Economic developments to watch in 2019

As we head into the New Year, all eyes are on the health of the economy of the United States.

The Dow Jones industrial average saw the worst Christmas Eve trading day in its history. While the country’s gross domestic product (GDP) is still pointing to the upside, there’s a cocktail of factors flashing a pessimistic message: the US government partial shutdown, higher interest rates and President Donald Trump‘s tweets criticising the US central bank, in addition to trade tensions with China which threatens to derail growth.

“I don’t expect there will be any retreat from the sort of protectionism or mercantilist policies that the US president is pursuing, so any truce is likely to be only short-lived,” explains Russell Jones, a partner at Llewellyn Consulting. “It’s one of the bigger risks for the global economy looking into the next 12 months or so.”

Discounting the recession in the country, Jones said, “The US is in an unsustainable boom at the moment. We’ve had this late cycle fiscal stimulus… but that stimulus is going to start to fade and the legacy of that stimulus is two large deficits – a very large budget deficit and a very large external deficit.”

“The tariffs that Mr Trump is imposing on imports will not change that fact. The US is consuming far more than it’s producing and that means the trade deficit will expand. In many ways, the US economy right now is looking similar to the way it did in the 1980s during the period of Reaganomics – that was another area of twin deficits and it was another era that ended rather badly,” Jones said. 

“It was an era of extreme volatility in financial markets and policymaking… so the US looks good for now but the situation over the course of the next year or so is going to deteriorate rapidly, and potentially traumatically so. The US is heading for a fall. It may not be imminent, but it’s coming at some stage.”

As for China, “the economy’s slowing down” but there are also issues around transparency, and on top of that, “we have the growing protectionist issues which it faces as a result of US trade policy”, says Jones.

The US is heading for a fall. It may not be imminent, but it's coming at some stage.

by Russell Jones, Partner, Llewellyn Consulting

“We also have a number of underlying tensions in the Chinese economy which have been around for a long time; tensions between a capitalist economy and a communist government, tensions between the economy’s economic growth and the underlying environmental problems it has; tensions between the rural areas and the urban areas; tensions between the rich and the poor…all of these issues are going to result in a crisis of some kind,” Jones added.

Gulf economies

Crude oil fell almost 25 percent in 2018 and for petroleum-dependent economies in the Gulf, that’s not welcome news. In the new year, government budgets may have to make some adjustments. So are economic diversification plans away from oil on track?

Across the wider region, a growing youth population needs stronger economic growth to create jobs, and diversification away from oil is a big part of that. Oil income is directly related to diversification plans because it allows oil exporting countries to invest in knowledge-based economic plans.

“Most people expect a tougher 2019 as oil prices are not expected to be very high,” explains Laurent A Lambert, a senior policy analyst at the social and economic survey research institute at Qatar University. 

Overall, oil exporting countries have not hit their targets, notes Lambert. “They are far below [their targets]. This diversification that they’ve tried to implement through grand infrastructure projects, development of a more knowledge-based economy are significantly delayed. Saudi Arabia, for instance, has changed its targets and for now, 2019 won’t be that much different from 2018, so it will only postpone those diversification plans further.”

The surge of US oil flooding the market also hurts Middle Eastern oil exporters like Saudi Arabia, according to Lambert, further delaying their move away from reliance on oil.

Interestingly, China’s decreased appetite for oil has changed the gas vs oil dynamic. “China’s shift away from coal and oil and now increasing reliance on natural gas is benefitting Qatar, while Saudi Arabia’s suffering from a number of elements, including lower oil prices.”

Also on this episode of Counting the Cost:

Saudi Arabia shake-up: Saudi Arabia announced a major cabinet reshuffle as the year nears an end. Significant changes include the appointment of former Finance Minister Ibrahim al-Assaf to the post of foreign minister. Assaf was briefly detained during Crown Prince Mohammed bin Salman‘s anti-corruption crackdown last year. The reshuffle is the first shake-up of the kingdom’s power structures since the killing of journalist Jamal Khashoggi.

Micro-chipping workers: Micro-chipping your pet is a good idea if they tend to roam away from home, but what if your employer wants to do the same thing? Several British companies are considering offering tiny micro-chip implants, similar to those for pets, for their employees. It’s voluntary of course, but, as Neave Barker reports from London, there are concerns the risks may outweigh the benefits.

Venezuelan migrants in Peru: Nearly 2,000 Venezuelans cross the border into Peru every day and that’s likely to continue into the new year. After Colombia, Peru now hosts more Venezuelans trying to escape economic hardship, than any other country, as Mariana Sanchez reports from Lima.