Published at @focuseconomics
Daniel Lacalle is a fund manager who holds a PhD in Economics and has a CIIA financial analyst title. He is author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley) as well as “Escape from the Central Bank Trap” (BEP). He has been ranked as one of the Top 20 Economists in the World by Richtopia and has over 24 years of experience in the energy and finance sectors. As an expert in this field, let’s take a look at what he is foreseeing for the global economy.
1. France to emerge as Europe’s biggest problem?
The previous year was marked by a lot of anti-establishment populist movements, immortalized in the victory of U.S. President Donald Trump and the United Kingdom’s vote to exit the European Union. However, Lacalle believes that these don’t come close to the biggest potential threat to stability in Europe, which is the likely political upheaval in France.
The French elections will be held later on this year and one of the biggest frontrunners is Marine Le Pen who has spoken about starting their own referendum to leave the bloc. Although Le Pen promises that this can be achieved in an orderly fashion, the numbers suggest that this might do more harm than good in the long run. After all, France is running on an unsustainable economic model with a high tax burden and labor market rigidity, keeping it in stagnation.
2. Potential reversal in Spain’s recovery
There’s no denying that the Spanish economy has made great strides in restoring economic growth and employment over the past few years, but this recovery could be threatened by both internal and external forces. For one, Spain has a complicated political landscape that makes reforms challenging to implement. To make things worse, the IMF is requiring Spain to raise some VAT tranches, which could dampen consumer spending just as it is trying to get back on its feet.
3. Are currency wars over?
Monetary policy seems to have taken the backseat to politics lately, although world leaders like Donald Trump haven’t stopped short of calling out countries like Japan and China for unfairly keeping their currencies weak. However, much of the global economy and central bank policy has evolved these days as rates have been cut to record lows and massive amounts of liquidity have been doled out in response to the financial crisis nearly a decade ago.
This suggests that monetary policy authorities have pretty much used up all the tools in their arsenal to keep internal and external demand afloat, including methods to devalue their currencies. Republicans have pointed out that central banks should no longer use the balance sheet indiscriminately as this would perpetuate bubbles.
4. Earnings recession may be over in Europe
On a less downbeat note for Europe, it may be the end of the earnings recession in the region after more than half a decade of dismal results. Morgan Stanley reported that out of 75 companies surveyed, 43% have surpassed estimates by 5% or more while less than 30% disappointed. This trend could carry on and improve, buoyed by rising commodity prices, improved banking performance, upward revisions of global growth, and widespread margin improvement.
5. What’s next for oil?
Oil has been recently hogging the spotlight as traders are trying to gauge whether or not the OPEC output cut is having a material impact on prices. Although several institutions projected that this could result to a significant reduction in supply, there are other factors such as higher US production that could still yield an overall increase in stockpiles. Apart from that, the complacent environment in which energy price gains are triggered by the inflationary effects of stimulus while overcapacity and debt remain could be a recipe for a crisis.