Monday, March 30, 2020

Peering into 2020

Dec 19. 2019
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By Andrew Sheng for Asia News Network

As 2019 fade, the world’s financial markets are reaching record high, celebrating in truth a sigh of relief that Britain has final closure on Brexit through a thumping victory for Boris Johnson; and the non-announcement of a US-China trade truce that seems to postpone more intractable problems to the future.  The S&P 500 index is up more than 27% in 2019, the strongest annual gain since 2013. 

A truce is not a treaty and the Brexit divorce are only the beginnings of a long journey.  But 2019 has indeed been an eventful and stressful year: the hottest on record with outbreaks of protests from Santiago, Chile to Hong Kong.   This was a year of intense politicking, but there are trends emerging.  The Conservative victory in Britain over Labour was a clear sign that leadership matters.   Labour Party leader Jeremy Corbyn was a weak 1970s style socialist who had little new ideas to offer as an alternative to the clear choice of Brexit, led by Boris Johnson who saw that the British simply want an end to three years of stressful confusion.

Similarly, even though US Democrats are pushing to impeach President Donald Trump, there is no chance that the impeachment trial will pass through the Republican controlled Senate.  And with fifteen Democratic presidential candidates still in the field, the chances that Trump will be re-elected in 2020 looks better than ever.  From his supporters’ point of view, he is one leader who has delivered on his electoral promises, rightly or wrongly, personal defects aside.  And the US economy is still the growing economy with fastest job creation in the advanced world.  Whilst the Left dithers, the Right acts, often with power in mind. 

In Europe, much will depend on how the emerging leadership in the European Union will tackle its many challenges. French President Macron was hinting more strongly when he called NATO “brain death”. Now that Britain has left the Union, the key axis of European leadership is between France and Germany.  Will Germany loosen her fiscal purse-strings by reflating to boost European growth and revive the Southern European economies, especially Italy, Spain and others?  If not, Spain is struggling with Catalan’s call for independence, whilst the stagnant Italian has led to very toxic populist politics. 

But the deeper existential threat facing Europe is immigration.  As long as climate change stresses the North Africa and Middle East economies through droughts, worsened by civil strife and failing governments, people will move to cooler climates and richer economies in the North.   The aging economies in Europe need new labour to stimulate growth, but can they peacefully assimilate serious cultural, ethnic, language and religious differences?   Many Scandinavian countries are liberal in approach and welcoming to immigration in policy, but even they recognize that their schools and urban services are stretched to breaking point trying to deal with huge gaps in language and training skills of the new arrivals.

In Asia, no country has escaped the US-China trade war, with growth in trade slowing and investments in limbo as the outlook becomes blurry.  China is slowing.  What the Asia supply chain fears most is the decoupling in standards and markets, which means that they have to re-tool with loss of economies of scale and market share.  Political tensions have flared in South Asia between India and Pakistan on Kashmir, and within India on the question of citizenship in Assam.  Protests everywhere have flared, erupting from serious issues of identity and national security. 

In Latin America and Africa, growing population facing less jobs and climate change are over-flowing to populist anger.  Unemployment remains high in a world of slower growth and declines in trade and inward foreign investment.  Inflation in Argentina has already reached 50% per annum, Mexican growth is in negative territory and both Nigeria and South Africa struggle with rising youth unemployment and unrest.  

Toxic politics is only the reflection of the boiling problem of climate warming on top of disruptive technology and inequality.  True, politics was what stopped the Madrid UN Conference of Parties (COP25) from taking firm collective action.  Before the meeting, UN secretary general António Guterres asked, “Do we really want to be remembered as the generation that buried its head in the sand?”  At the end of the meeting, he admitted he was “disappointed”.   The mindset is still like boiling frogs waiting for someone else to jump first. 

The bad news is that “the world is already 1.1°C warmer than it was at the onset of the industrial revolution, and it is already having a significant impact on the world, and on people’s lives. And if current trends persist, then global temperatures can be expected to rise by 3.2 to 3.9°C this century, which would bring wide-ranging and destructive climate impacts.”   But these averages hide the fact that in many parts of the world, extreme variations in weather would already make them uninhabitable for humans, livestock or growing of plant food. 

The good news is that more and more companies are waking up to climate change as more opportunity than threats to profits. Certainly, asset managers with more than $34 trillion in assets under management are pushing governments to price carbon, reduce fossil fuel subsidies, and phase out coal based power plants.   The climate protests led by Swedish teenager Greta Thunberg and movie star Jane Fonda signal that there is a generational coalition forming to push for action on all fronts. 

Ironically, having discovered quantitative easing by central banks, there is no shortage of finance to take action on climate change, only no one has the guts to direct resource allocation to invest in green infrastructure.  At zero and negative interest rates, money is being shoved to rich borrowers who do not need the money, not to where our existence is at stake. 

Will 2020 be a year of clear vision, or another 365 days of muddling through?   We are still wearing Cold War glasses of 1960s vintage tackling the quantum problems of the 21st century. Get your eyes checked in 2020. 

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