A positive tone to start 2020
As we enter a new decade in 2020, markets have kicked off the year in a positive mood. In 2019, the global economy suffered from a contraction in trade largely due to the dispute between the US and China. There are three reasons to expect an improvement in global trade in 2020.
Firstly, the US and China have agreed to a “Phase One” trade deal that at a minimum will prevent further tariff escalation and provide for increased US agricultural exports to China. There is also an undertaking from China to be more cognisant of patent breaches and IP theft with a mediation mechanism established to resolve disputes.
Secondly, the US Congress finally approved the USMCA trade deal between the US, Mexico and Canada after a one-year delay in the House of Representatives. This is much more favourable to the US than the previous NAFTA trade agreement struck in the 1980’s which saw a mass migration of US manufacturing to Mexico to take advantage of lower labour costs.
Finally, the Brexit impasse is likely to be resolved by the end of January with the UK Parliament almost certain to approve the terms of departure negotiated with the EU. This opens the way for trade negotiations between the UK and the EU with a deal expected to be implemented before the end of the year.
Against this there has also been some negatives. Most notably in Australia, the devastating bushfires that continue to ravage the East Coast have left a trail of property and wildlife destruction not to mention loss of human life, primarily across NSW and Victoria. In economic terms, this will likely reduce GDP by 0.4-0.5% in the March quarter due to the impact on agriculture, tourism and consumer activity. The rebuilding efforts will stimulate growth in the June quarter but a rebound in confidence levels is hard to predict.
In the Middle East, tensions have flared between the US and Iran following the assassination of Qaesem Soleimani, the Iranian military leader allegedly responsible for terrorist activities in the region including the recent attack on the US Embassy in Baghdad. Iran responded with an ineffective missile attack on Iraqi military bases that housed US soldiers, which appeared to be orchestrated to avoid inflicting major damage or loss of life so as to de-escalate the situation. While the temperature of the conflict has simmered for now, this has the potential to ignite at any time and threaten the supply and price of oil.