All signs point to slowing economic growth in 2019, both domestically and internationally, and the surrounding uncertainty poses risks for trade finance says trade credit insurer Atradius
David Culotta, senior manager of US buyer underwriting at Atradius, notes that the rate appears to have peaked in 2018 at 3%, and analysts at the firm expect global growth to ease to 2.8% this year.
The economic slowdown will impact on both developed and emerging markets and will be driven by monetary policy decisions, a fading US fiscal stimulus, increased volatility in financial markets and rising uncertainties about future trade relations.
While global trade growth remains relatively strong it is decelerating, from 4.7% in 2017, 3.7% in 2018 and an expected 3% in 2019 as uncertainty poses an overarching threat to global economic growth and puts a brake on business investment.
Much if the current uncertainty centres on the unfolding trade war between the US and China. Conversations have begun and are focused on intellectual property and technology transfer, but should these countries significantly ramp up their trade conflict, the forecasts for 2019 economic growth would likely be revised downward.
Another big area of uncertainty is a further looming US government shutdown. While a short-term agreement was reached at the end of January, it is unclear whether the government can remain functional for some time or avoid another impasse. The recent 35-day shutdown has already made its mark on consumer confidence.
The US is not immune to the slowdown trend says Culotta, but several economic tailwinds continue. Oxford Economics expects real GDP growth to slow from 2.9% in 2018 to 2.5 % this year, with increased downside risks related to trade and monetary policy decisions.
By mid-2019, if the current pattern holds, the US economic expansion will have lasted 13 years, the longest on record. So far, private consumption has been the engine behind the economy’s growth, aided by record low unemployment and wage growth in line with inflation
Yet various factors are making the US economy increasingly fragile. Business investment and overall growth face challenges from trade protectionism and monetary policy, which are simultaneously increasing input costs and borrowing costs. US housing data has started to weaken in the face of rising uncertainty, a lack of material wage inflation and a rising rate environment.
The Federal Reserve increased US interest rates again in December to 2.5%, reflecting its perception of ongoing strength within the domestic economy but quickly shifted to a more dovish tone by January.
Although analysts expect the pace of tightening to slow, with no further hikes forecasted in 2019, the future is currently difficult to predict with monetary policy expected to be data dependent moving forward. Based on historical data, the flattening yield curve and tight treasury yield spreads could suggest a looming recession though the Fed balance sheet looks significantly different from past economic cycles.
The corporate sector
US corporate insolvencies decreased to just 8% last year. However, as business risks mount due to the recent rise in interest rates, significant levels of corporate debt and overall trade policy uncertainty, Atradius expects business failures to decline by only 2% in 2019.
A similar slowdown is expected elsewhere. Although 2018 brought a 3.6% decline in insolvencies in advanced markets in North America, Asia-Pacific and Europe, Atradius predicts 2019 will see a more modest 1.7 % decrease. In emerging markets, the picture is slightly worse, as global financial conditions become more volatile and some countries face unfavourable domestic policy situations.
One current area of concern for the business sector faces is credit risk. Corporate balance sheets show significantly more leverage than in previous economic cycles, with a large proportion of BBB-rated debt.
Fiscal stimulus applied after the 2008 financial crisis saw many companies take advantage of easy and cheap access to financing in order to fund growth. However, heavily leveraged corporate balance sheets could now face meaningful refinancing risk due to the significant interest burden coupled with expectations for earnings growth pressure.