In terms of issues on the horizon, the China-US trade standoff might only thaw in the latter half of the year as the US braces to ramp up its Covid-19 efforts, while the UK grapples with the challenges of implementing Brexit.
Ira Kalish, chief global economist at Deloitte Touche Tohmatsu, and Fan Gang, an economist and president of the China Development Institute, are in agreement that the intensity of the US-China enmity will be less pronounced. But the arrival of the Joe Biden’s administration does not spell an end to the dispute.
Across the pond, Rain Newton-Smith, the chief economist at the Confederation of British Industry, says the UK’s ports are experiencing delays in the movement of goods as the small island country acclimatises to the new norm that is Brexit.
Kalish, Fan and Newton-Smith were all contributors on 20 January to Deloitte Africa’s Outlook Conference, giving insights into the three major economies.
Kalish predicted a swift re-entry of the US into the World Health Organisation (WHO) and a more supportive posture to the North Atlantic Treaty Organisation and the European Union. He was proven correct on the WHO, because the US announced on 21 January that it had re-joined the global health body.
“With respect to China, I expect something of a bifurcated policy. I don’t expect movement anytime soon. I think Biden will initially focus on virus suppression, stimulus, vaccine distribution. And only later in the year focus on external issues, including the relationship with China,” says Kalish.
First things first
Domestically, the US is in the middle of a catastrophic outbreak of Covid-19. “It’s the worst we’ve had since this peak,” he says.
The Biden administration has committed to increase spending on testing and tracing.
On the economic front, Kalish’s baseline forecast for the US is negative GDP growth in the first quarter, “and then slow growth thereafter until the vaccine is fully distributed.”
Kalish expects low inflation and low borrowing costs to remain.
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“We could see a surge in inflation once the virus is fully suppressed. But even after that, my expectation is the Federal Reserve has adequate tools […] and can keep inflation from getting out of control,” explains Kalish.
Wall Street vs. Main Street
The differences between Wall Street, which has experienced record highs, and the real US economy, which has shed jobs and contracted, are not unusual, says Kalish. “Theoretically, equity markets should reflect expectations about the future – not what’s actually happening right now,” he adds.
“I think investors are confident that, with more fiscal stimulus coming and with vaccine distribution, the outlook, at least for the later part of 2021 and heading into 2022, is actually quite good. I think also the massive injection of liquidity by the Federal Reserve and the low borrowing costs have meant that investors are looking for something to do with their cash,” says Kalish.
“Both businesses and households have been hoarding cash. Fixed-return investments have been poor, so people have been going into risk assets, like equities, and that has pushed them up as well. You could argue that we’re in the midst of a speculative bubble as well,” notes Kalish.
US cheap money a headache for China
For Fan, the biggest long-term concern is the China-US relationship.
“We know that both presidents [Biden and Trump] have the same policy line against China. We do not expect too many changes. But we do expect that the policy will become more predictable and rational,” says Fan.
Fan also says there was concern in China about how the US injection of money and debt would impact the global market.
“Not only the financial market, but also industries. We are concerned about the exchange rate, the renminbi appreciated and the dollar has weakened. That will have a big impact on exports from China and China’s financial market,” adds Fan.
The UK will be in the spotlight this year as it is scheduled to host both the G7 and COP26 meetings.
In addition to the complexities surrounding the UK’s management of Covid-19, Brexit adds another layer of complexity for businesses, says Newton-Smith.
“I think there’s a huge sigh of relief we now have a deal with the European Union. [But] there’s still some challenges ahead though,” she says.
“We’re still having delays at ports right now. We have businesses approaching us, saying they’re still having issues with goods moving through ports. Some of that is Covid-19-related […] but a lot of it is also some of the processes that now need to be in place around customs,” explains Newton-Smith.
There are still more Brexit hurdles to clear.
“There are still negotiations that need to be held around our access in terms of services trade more broadly, particularly around financial services. We have until the end of March to figure out what kind of equivalents we will have for financial services,” adds Newton-Smith.
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