Analysis: Seven high-risk factors in the global economy and how they could affect Romania

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The global economy has several high-risk factors in 2019, which may lead to disasters that would also affect Romania. An analysis by XTB, one of Europe’s largest brokerage companies, identified the risks the world is facing and how they can affect our country.

Hard Brexit

The decline in trade in the UK, generated by a possible hard Brexit, would severely affect Norway, Poland, Germany, France, the Netherlands and Ireland. Even if the European Union announced that Britain could have a new Brexit agreement, after the British Parliament rejected the one negotiated by Theresa May, things could be getting worse. The absence of such an agreement would cause a disorderly Brexit, a return to customs controls, and the UK would remain without trade agreements with countries outside the Union. Although the scenario is negative for the business environment, the Central Bank of England’s estimates are even more alarming: GDP will shrink by 8 percent, the unemployment rate will double and will reach over 7 percent and inflation will gallop, which would cause the US Federal Reserve to increase the benchmark rate twice, like it did in 2015. The situation would be shocking for the financial markets.

Italexit

Analysts also looked at the risk of ITALEXIT, since only 44 percent of the voting population would choose to remain in the European Union; the percentage would represent the lowest positive votes registered in a Community state, even below those counted in the UK in the same context. In addition, Italy is ranked as a source of risk for the continent and the world economy, since it occupies second place in Europe in terms of public debt in GDP, amounting to EUR 2.26 trillion. In nominal terms, it is the most indebted country, and raising the minimum wage and reducing the retirement age could fuel this debt. Therefore, Italy could be forced to leave the community space.

Trade tensions

Global trade tensions have been strongly intensified by the United States with the introduction of steel and aluminum duties, which still pose a significant risk to the world economy. America, which imports five times more goods from China than vice versa, has entered a tariff war with this trading partner, and its impact has been felt immediately in Asia, where the Chinese index lost over 20 percent at a difficult time. New taxes will increase raw material costs and lower demand, a situation that may cause inflation, slowing the economy, and hence rising interest rates, a pessimistic scenario for the capital market.

Middle East conflict

As for the oil market, Iran is a key player. Strait Ormuz transits 18.5 million barrels of oil per day, around 20 percent of the total global supply. Oil prices, which significantly affect the world economy and financial markets, fell in the second half of 2018, influenced by the Middle East conflict. America has decided to get out of the nuclear agreement and to impose sanctions again on Iran, which would lead to a decrease in production and new economic sanctions for Iran, a situation similar to that of 2011-2015. If the US reduces Iran’s exports to zero, it could reactivate the nuclear program and the international conflict would raise prices to USD 100, which would have catastrophic consequences for the global economy.

Political tension

Scenarios with disastrous economic effects could also be influenced by political tensions in Turkey, Ukraine, Argentina, South Africa and Poland. Political risks are relevant to emerging markets, and 2018 is a representative example. This year, six out of seven emerging-country currencies will be exposed to the risks involved in the elections. Russia seems to be on top of the list. If it intervenes in the Ukrainian elections, causing a military conflict, new sanctions will be imposed by the European Union and the United States. And South Africa is a risk – a victory for the ANC, in the context of the agrarian reform plan, could strongly affect the local currency and the banking system. In Argentina, the loss of Macri’s election to socialist parties could lead the country into a new crisis that would affect Brazil and Chile.

Restrictive monetary policy

Restrictive monetary policy could also trigger global economic disasters. The 2008 financial crisis imposed a radical intervention from the central banks. Ten years after the crisis, there are still banks that apply monetary easing programs, but also many critics of these unconventional monetary policy measures, as there is a risk of speculative bubbles. 2019 seems to be the first year in which the three major banks will reduce asset values. Investors can fear the drop in liquidity, which could generate a panic episode for major indices, such as DE30, US500 and JAP225.

China real estate

China has over 50 million uninhabited apartments, a 22 percent vacancy rate, double that of the United States. This indicator puts China on the map of major risks for the real estate market as well, not just in terms of trade relations. The real estate sector has been a popular target for investors who fueled a credit boom, unsustainable prices, and helped boost economic growth. XTB’s calculations show that, without real estate and infrastructure investment, the nominal growth would be no more than half the current one. Authorities have no solutions, so Chinese owners could sell their real estate, which would cause a massive drop in prices. Advancement in the real estate sector is therefore another major risk factor.

How Romania is affected

In Romania, the effect of a hard Brexit or Italexit would be to reduce the attractiveness and accessibility of the international labor market, which would mean a significant reduction in foreign currency inflows into the country; therefore, the resources available for consumption and private domestic investment would also be limited. An indirect effect may be visible in certain periods, even in terms of the exchange rate. Rising trade tensions would affect Romania especially through commercial channels, since Germany’s economy has significant exposure to China, and Romania has its first partner in intra-European trade in Germany. An increase in political stress in emerging countries would make the non-residents’ placement scenario less attractive in projects in the local, real or stock market.

On the other hand, rising oil prices in the face of tensions in the Middle East or more severely sanctioned US sanctions would induce a wave of inflationary pressures. This would lead to interest rate hikes at local level as well. The braking effect of the advance of the Romanian economy would have amplified if the Fed and the ECB would impose restrictive monetary policies, although recent clues show an entry into a period of observation, following the worsening of some of the variables observed at the macro level. Finally, given that China’s real estate price adjustment would pick up, overflowing weakness from the sector to the economy as a whole could later be reflected at European level, which would also affect the level of growth in our country’s gross domestic product.

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