Weekly Commentary September 7, 2018
Global Market Outlook in Light of Tensions in Turkey and China
By Tim Courtney, Chief Investment Officer
The Turkish currency crisis1 is one of the latest economic happenings to spark fears of a global recession. Investors are wondering if financial contagion will make Turkey the first domino to fall in the long line of world economies, or whether it is an isolated incident.
It’s important to recognize that Turkey has a long history of economic mismanagement. Its currency, the lira, already dropped 40 percent over the course of the year2, its annual inflation rate is estimated at over 100 percent3 and its president, Tayyip Erdoğan, is known to be resistant to raising interest rates4. This has made, and will continue to make, it difficult for the country to recover from the market troubles it has seen.
The threat of U.S. tariffs5 only worsened the economic situation in Turkey, but it was one factor in a long, much more serious line of circumstances. Turkey’s currency meltdown wasn’t caused by a single policy issue, but by the country’s growing account deficit, foreign-currency debt and continual financial misadministration6. Like Turkey, there have been some especially weak countries like Brazil and Argentina that have also been punished by markets for failing to deal with financial problems. However, Europe continues to do quite well, with annual gross domestic product (GDP) growth of 2 percent7 and increasing earnings8.
These tariffs though have the potential to turn into a long-term systemic issue, with particular focus on the China-U.S. trade relationship. Mounting trade tensions9 could have long-term ramifications on both countries, and even the broader global economy. Chinese economic growth is already slowing10, and the government is trying to compensate for loss of trade by generating demand through infrastructure and government spending11.
Meanwhile, the U.S. is facing some issues of its own. Farmers face tariffs on goods and are finding it difficult to find viable buyers12, which could negatively impact the country’s agricultural marketplace. The U.S. has some advantages in this fight though, primarily that China will soon run out of U.S. imports on which to retaliate. This has been the administration’s rationale as they attempt to address sticking points that have been lingering for some time. These include China’s pre-existing high tariffs and restrictions on U.S. companies operating in China. In order to have a presence in China, U.S. companies are often required to hand over their proprietary knowledge, which cost U.S. investors billions to acquire13.
The below chart showcases already imposed and threatened tariffs on both U.S. and Chinese goods, as of August 27, 201814.
Source: The Wall Street Journal – The Daily Shot: Stock investors ignore the elephant in the room
At least for now, the tariffs appear to have had relatively small impacts on global trade and growth. However, if continued, these trade disagreements will have greater impacts that are not currently reflected in market prices.
1 Business Insider – The Turkish lira is diving after Moody’s warns the worst is yet to come for the country’s banks
2 Reuters – Turkey’s lira falls 3 percent, Trump won’t take pastor’s detention ‘sitting down’
3 CNBC – Turkey’s crushing annual inflation rate is running at an estimated 101%
4 Reuters – Turkey’s Erdogan calls interest rates “mother of all evil”; lira slides
5 CNN – Trump vows to double steel and aluminum tariffs on Turkey
6 CNBC – What went wrong for Turkey? Its economy is ‘in the midst of a perfect storm’
7 Trading Economics – European Union GDP annual growth rate
8 Bloomberg – Trade noise aside, earnings are perking up again in Europe
9 CNBC – Global trade tensions are likely to get even worse after the US midterms, expert says
10 CNNMoney – China’s economy slows just as the trade fight begins
11 Reuters – Exclusive: China eyes infrastructure boost to cushion growth as trade war escalates – sources
12 CNBC – Trade war bailout: Trump administration plans to offer $12 billion in emergency aid for farmers hurt by tariffs
13 CNNMoney – How China gets what it wants from American companies
14 The Wall Street Journal – The Daily Shot: Stock investors ignore the elephant in the room
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