A new year—new issues, new aims and ambitions. In the first snippet of Market Insights let us see what are the most pressing issues in the political economy in this year. Let us start with the European shock—Brexit. Theresa May has said to invoke the article 50 in March. Pound Sterling is expected go down in the coming months as the uncertainty looms over the economic performance of the UK under the new trade relations the medium and method of which will be formed in the coming months.
It can take years as well. In the words of the UK Ambassador, Sir Ivan Rogers, who sang his swan song few days back saying that “Brexit negotiations can take up to 10 years.” The elections in France and then afterwards in Germany and Netherlands also pose threat to the integration of EU subsequently affecting the economic health of the zone.
US dollar is in news of-late. It has surged to a 14 years high. This rally has pros and cons. More cons if we consider the plight of the countries that have to buy the commodities in US dollars. A strong dollar may prove detrimental for US companies as the demand for their products outside US becomes low. Last year when Federal Reserve Bank of America increased its interest rate by 0.25 percent the US Iphone giant—Apple Inc. suffered a loss of billions as its demand in China (which constitutes one third of demand for Iphone) plunged down. A strong dollar creates trouble for other countries as well. China, of-late, is fighting a ‘capital flight’. Around $500bn of capital has fluttered from China and settled into US.
Crude Oil which was the most talked about commodity in 2016 (actually it has always been) has seen its best year after 2014. While touching $26 a barrel it now stands at $56 in the aftermath of the Vienna deal on November 30th. The OPEC and NOPEC oil producers have been successful reaching an entente which will take out 1.8 mbpd of supply out of the glut. The deal has been put into effect from 1st January and a meeting has been called for monitoring the results (too early) on 21st and 22nd January. Future of oil prices solely depends upon the cooperation between the OPEC and NOPEC members. Especially, Russia. Albeit, the history of cooperation in past is checkered this time the countries seem serious. And there is a reason for it. Saudi Arabia, who has taken the largest individual production cut, has suffered a lot from this war between Sheikhs and Shale. Russia is tackling a declining economy as it suffers from low oil prices and sanctions from the West. Venezuela is the worst of all. Not only economically but also politically. There is a referendum brewing there as well. The threat to the deal however comes from the countries that have been given exemption: Nigeria, Libya, and Iraq. Libya, few days ago, added 85,000 of barrels in production. The deal hinges on the whims of the leaders but the case should have been otherwise.
China economy is still in the process of shifting from Old to New. Chinese growth is expected to slow down from 6.7pc to 6.5 pc this year. A troublesome real-estate market, less investments and other structural issues further fuels the concerns. Russia’s economy is expected to do well—but only slight—as the prospects of oil prices improve. Europe is preparing to embrace with a rightist flood and on-going refugee crisis. And we hope that it gets through with it. Middle-East especially Syria, is, of-late experiencing a truce but as it has always been, this peace is extremely susceptible and temporary.
The world in 2017 is full of challenges. It is up to us, now, either we deal with them or they with us.