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  • KPB & Co Research

Today the International Monetary Fund (IMF) published its outlook for the globe for 2019, a report that should be appropriately called the fear report this time. The common thread throughout much of the report was that the global money train is about to derail for reasons primarily tied to politics -- American Politics, European Politics, and Chinese Politics. It seems that governments can't get along but that is not new, government's have not be able to maintain good relationships since the beginning of time. Nowadays, the point of contention seems to be tied to globalization in one form or another, it is all about how do countries share the benefits and disadvantage of a smaller world. When all the factors are considered, IMF believes that global GDP growth is about to the slow from the 3.7% estimated for 2018, to 3.5% in 2019, but then will increase to 3.6% in 2020.

Countries Can't Get Along in Trade

It is no secret that the policies of the Trump administration have led to some degree of tension with America's trading partners. The levying of tariffs have led to China, European Union, and even Canada taking countervailing measures against American goods coming into their countries. Ultimately, the tit for tat battle has led to a drop in confidence and businesses are becoming more conservative when it comes to making investments, a position we believe will remain as long as the tension continue. According to the IMF:

Failure to resolve differences and a resulting increase in tariff barriers would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers. Beyond these direct impacts, higher trade policy uncertainty and concerns over escalation and retaliation would lower business investment, disrupt supply chains, and slow productivity growth.

Countries Cant Get Along Internally

Despite all the talk that "team work, makes the dream work" there is a whole range of advanced countries that cannot come to an agreement on domestic policy issues. The USA is now breaking records for how long the government can remain shut down. The main issue of disagreement is around border security and immigration. Nancy Pelosi and president Trump have not been able to make headway on find US$5Bn to fund a wall/fence, which in the general scheme of things is a pretty tiny sum for the USA. Over in Britain, Theresa May had all her hard work thrown down the tubes, after members of the British parliament voted down the Brexit plan in what is believed to the largest defeat by sitting government in history. Over in Italy, the government is essentially walking on glass, as the possibility a fiscal crisis is high. The level of government deficit is unsustainable and the financial system is somewhat shaky. of All of these issues have led to and will likely lead to more uncertainty, and business conservatism. Next year will be an election for the USA, and many other advanced countries. You don't know the future with 100% certainty, but you best be prepared for wild ride.

Oil Prices

The story behind the impact of lower oil prices (Currently at US$54.17/ Bbls) on the outlook is somewhat less clear. In some countries particularly the net oil consumers, the impact is expected to be positive, while for the net oil (Saudi Arabia, Russia, Canada etc) exporters the impact is expected to be negative. There is some concern however that there might be a feedback loop between net oil exporters and net oil consumers through the role that remittance plays in the economies of the net oil consumers. How does it works ? Imagine you are working in the oil fields up in Alberta Canada, and you usually send money back to India to take care of family. Oil price declines you lose our job and you cant afford to send money back to India hence India's economy become challenged. We have always argued that oil price should remain subdued for protracted period into the future owing to the fact that there are many oil fields out there idle waiting to be reactivated should oil prices reach in US$70/Bbl range.

The decline in world stock markets in late 2018 provided a signal of things to come. Economic fundamentals remain fairly ok now, but could likely change if this level of uncertainty continues well into 2019. Businesses have already become conservative regarding future investment, and according the IMF's report the level of trade between countries have declined materially. You can be sure that business are already thinking about how to ride through a storm, but that action alone is enough for the whole economy to enter a period of slow growth.

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