| 21-2-2019 | ICC Consultants | treasuryXL |

This blog analyzes the international political developments that can have an impact on the financial markets and the extent to which. The vision of ICC Consultants is based on a large network within the worldwide leading research houses and 40 years of experience in the financial markets. By means of the web link at the bottom of this blog you can download multiple reports from ICC Consultants.

Global central banks are starting to worry about economic growth, slowly but surely. The Fed made an about-turn recently. It announced it would put off further monetary tightening. The ECB was already treading cautiously. Now even hawks such as the Dutch member of the Governing Council of the ECB, Klaas Knot, are becoming jittery on signs of economic weakening both in the stronger euro countries and the struggling member states. Not just the western central banks are bracing themselves. Two months before India heads for the polls, its newly appointed central bank governor implemented a rate cut, much to the surprise of quite a few analysts. From Australia all the way to the Czech Republic and the Philippines, central bankers who wanted to tighten the reins not so long ago are increasingly speaking in dovish tones

Focusing on the prospects for Europe, we see plenty of economists and analysts who mainly attribute the disappointing economic data to once-off factors that are unique to the countries in question. They claim that German growth is mainly in heavy weather due to new emission regulations in the automotive industry. Likewise, the Yellow Vest protests in France are identified as a singular phenomenon that does not have a broader fundamental-economic effect on the country’s growth potential. The UK is fraught due to Brexit, Italy’s populist government seeks the confrontation with Brussels (and France), and a looming government crisis is what is undermining Spain. And so on.

Some analysts point at these factors and argue that such growth obstacles are specific to each country while there is little reason to expect a global, structural, and intensive growth slowdown. They think the recent pessimism of many market watchers is exaggerated. This is a dubious viewpoint from a political perspective. First, we are seeing plentiful and (potentially) substantial drags on growth, precisely in several of the world’s largest economies.

Second, quite a large number of growth impediments are symptomatic for wider developments that will not disappear from one day to the next. This does not automatically imply that a recession is nigh but owing to problems in individual major economies and various cross-border trends it is unlikely that growth will accelerate to any great extent.

To each state its own problems

As to the country-specific problems, we believe there is copious cause for concern:

> The German economy has cooled significantly. Most analyses point to the weaker German automotive industry, which faces new emission standards for greenhouse gasses as well as declining export opportunities. A leading industry for decades, it is especially reliant on diesel cars. The downside of progress is that while the German vehicle manufacturers (partially) set the tone for decades, they also became complacent and are now overtaken by manufacturers from elsewhere. More often than not, the Germans are focused on survival rather than on seeking out new opportunities. We have seen something similar in German politics. The German economy has mainly profited in the past years from reforms that were introduced in the 1990s. Angela Merkel has merely been holding the fort in that sense. Admittedly, she has done so in a very capable, quiet, and decisive manner but reforms and progress have been thin on the ground. A number of influential think tanks in Germany have been warning against this situation for years. Merkel is now in her twilight years as chancellor, while her successor is not exactly known for her revolutionary fervor. In addition, the SPD (the second-largest political party) has weakened and the German political centre has eroded in general terms – as has happened in many areas. Therefore, it does not seem likely that Berlin will become deeply enamored of reform any time soon. Meanwhile, the country’s population is set to age rapidly in the coming decades, which will bring a myriad of challenges.

> It cannot be denied that the Italian coalition government has a zeal for reform but it is often aiming for the wrong type of change. Many measures that were meant to render the economy more flexible and competitive have been reversed; most economists believe these policies will backfire. Having made a lot of headway between roughly 2011 and 2014 – if we take the Ease Of Doing Business Index as our benchmark, for example – Italy is once again sliding down the ranks. Rome is not just changing its economic course in a negative direction while in terms of diplomacy, its status is also blemished. Recent examples are its refusal (as the only EU country) to recognize the Venezuelan opposition leader Juan Guaido as interim president and the embarrassing tiff with France around Italy’s support for the Yellow Vests and its attempts to nix the construction of the railway link between Lyon and Turin. Government policies in Rome are an important reason why Italian economic growth is in the doldrums – the country is in a technical recession – as it buckles under the weight of debts and deficits. Consequently, it is again on a collision course with Brussels. On top of this, the coalition has already threatened to ‘clear out’ the Italian central bank. To sum, we cannot expect a lot of positive news from Italy in the short to medium term. A recent regional election gave off worrying signals; the rightwing populist parties with entrenched Eurosceptic sentiments made big gains.

> Further to the West, Spain has been frequently held up as an example of how to tackle a crisis and implement reform. Rightly so, to some degree. Jobless rates have dropped from 27% to less than 15% in recent years, the extremist parties did not gain a substantial foothold, and growth was robust in European terms. Yet, a political crisis is now looming as the left-wing Prime Minister Pedro Sanchez has lost the support of the Catalan parties. Fresh elections appear to be in the offing. The ruling coalition is already a hodgepodge of parties and the situation will probably not improve after the elections. Plus, the tensions between Catalonia and Madrid will undoubtedly mount once the conservatives take over the baton from Sanchez. The period of relative peace and quiet in Spain is over and we suspect this will have a negative impact on growth.

> As for France, factors including the Yellow Vests protest movement have knocked back the economy. Dissatisfied French citizens have been taking to the streets on a weekly basis for months. President Macron opted for an ill-advised hard line that has created a lot of resentment. On the other hand, the French are beginning to suffer from protest fatigue. The numbers taking to the streets are not as high as before while Macron’s popularity among voters is creeping up. Nevertheless, his reform agenda has been dented by setbacks so the president will have to scale down his ambitions whereas the French economy wasn’t doing that great before, in any case.

> The other major European economy is the only one (out of five) outside the Eurozone. Soon it may even leave the EU. Of course we are talking about the United Kingdom under PM Theresa May, who maintains that she will manoeuvre her country away from the EU on 29 March. We think this is not the most likely scenario. Neither is a new referendum or notification revoking Article 50 (meaning that the UK would remain an EU-member). The most logical outcome would seem an extension of the negotiations by a few months. Meanwhile, the UK is starting to feel the Brexit pain or rather, the adverse effects of the prevailing uncertainty. Businesses are postponing investment, growth is slowing, and consumer as well as producer confidence is waning. Faith in politics is also at a nadir: just 33% of the British thinks May is doing a good job and for opposition leader Jeremy Corbyn that percentage is even more depressing at 17%. The Tories are deeply divided and Labour is led by a left-wing populist who has shown several times that his knowledge of Brexit is deplorable. The gripping Brexit drama overshadows the entire British political landscape at the expense of other important issues. It is not a coincidence that Bank of England boss Carney did sound the alarm bell last week as he warned against the detrimental consequences of a no deal Brexit. Will the British people take any notice? Many are numbed by the ongoing spectacle. Increasingly, Brexit is tearing apart the fabric of the British economy whereas a real recovery is nowhere in sight.

The report was written by Andy Langenkamp , ​​political analyst at ICC Consultants. On the website of ICC Consultants you can download the full report.