In association with Travelport
In the second part of his monthly column, David Stevenson considers the global economic outlook, having yesterday taken the temperature in the City of London
What will happen to the global economy over the next 12 to 18 months and how will the ebb and flow impact on the travel sector?
The one good thing about a quiet summer is that I get a chance to sit down with big bank economists and talk ‘economics’.
I’m willing to bet the house on the following six ‘near certainties’ plus one ‘up in the air’ issue – shaped by a debate about a global economy which seems, at first glance, to be slowing.
The bulls maintain this is an illusion, arguing the global economy is just taking a breather before growth resumes in 2015.
My six near certainties are as follows:
- We’re going to see a substantial increase in currency volatility with the dollar strengthening against sterling and the euro. Put simply, global investors don’t know whether the global economy is slowing and it’s better to be safe than sorry. That means shifting assets into the most-robust economy, the US, via dollar purchases.
- The US cannot go on growing at its current rate unless either Japan or the Eurozone do something substantial to kick start their own growth rates.
The US is the most robust economy because it has gone out of its way to tackle its accumulated debts both in the consumer and corporate sectors. But it needs the rest of the world to pull its weight, especially as a strong US dollar will hurt its exporters. - The energy sector is helping the US push forward. It’s also flooding oil markets with WTI-priced (West Texas Intermediate) crude and that is having an impact on Brent crude prices.
My sense is that WTI will go below $80 a barrel and Brent could hit as low as $80. This implies real pain for many countries, not least Russia, which will in turn encourage the next development. - Increased geopolitical risk. The nightmare scenario for a cynical few is not that Isis spirals out of control in Iraq and Syria, but that Iran does a deal with the US and Kurdish forces manage to put the Islamic terrorists back in their box.
That would spell a deal on nuclear weapons, increased Iranian and Iraqi oil exports and make Saudi Arabia uncomfortable. All of these developments could be torpedoed by a geopolitical outburst which will have the effect of increasing oil prices. - Lurking in the background is a strong pulse – almost a drumbeat – of global deflation. The downward pressure on costs is being driven by many factors including plentiful cheap goods from China, massive debt levels in the West and relatively low productivity growth trends in the developed world (helped along by anaemic capital investment).
This shows up in low price inflation, low wage growth and concern about austerity. It’s not going away any time soon and could much, much worse. Cue my last ‘near certainty’. - More QE is coming. Quantitative easing is a form of monetary intervention designed to pump money liquidity into the global financial system via central bank balance sheets.
In simple terms if no one in the real world will spend, central banks will do it via their money market operations. The aim is to get growth rates back at trend so central banks can start to taper their intervention. Unfortunately, factor five – deflation – is a recurring problem.
Every time an economy looks like it might break free from QE (the US and the UK spring to mind) someone else’s problems drags us all back down again. That someone else is the euro zone where you should expect QE in 2015.
That will weaken the euro and hopefully see a pickup in growth on the continent. But I’m willing to bet we’ll see more QE in both the US and the UK. - The up-in-the-air issue is whether China will lose control of its economy and be hit by a hard landing. The jury is out on this although, personally, I’m more optimistic at the moment.
The Chinese leadership loves to boast of its control over the economy, but if it loses control of its programme of restructuring we could see a very nasty hard landing indeed, with bankruptcies spiking and bad debts starting to spiral out of control. We might even discover that Chinese growth is below 7% and possibly closer to 4.5%.
The best summary of the critical juncture the global economy finds itself at comes from research firm Cross Border Capital which works for the hedge fund community. I’m a huge fan of its economic insights.
Cross Border Capital explains the current global economic situation thus: The global economy is having to cope with squeezing “two-to-three-billion extra workers previously shackled under the yoke of communism, into a capitalist economy that, prior to the Fall of the Berlin Wall, could barely support a billion jobs. Large household debts and sizeable government deficits are simply derivatives of this.
“This supply overhang creates serious cost deflation and, unless policy-makers are careful, these falling costs can morph into the far more dangerous variety of monetary deflation. Financial markets rest on monetary stability and they are periodically undermined both by phases of monetary inflation and monetary deflation.”
The big challenge in the global economy isn’t inflation, but deflation, decades-long deleveraging and anaemic consumer demand.
“Rising bond markets and the falling gold price both point to monetary deflation. The only solution is an offsetting monetary inflation, in other words more QE.
“This option is not yet on policy makers’ radar screens, but it soon may be. The World and the US badly need more liquidity – In other words, a new QE4. Every time the US QE programme has been suspended, the fragile real economy has wobbled. So we’re betting on QE4 by spring 2015.”
My guess is the global economy is slowing down a bit, with some emerging markets being hit hard by lower energy costs while other economies – China and the US – benefit from lower input costs.
This knife-edge situation will be addressed in 2015 by more QE in Europe, then the US in late 2015 and the UK in 2016. In both the latter cases, central bank intervention will emerge after it becomes obvious that the Anglo Saxon economies are being hurt by slower growth elsewhere.
So what does all this mean for the UK travel sector?
My feeling is sterling will weaken considerably into 2015 until the European Central Bank (ECB) steps up to the mark and starts to kick start growth.
We won’t see a rebound in the euro zone hit consumer spending come until later in 2015 and, in the meantime, I’d expect to see a sharp fall in consumer spending in both France and Germany.
The good news is that the UK economy should remain relatively resilient until after the election (in May) at which point I’d expect to see a new government come clean on the mess it is about to inherit in 2016 – with more austerity and cutbacks.
At that point, hopefully the euro zone will be pushing ahead so any weakness in the UK might be up for by resurgent growth in Germany and France.
The travel sector may also be helped along by two other positive drivers – lower energy prices should help the cost side of the equation, while on the demand side expect to see a wave of pensioners using their life savings to have once-in-a-lifetime holidays as Government reforms kick in.
All in all, I’d say 2015 will be a strong year. But I’d start planning for a fairly grim 2016 – unless the global economy really does rediscover its mojo courtesy of the central banks.