Visiting economists forecast global moves
Two leading economists visiting Bermuda brought global economic developments into focus, discussing why Britain is unlikely to get a Brexit “sweetheart deal” from the European Union, and the US Federal Reserve’s expected unwinding of its $4.5 trillion balance sheet.
Delegates at the Bermuda Captive Conference packed an event room at the Fairmont Southampton last week to hear Henk Potts, director at Barclays, and Ryan Wang, US economist with HSBC Securities (USA), discuss the global economy and likely developments in the near future.
Mr Potts has a pessimistic view of the near-term future of Britain as Brexit takes shape.
He said it was not in the EU’s interests to give Britain a good deal, however, he noted there has been talk of a transition period of three years beyond the Brexit negotiations that may be a good thing.
“The reason why we have become more pessimistic about the prospects for the UK economy as a result of Brexit is that some key elements are coming under significant pressure, particularly household consumption,” he said.
While unemployment in the United Kingdom is at 4.3 per cent, the lowest in 43 years, he sees this growing to more than 5 per cent by the end of next year.
“Companies are becoming more cautious as Brexit shines through. We think employment growth will turn negative next year and unemployment will start to pick up,” he said.
Business growth in the UK is slowing down as companies make two-year investment plans rather than five or ten-year plans. This is because of the uncertainty of the Brexit situation, said Mr Potts, who added: “We know that inflation is running at a faster rate than pay growth. Inflation is 2.9 per cent, pay growth is 2.1 per cent. That puts a real squeeze on consumers.”
He foresees household consumption slowing, and said Barclays has downgraded expectation’s for UK growth to 1.4 per cent for this year, and 1.3 per cent in 2018.
However, he did not expect the British Pound to fall dramatically from this point onwards.
Mr Potts said the reason he did not think Britain would get a good deal from the EU was because European politicians and bureaucrats fear the European project could fall apart if the UK got “a sweetheart deal” that “gives oxygen for the other anti-European parties”.
He said: “The UK will suffer, perhaps not the recession that was feared, but still a significant slowdown with lots to be negotiated.”
Turning to the EU, he said the economic bloc was looking a lot brighter, and Barclays has raised its growth forecast for the year to 2.1 per cent, with a similar outlook for 2018. He said the stage was set for the European Central Bank to raise deposit rates — with possibly two next year — and reduce quantitative easing.
Looking further afield, Mr Potts spoke of the emerging potential of China and India. He mentioned a PwC report that states by 2050 China will be the world’s largest economy, and the second largest will be India.
While the Chinese economy’s rate of growth is slowing, with Barclays forecasting 6.8 per cent this year and 6.4 per cent next year, it is maturing and being driven by domestic consumption on a staggering scale.
Mr Potts said 60 per cent of economic activity in China now revolves around the domestic consumer.
“It is the largest market for cars, computers, smart phones. I was listening to a US technology boss, who said five years ago China’s middle class was 50 million people; in the next five years it will be 500 million people. Think what an opportunity that is in terms of the global economy. It has a huge population, 1.3 billion people.”
India is also undergoing major transformation and has a “very attractive demographic and potential for a very vibrant domestic economy”. In the next two decades, the country intends to develop 20 manufacturing cities. By 2030 it will be the world’s most populous country, with 1.5 billion people “with a very low median age — that means young people in their most productive years”.
Mr Potts noted India’s strong institutions, and said: “We think India will be the fastest-growing major economy over the course of the next decade, generating growth of between 7 to 8 per cent per annum.”
Turning to technology and in particular bitcoin, in his view the volatile cryptocurrency should not form any part of a balanced portfolio. However he noted that cryptocurrencies use blockchain, the open ledger technology.
“This is going to become a really important development over the next few years. If you are thinking of investing in an element around bitcoin, one would suggest blockchain technology is probably a better place to put your money than the really volatile, gambling world that is bitcoin.”
Barclays expects to see the US economy grow by 2 to 2.45 per cent this year, and 2.3 per cent next year. Mr Potts said pressure on the Fed Reserve to raise interest rates would likely bring a hike in December and “potentially three hikes next year. Then we will be getting close to the terminal rate where we expect rates to settle.”
Mr Potts said two of the main tenants of US President Trump’s election campaign, stimulus and tariffs, “are likely to be enacted, but in a lot less exaggerated fashion”.
The US economy was the focus of HSBC’s Mr Wang, who said: “This is probably the most synchronised growth recovery for the past six or seven years. There is not a major economic region in the world that is experiencing recession.”
HSBC expects US economic growth to be 2.3 per cent this year and around 2.4 per cent in 2018.
Mr Wang said the US housing sector will continue to grow with new housing starts, although the apartment construction segment has levelled off.
The Fed Reserve is keeping a close watch on core inflation, which has been faltering during the past year because of a number of factors, such as slower rent increase and a slower rise in tuition fees.
Mr Wang added: “Goods prices in the US for the past four or five years have been falling, and it is not one particular category that can explain this. There have been declines in vehicle prices, furniture costs, stable prices for apparel and declining prices for high tech items, such as computers.”
The dollar’s fall in value this year has not put much upward pressure on goods prices, said Mr Wang.
Regarding Fed Reserve policy, he pointed out that long-term bond yields in the US have stayed low, even as the Fed has started to tighten its monetary policy. One reason for that is global forces.
“Two other major central banks in the world, the ECB and the Bank of Japan — they are continuing to buy bonds. They are holding onto extremely low interest rate policies,” said Mr Wang.
In contrast to the view of Mr Potts, Mr Wang said HSBC did not expect the ECB will raise rates next year. But he said the ECB and BoJ are likely to slow their rate of bond purchases because they are running out of bonds to buy.
He said the Fed is expected to announce this week it will begin shrinking its balance sheet, giving it the opportunity to receive feedback from the market as the process gets under way.
“Over the course of next year, we estimate the Fed’s treasury holdings will decline by $200 billion, its holdings of mortgage-backed securities will decline at a more uncertain pace,” said Mr Wang.
“Over the next three years the Fed intends to shrink its balance sheet by a little over $1 trillion.”
And he expects the Fed to raise interest rates once more this year, and possibly once next year to reach an “equilibrium, neutral rate of interest”. He said there is a suggestion that the rate of equilibrium could be about 1.5 or 1.75 per cent.