global oil prices to surge where Brent crude rose to $53.77 per barrel, from $46 per barrel. According to several analysts however, many U.S. independent oil producers and scores of smaller ones need only $40-$60 to breakeven, and this may cause supply to be coming back on line. If that’s the case, OPEC may ended up cheating on the deal for fear of losing out on its market share, putting us back to square one. There is definitely a lot of uncertainty and no one knows how exactly this would turn out. With US shale drillers coming into play time and again, OPEC is losing its market power faster than ever before. The world is still likely to be stung with low oil prices in the short term.
China’s Growing Debt
China has always been plagued with debt problems ever since the global financial crisis in 2008, we know it, and we know that the debt problem they have is getting out of hand. For the past ten years, total debt has grown by 465 per cent. Even though China’s household savings are in fact twice as large as debt, where at the end of 2015, deposits were about 55 trillion yuan ($8.4 trillion) while debt was 27.4 trillion yuan, this is not to be taken for granted. China’s economic growth is slowing down, companies are not doing as well as they are in the past. This means that profits are sliding, leaving debtors lesser room to pay off their debts. With an increase in both household and corporate debts, both consumers and investors may spend and invest lesser than before, causing economic growth to slow down even further. The traditional view is that rapidly rising debt would eventually lead to an economic crisis. Look at what happened to Greece where the government built up so much debt that it could barely handle. Bad loans rise and banks may even freeze lending. Confidence in the banking and finance sector could be shaken, resulting in a full-fledged banking crisis.
China is the world’s largest second economy after the United States, and it plays a very important role in contributing towards global growth. Should an economic crisis happen to China, its ripples would definitely be felt across the world.