We are delighted introduce you to The Lens, the newest addition to FrontierView’s market-leading insights. The Lens is a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business executives. Each week, we will provide our views on the most critical economic and geopolitical trends through our signature scenarios framework, key forecasts and major revisions, and the “so what, now what?” implications that will enable you and your teams to interpret these fast-moving events to power your decision making.

The Lens

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In this week’s edition, our analysts provide our view on US-China relations, Trump and the Fed, and a Brexit extension.

The Lens: April 11, 2019

US-China talks continue, as US policymakers think to the future
  • Despite optimism in recent weeks, the US and China have failed to negotiate an end to the current trade dispute.
  • Talks are ongoing and seem to be leading towards an agreement that would provide a gradual reduction of tariffs. This is contingent upon China complying with agreements on a set of structural reforms and IP protections. However, the last 10% is often the hardest part of trade agreements.
  • As these talks seem to be approaching an outcome, it has become clear that US-China tensions won’t end soon. The growing consensus in Washington policy circles is that the US should avoid returning to pre-2017 relations with China. Multinational firms have already begun looking at ways to reduce their reliance on US-China supply chains.
Our view

It remains likely that the US and China will arrive at a temporary trade agreement in 2019. However, in taking such a tough stance on trade with China, President Trump has accidentally created a significant shift in beliefs about the costs and benefits of doing business in China. Politicians and business leaders have begun to adapt their plans to better work with China in the future.

Business implications

An end to trade tensions will lead to a short-term bump in optimism and minor benefits for certain industry verticals. Firms need to plan for the medium term—a world in which the US and China are likely to further decouple from each other—as politicians in the US make it increasingly difficult to conduct business in China. As economic flows have become politicized, firms should rethink the benefits of global supply chains that rely on US-China flows and reconsider the benefits of localizing production closer to key consumers.

Ryan Connelly, Senior Analyst for Global Economics and Scenarios

FrontierView clients: See our most recent US-China Trade War Dashboard presentation for further updates


Recent increase in oil price not expected to last
  • Oil prices have increased steadily across 2019, with Brent and WTI both up over 30% since the beginning of the year.
  • Higher prices have been temporarily supported by Saudi production cuts and Venezuelan outages, both of which have reduced the supply of available crude.
  • US oil output continues to expand, with total output expected to grow by 1.4 million b/d in 2019–more than enough to meet global demand growth for 2019.
  • Proven viability and massive amounts of global shale oil available for extraction will limit the upside risk to oil prices over the long term, especially as oil demand growth is slowing due to a shift towards cleaner and more efficient technologies.

Oil prices and futures (The Lens)

Our view

In the short term, higher oil prices are supported by temporary factors that are not expected to last. US production growth is expanding incrementally every month, and new pipelines will be completed later in 2019 that will ease logistics bottlenecks that have pushed down WTI crude prices. As soon as peak summer demand passes, we expect global oil prices to collapse below our annual price targets of $62 for Brent and $55 WTI. This is similar to what took place in 2018, when prices collapsed beginning in the late-3rd quarter.

Business implications

Consumers tend to be sensitive to higher oil prices, more so in developing countries, where households have less savings. They reduce consumption of other goods and services directly in response to paying more for gasoline. Higher prices in the summer months may put pressure on domestic consumers and firms, but this should fade into the back half of the year. Consumer goods companies especially need to take this seasonality into consideration as they set demand targets and manage their inventories.

Ryan Connelly, Senior Analyst for Global Economics and Scenarios


Trump, the Fed, and the end of innocence
  • President Donald Trump has nominated two political allies–Stephen Moore and Herman Cain–for voting seats at the Federal Reserve Board of Governors.
  • The Fed operates independent of government, and has a congressional mandate to maintain a low level of inflation (around 2% YOY) and provide supportive conditions for employment.
  • There is widespread concern that, if appointed, Moore and Cain will pursue Trump’s preference for loose monetary policy that could result in high levels of inflation.

Fed funds rate expectations chart (The Lens)

Our view

Even if both men are appointed to the Fed, which seems unlikely, it will not materially impact Fed policymaking as there are up to 12 voting members on interest rate policy at every meeting. As we saw following the March meeting, the majority of Fed members expect no further hikes in 2019. However, no members plan to cut rates, either. Neither Moore nor Cain have the academic or policy background needed to steer the committee towards rate cuts. Trump’s politicization of the Fed will only matter if he wins reelection in 2020 and continues to install political allies instead of neutral policymakers at the Fed.

Business implications

There is no change to the short-term outlook, regardless of whether or not these men are appointed. We expect rates to remain at current levels in 2019, though the outlook is dependent on both domestic factors like continued US wage and employment growth, as well as external factors like the ongoing efforts in China and the EU to arrest the fall in local GDP.

Ryan Connelly, Senior Analyst for Global Economics and Scenarios


Turkey bails out state banks, creates ‘bad bank’ for toxic assets
  • Turkey’s Finance and Treasury Minister announced a range of measures designed to address issues in the banking sector.
  • State banks have been pressured to increase loan activity, even as private sector loans continue to contract. State banks will receive ~$4.9bn in government bonds to improve their equity capital ratios, providing more space to increase loan activity without falling below regulatory capital ratios.
  • The Government will also create two ‘bad banks,’ one for energy debt and one for construction debt, to further alleviate balance sheet pressures on a banking sector where 4.2% of total loans are currently non-performing.
Our view

These measures will improve the equity capital of state banks, but investors need to continue to monitor political risks before raising confidence levels for the Turkey outlook. Lira volatility and pressure on private sector profitability will continue to lead to deteriorating bank asset quality, which will be further damaged by the high degree of political uncertainty in the country.

Business implications

Multinational firms will not see a major improvement in credit growth in Turkey in the short-term. Most of the announced measures are targeted at state banks instead of the private banking sector, where we expect further retrenchment due to high interest rates that continues to limit the profitability of issuing new loans. Continue to expect muted B2B demand and limited access to credit for distributors.

Zeynep Kosereisoglu, Director for the Middle East and Africa

FrontierView clients: See our Turkey LiveView and Turkey Quarterly Market Review for further insights 


Poor manufacturing activity drives economic downturn in Germany
  • In March, German manufacturing took a further hit from weaker external demand amid slowing global and eurozone growth outlook.
  • Exports, production, and sales of passenger vehicles continued to heavily disappoint in Q1, broadly remaining in contractionary territory.
  • Likewise, industrial production and new manufacturing orders decreased further and business confidence remained muted.

German Manufacturing Activity (The Lens)

Our view

In Germany, construction will hold up well due to strong consumer demand and supportive government housing policies. Durable exports, like autos, will continue to be weak. The softness in German exports has spilled over to the rest of Western Europe. This led to a slower rate of new job creation and weaker consumer confidence. We expect manufacturing to stay sluggish throughout 2019. However, we expect it to begin to slightly improve in the second half of the year.

Business implications

In a low growth environment, the only way to accelerate top-line growth is at the expense of competitors. But in a highly competitive environment, this most likely comes at the expense of profitability. Businesses with growth mandates need to make sure their pricing strategies allow them to succeed in 2019.

Athanasia Kokkinogeni, Senior Analyst for Western Europe

FrontierView clients: See our latest WEUR Quarterly Market Review for further insights


Long Brexit extension doesn’t make things easier for business
  • Late on Wednesday night, the UK government reached an agreement with the EU to delay Brexit until October 31
  • Conservative and Labour party talks continued, hinting at the prospect of a softer Brexit. However, a cross-party compromise remains unpopular within both parties.
  • Amid Brexit uncertainty, UK business confidence plummeted to a two-year low in March.
Our view

The long extension provides space for UK politicians to work out a compromise, but there is no clear way out of the current UK political impase. In our Brexit scenarios, the likelihood that the UK stumbles into a hard Brexit remains at 25%. However, an eventual agreement that leads to a transitional deal remains the most likely outcome.

Business implications

The risk of a no-deal Brexit has impacted the business environment. The extension will result in a period of prolonged economic uncertainty. As a result, we have revised down our economic expectations for the UK for 2019. Multinationals should continue to execute on contingency plans until the House of Commons agrees on withdrawal terms with the EU.

Athanasia Kokkinogeni, Senior Analyst for Western Europe

FrontierView clients: See our latest WEUR Quarterly Market Review for further insights

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