Investors and businesses fearful of recession
KUWAIT: The future of the global economy is a key concern on everyone's mind these days. Investors and businesses across the region and the world are watching the slowdown, fearful of a recession. Kuwait Times spoke with Arnab Das, Global Market Strategist at Invesco, for insight on what to expect and how major economies and key commodities like oil can be expected to perform this coming year.
Kuwait Times: What are your expectations for the global economy for 2020? Will there be a recession or a significant slowdown in global growth?
Arnab Das: We already have had a significant slowdown in global growth this year, partly due to the trade war and partly due to the effects of the Fed raising interest rates previously. Our outlook for 2020 is constructive. We are not expecting a US or global recession. We just did the forecast round for next year, and we came to a conclusion of about three percent growth.
So our view is that major economies within the global economy are stabilizing, because the Fed has shifted gears from raising rates to lowering them. It has eased monetary policy, and following the Fed the ECB and many central banks around the world including big and small ones are cutting rates as well. That should put a floor under the manufacturing sector and stock markets, and help people feel better and make them more willing to spend.
In addition, trade tensions between the US and China in particular appear to be stabilizing. The tension between the UK and EU and Brexit is not over, but is improving a bit. It seems unlikely that we will get a hard Brexit or a no-deal Brexit. The deadline was pushed back to January due to early elections, which will probably be pushed back again, so we will have a transition rather than a hard Brexit. We don't expect a strong rebound, nor do we expect a global or US recession. So it's not a perfect world and it's not a terrible world either - it's a decent world.
Kuwait Times: What are you expectations for oil prices for 2020?
Das: The current scenario is helpful for oil and commodity producing regions in the world, as it's much better than where we seemed to be heading six months ago. There is no reason why the GCC would be an exception to that. We don't expect a big liftoff in the price of oil as the market is well supplied. There are efforts to cut production in some places. The US' share has become more efficient than it was over a period of many years. Many producers that previously required $70 or $80 for a barrel of oil are now profitable at $50 or $60. There is no reason to think that the US share will go offline.
A number of oil producers like Russia and others need the fiscal and budgetary revenue and foreign exchange from oil, so they won't cut production. Due to all these things put together, it's reasonable to see the oil range may be a little higher or lower than where we are now, as it's probably stable. The dollar is important for oil - normally if the dollar goes up, oil prices go down, and vice versa.
Kuwait Times: How will this impact the economies of the GCC if there is a recession or slower global growth?
Das: Besides the market being very well supplied, we do have a continued slowdown in major oil importers. Despite all these expectations that we are not going to have a recession, this doesn't mean we are not having slowdowns. So the US is decelerating, EU is decelerating, China is decelerating, India is decelerating, and all major oil consumers are slowing down. We don't think they are going into recession, but are decelerating. So the demand for oil will be moderate rather than accelerating sharply. So we expect oil to remain within the range.
From that point of view, it's not a perfect world for the Gulf and not a bad world either. The world looks a bit better than it did a few months ago. There is also a bit of reprieve and lot of tensions in the world because of the US elections. The US president will be more focused on domestic issues than on trade tensions and geopolitics. So we will probably get some formal improvement in the trade relationship between US and China. We have to see after the elections what the new administration looks like, and how that may change the approach of the US to these big questions.
In this region, I see a lot of desire in many places for economic reforms in particular. There is a desire to not just be dependent on oil, but to invest in the rest of the world. Not only in Kuwait but also in Saudi Arabia - it's a general trend in emerging markets as a whole.
Kuwait Times: How do you see traditional banks and financial institutions weathering the next recession or global slowdown?
Das: Bank stocks have been under a lot of pressure in many parts of the world. In many places, we have negative interest rates including Europe, Japan and others, which have been very bad for banks. Banks have already been hit very hard. But bank stocks have come back significantly in many parts of the world, which is another indicator and good reason to say that the world and US economy in particular will avoid a recession, at least in the near term. There are also places where banks haven't been fixed. In the US and UK, the banking sector problem has been addressed, while in Europe and India it hasn't.
We know from the history of banking crises that if we don't fix the problem in the banks, it's going to be a problem for the economy for a long time to come. So Europe and India need to deal with this problem. If the global economy continues to decelerate, then we will have more pressure on banks, just like oil prices.
Kuwait Times: What is your take on the impact fintech will have on growth prospects for traditional finance? Do you foresee fintech taking off significantly in the region? In what way or how?
Das: Fintech like all other areas of this fourth industrial revolution is clearly very important, and is affecting every walk of life. It is affecting traditional banking institutions, non-banks and asset managers as well. Fintech is a special case of this fourth industrial revolution, which is about big data, artificial intelligence, automation and so on. We don't know how they are going to end up. In the beginning of each previous industrial revolution, the transition was very difficult. For example, for a long time the computers seemed to have no or very little effect.
Fintech to me seems very critical - it already is leading to very important developments like financial inclusion. It's very important for people who have difficulty accessing the formal financial system. They can use it in making payments, opening bank accounts and managing them, and other services. It's a good thing if it's properly managed, and it will be good for the people and the country as a whole. Of course, like anything, there are dangers and risks, but it's a positive development at the end.
Kuwait Times: What are the opportunities investors should be looking at for 2020 in Kuwait, in the Gulf, and in the rest of the world?
Das: People seeking safety and liquidity is giving way to a bit more appetite for risk and a willingness to invest not just in government bonds, but also in equities. This is good for emerging markets, Kuwait and the GCC as well.
Kuwait Times: What are we missing that you think is an interesting or new development in the global financial structure that needs more attention or concern?
Das: The opening of the financial system and financial markets in China for foreign investments is very important. There is so much interest that investors and even people from the US are pushing back against the government's position. China wants to open its financial markets and equity capital in the economy. Hopefully, it will continue despite all the tensions. Many countries have significant challenges as they open up, but it's not a reason not to open up. They rather have to deal with the challenges. China needs open financial markets and they understand that.
An important concern is Europe's financial markets, economy and political system. Europe needs more reforms, and needs to unify the banking system and capital market. Instead, there is a lot of debate but not a lot of progress. Some firms there have moved some of their people and operations from London to the EU to protect themselves against Brexit. They are going to different places such as Amsterdam, Paris, Dublin and others, so there is a danger of fragmentation or friction in capital markets and the banking system. So the financial system in Europe will be less efficient.
Kuwait Times: 2018 marked the 10th anniversary of the worst US economic disaster since the Great Depression, reshaping financial markets and the global economy. Today, many of the world's largest banks have recovered their losses in assets and central banks have injected trillions of dollars into the economy. Has the world learned its lesson?
Das: I think that much of the world has learned the lesson as there have been a lot of regulations for banks, capital requirements are much higher, and liquidity requirements are much higher too. Credit growth has been much weaker in the developed West in this cycle than in previous cycles. Correspondingly, this is also the reason why inflation has been lower. There is much less leverage in the housing market. The overall growth of debts has slowed down. There is still a very big amount of debt, but the big growth of debt in this cycle came from China and emerging markets rather than from the US or Western Europe. So the overall debt ratios, government debt, corporate debt and household debt in the developed world are more or less stable.
It doesn't feel like we are heading for a major crisis like in 2008 or 2011. It feels like there are pockets where debt has grown very rapidly like corporate US, although it recently stopped. China is dealing with its debt problem as it slowed the growth of its debt significantly and rebalanced the economy to be much less capital-intensive. So the financial stability risks in general are lower than they were 10 years ago.
I think the general story is not the rapid growth of debt, which was the case before the crisis, but the problem of slow growth. So the world has learned its lesson, but it hasn't done its homework of reducing debt.
By Nawara Fattahova