FrontierView recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business scenarios. Below is an excerpt from this week’s edition covering the latest developments in the US Fed interest rate cuts, Brexit updates, and what to expect from Argentina’s next president. For the full complimentary newsletter, subscribe today.
Fed cuts interest rate, despite surprise upside Q3 growth
- As expected, the Federal Reserve (Fed) cut its headline interest rate by another 25bps.
- The Fed notes that weak global growth, weak business investment, and trade–related uncertainty were significant factors in the decision to cut rates.
- The Fed also hinted at a pause in rate cuts moving forward. Stock markets were calm upon the release of the announcement.
- US Q3 GDP came in at 1.9% QOQ, surprising market expectations.
The Fed was largely locked into this week’s rate cut. Failing to cut rates would have disappointed market expectations and triggered a significant selloff in asset markets. Low rates have benefited the ongoing housing boom, which was an essential contribution to the Q3 GDP print. Chair Jerome Powell was careful to state during the press conference that the FOMC had no bias to avoid locking market expectations into future cuts should the US data remain stable, regardless of any ongoing weakness in the external environment. We expect GDP to soften in Q4 with 2019 growth projected at 2.1% due to a weak business investment and moderating jobs added.
We expect the 2020 global outlook to be heavily dependent on global monetary easing. China and the ECB have both taken steps in the past months to support their domestic economies through monetary policy easing. A third rate cut by the Fed confirms our view that the US economy will continue to expand in 2020. B2C firms should consider pursuing premiumization strategies. If the US economy slows more than expected, or if the external environment worsens further, expect the Fed to step up its policy support, providing a sort of natural hedge for your NAM targets in 2020.
Yang Liu, Junior Analyst for Global Economics
FrontierView clients: See our Global Outlook for 2020 for further insights
Brexit: Uncertainty will continue to erode growth potential in 2020
- Despite granting the UK an article 50 extension, moving the deadline to January 31st, the EU remains open to agreeing on a deal before this deadline.
- Earlier in October, parliament members strategically rejected Boris Johnson’s timetable, forcing further bill scrutiny, which could change the foundation of his Brexit proposal.
- This week, Johnson succeeded in calling an early election for December 12th in an attempt to secure a majority in the Parliament and pass his deal without support from the opposition.
We have decreased the likelihood of a No-Deal Brexit from 30% to 15%, but the risk of Britain crashing out of the EU without a deal will persist and political uncertainty will intensify moving into 2020. December elections will likely produce a hung parliament led by the Conservatives. The Labour party is expected to lose significant support, while the Conservatives and Liberal Democrats will likely find increased support at varying levels, creating a more pro-remain Parliament that will demand a second referendum to take place in H2 2020.
Firms should plan for a new surge of political uncertainty, accompanied by another article 50 extension in January and an additional possible round of elections in 2020. Heightened uncertainty will weigh on sales across sectors. Businesses should assess their Brexit exposure, enhance their contingency plans, taking into account a potential border in the Irish Sea, and closely monitor Brexit developments in the months ahead as the issue is likely far from being resolved.
Athanasia Kokkinogeni, Senior Analyst for Europe
Alberto Fernandez is Argentina’s next president: What to expect?
- Alberto Fernández (Frente de Todos – FdT) defeated incumbent President Mauricio Macri (Cambiemos) 48.1% to 40.4%. He will assume the presidency on December 10th.
- However, FdT failed to win a majority in Argentina’s Chamber of Deputies. This stronger-than-expected electoral performance by Cambiemos will likely deter Alberto Fernández from pursuing an overly radical policy agenda.
- All eyes are now on Fernández to clarify his plan to steer the country’s economy out of the crisis. Firms should monitor key signposts such as Fernández’s minister of finance and central bank governor appointments, the unveiling of a credible economic plan, initial talks with the IMF, and negotiations with private creditors.
- Argentina will need to restructure its sovereign debt. Amid an economic recession and dwindling foreign exchange reserves, the country simply lacks the cash to pay debt obligations in 2020 and 2021 without restructuring its credit.
Alberto Fernández will need to walk on a tightrope to get Argentina’s economy back on track. We believe he needs to appoint moderate policymakers to the ministry of finance and the central bank as soon as possible. He also must disseminate a credible economic plan, begin negotiations with the IMF to prolong payback periods, and agree with private creditors on a restructuring plan. Given the fragile nature of this chain of events and the number of alternative scenarios, we assign this scenario a relatively low probability. Both of our extreme downside and downside scenarios explicitly call for a sovereign default, which will push Argentina’s economy into a deeper recession and stoke inflation.
Regardless of the political scenario, we expect high inflation and a recession in 2020. The peso will continue to depreciate. However, with the emergence of stricter capital controls and the divergence of parallel exchange rates, inflation will likely outpace depreciation. This will theoretically make it easier for importing companies to pass on the cost of importing to customers. Firms should stay extremely vigilant in the market, focus on their stabilization business strategies, and consider their next move once we have concrete answers to the new administration’s economic agenda.
Alex Schober, Senior Analyst for Latin America
FrontierView clients: See our recent Argentina Live Dashboard for further insights