Global Growth Slows, Trade Tensions Escalate and Brexit Negotiations Continue

At the beginning of last week the World Trade Organisation revised their global growth forecasts for 2019 from 2.6% to 1.2% referencing escalating trade tensions and a slowing global economy.

As the week progressed we saw the effects of this slowdown further evidenced as PMI surveys for manufacturing and services were released.

With the continued contraction in manufacturing in the US, China, UK and Europe confirmed, services are now also starting to suffer with US figures at a three year low and the UK number falling below the expansionary 50 level for the second time this year.

Other indicators of a cooling global economy saw EU inflation drop to 0.9% and Australia cut interest rates to their lowest rates ever in a bid to drive job growth.

Finally on Friday US employment figures were released with new jobs created and average earnings both below expectations.

In a case that has been running since 2004 we also saw the WTO ruling in favour of the US that subsidised state payments made by the EU to Airbus were in breach of trade rules.

As a result the US are authorised to start applying punitive tariffs of $7.5b on various European goods this month. Tariffs of 25% are expected from the 18th October mostly effecting exports from France, Germany, Spain and the UK.

If these are enforced expect to see the EU respond in the New Year when the WTO is due to announce similar compensatory tariffs to US exports as recompense for state payments that were made to Boeing.

This week trade negotiations between the US and China are due to resume on Thursday in Washington. Talks that have already been overshadowed by Donald Trump’s request for China to investigate the business dealings of Hunter Biden, the son of Joe Biden, the former US Vice-President and democratic rival in next year’s presidential elections.

With interest rate differentials widening and the effect of trade wars and the wider global slowdown taking their toll US goods are becoming more expensive to import. The Australian and New Zealand dollar are currently at a ten year low against the greenback, the Chinese yuan is at a twelve year low and you have to go back to 2002 for the last time the Norwegian Krone was this weak against the US dollar.

In the UK on Friday the government confirmed that they will be complying with parliamentary legislation requesting a three month extension from the EU if a Brexit deal cannot be agreed by the 19th October.

This was followed with a Tweet from PM Boris Johnson stating “New Deal or No Deal - but no delay”.

No doubt the intention being to maintain pressure, momentum and urgency to keep negotiations with the EU on track to achieve a deal by the deadline date.

Over the weekend articles written by PM Boris Johnson in the Sunday Papers call on the EU to compromise and to get a deal done that works for all parties.

However the European Parliament have stated that the current proposals for the Northern Ireland border do not amount to an acceptable deal. Indications are that with the request for an extension due to be submitted the preferred route for the EU would be to grant the extension. A general election would then follow with increased probability of the original referendum result being reversed.

Nevertheless even with the extension submitted the PM is still insisting we will be leaving on the 31st, deal or no deal.

Brexit negotiations resume today with an agreement ratified by parliament required in time for the next EU summit on the 17th October.

With so much at stake the result of these negotiations could be extremely positive or negative for the pound. If you are a company that imports or exports this could obviously be a move in your favour or against you.

With this in mind, if as a business you can forecast future requirements to convert currency a proportion of appropriate forward cover is worthy of consideration. The goal being to take some risk off the table and provide some certainty of sterling cost/ revenue for the weeks and months ahead.

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