DuckerFrontier 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 in the US-China trade war, Brexit uncertainty, and contraction in US manufacturing. For the full newsletter, subscribe today.
Despite efforts by both China and the US to cool tensions leading up to trade talks, fundamental challenges to a comprehensive trade deal remain. Agriculture and IP will continue to be sticking points for the US, as US restrictions on Huawei will be for China. A trade truce or a decrease in tariffs in the months before the 2020 US Presidential election could occur, but this deal would not be capable of resolving the underlying issues between the two countries that led to bipartisan support in favor of taking action against China. As a result, we expect gradual tariff increase to continue, with a similar start-stop dynamic that has characterized most of the US-China trade war so far.
Firms should reassess production plans and supply chain challenges as tariffs continue to increase through the end of 2019. As the US and global economies slow and scheduled tariffs on consumer goods increase through H2 2019, US consumers will begin to tighten their belts, putting downward pressure on domestic consumption and demand. The US and Chinese economies will continue to decouple over time leading to long term changes in supply chains. Firms should continue to consider diversifying supply chains and investing in alternative production hubs.
Emilie Newton, Junior Analyst for Global Economics and Scenarios
FrontierView clients: See our most recent Global Outlook for 2020 for further insights
We expect firms to clear inventories in late 2019 and early 2020 as industrial production and investment stabilize moving into 2020. The US economy will grow at a slower pace but will be held up by consumer spending and supportive monetary policy. Consumer confidence and private consumption remain above market expectations, buoying growth. We have anticipated an H2 2019 slowdown, and will maintain our 2.1% YOY GDP forecast.
Export-oriented manufacturers will likely experience increasing pricing pressure and decreasing profit margins as inventory clearing begins. Firms operating within manufacturing and auto supply chains will also experience negative impacts from falling PMI. We expect domestic B2C businesses to be less affected due to resilient domestic demand.
Yang Liu, Junior Analyst for Global Economics and Scenarios
FrontierView clients: See our recent Global Outlook for 2020 for further insights
No-Deal Brexit remains a 30% likelihood, regardless of the parliamentary motion blocking a No-Deal Brexit. Firms should remain cautious until the EU formally grants an extension of Article 50, because both the PM and the EU have the power to refuse an Article 50 extension. PM Johnson could ignore the law, choosing to face a legal challenge in court. Additionally, any of the 27 EU members could veto another extension of Article 50. PM Johnson will continue to deliver his populist rhetoric and ask for an early election-which is likely to be triggered in November/December-as he seeks to call an election to capitalize on his strong popularity. However, an early election cannot be called without support from the opposition that will attempt to delay it as much as possible to restrain Conservatives’ polling momentum.
An Article 50 extension translates into prolonged business uncertainty, undermining the 2019 and 2020 sales outlook. Businesses should continue to enhance their contingency plans and prepare for the adverse consequences of the eventuality of a No-Deal Brexit and should ensure that they are internally aligned for the expected muted outlook for 2020
Athanasia Kokkinogeni, Senior Analyst for Europe
FrontierView clients: See our most recent Brexit Scenarios Update report for further insights