By Tim Fox
Question marks continue to linger over oil prices, interest rates, and trade tensions in 2019, writes Tim Fox, Chief Economist at Emirates NBD
Few of the main issues that have dominated markets in 2018 will see any substantial alleviation in 2019, with question marks continuing to linger over oil prices, interest rates, and trade tensions.
All of these issues carry important implications for regional growth and activity, while idiosyncratic political tensions in different parts of the world will add additional dimensions of risk and uncertainty.
Oil is still an important variable. After an initial spark of enthusiasm following OPEC’s decision to cut output, oil markets have resumed their downward trend with both Brent and WTI moving below the levels they recorded ahead of the OPEC meeting in December.
Forecasts all point to a tougher year ahead for OPEC countries with fewer barrels from the producers’ bloc required to balance markets. As they stand now, OPEC’s cuts won’t be enough to push the market into deficit in Q1 unless there are substantially more unplanned outages.
Oil production will remain a critical variable in the region
While the cuts have yet to put a fire under crude prices, they are coming from November’s high output base, meaning they may not impact negatively on overall growth in the region.
However, it cannot be ruled out that further steps may still need to be taken if prices fail to respond, meaning that production from OPEC members will display a much more flexible profile, responding to near term market conditions. Oil production will remain a critical variable in the region’s economic performance in 2019, but not yet in a way that is predictable.
As far as trade tensions are concerned, at least the year ended with some encouraging signs that perhaps a truce is playing out between the US and China, with Presidents Xi Jinping and Trump agreeing a 90-day pause in their trade dispute at the G20 summit.
This provides a glimmer of hope that a global trade war might be avoided, although it is too early to say this with much confidence. China has agreed to cut tariffs on imported US cars from 40 percent to 15 percent, and Trump has said he would intervene in the case of the arrested Huawei CFO if it would help secure a trade deal.
However, the news flow regarding developments in this dispute has been erratic and positive news can evaporate quickly. Official talks are due to take place in January, so it is certain that trade issues will remain a cloud over global and regional growth prospects at least into Q1 2019.
Given the personalised nature of the dispute, it is hard to have conviction that any agreement may not suddenly get overridden by other events, especially with both countries potentially seeking distractions from domestic pressures.
The continuation of us interest rate hikes is a potential headwind in 2019
Monetary policy normalisation was the other significant theme of 2018, with policy tightening in the US picking up momentum this year and with central banks in the UK and Canada also raising rates. The continuation of US interest rate rises is one of the main potential headwinds to regional growth in the coming year.
It is welcome that investors have revised down sharply their expectations for monetary tightening in the US in 2019, amid a weakening of inflation expectations and worries about global growth.
The key question is whether this adjustment is justified, or whether there will be a resurgence of inflationary expectations forcing the markets again to revisit their projections and central banks to become more hawkish. Certainly it seems unavoidable that there will be at least one further interest rate rise next year. These will probably occur in H1, again reinforcing the cautious mood emanating from the oil market and over trade.
These issues are the identifiable ones that can already be seen having relevance. There will be others that are less identifiable but will emerge this year.
Some of these will be regional while others will be more geopolitical, and may seem idiosyncratic. Brexit may not be seen having much direct relevance to the region but it could still have far reaching consequences far beyond Europe’s borders.