12 September 2018

2018 Fourth-Quarter Forecast


The White House's Enduring Gamble Over Trade Policy. As the White House finalizes a deal to preserve the North American Free Trade Agreement (NAFTA), the Trump administration will increase trade risks elsewhere. China will have to weather an even bigger squall of tariffs this quarter as trade negotiations stall out. European efforts to neutralize the U.S. auto tariff threat will drag beyond the quarter, but ultimately fail.


The Mounting Cost of U.S. Unilateralism. The United States needs all the allies it can get in an era of great power competition. A blunt U.S. policy on tariffs and sanctions will, however, drive strategic middle powers — like Turkey and Pakistan — to seek non-Western alternatives and compel great powers — like Europe — to rebuild their economic and security sovereignty with transatlantic ties under great strain.

The Global Oil Supply Contracts. Even as high summer demand fades, a steep drop in Iranian oil exports will strain global supply and sustain higher prices. Heavy White House pressure on Saudi Arabia to use its spare capacity to balance the market will leave dangerously little room for Riyadh to respond to other looming supply disruptions from countries such as Venezuela and Libya. 

A Stressful Period for Emerging Markets. Higher oil prices and further monetary tightening in the United States will continue to place strain on emerging markets: For Argentina, complying with the International Monetary Fund's requirements will come at heavy political cost; India and South Africa's populist drives ahead of elections will come at the expense of financial prudence; the Brazilian economy hangs in the balance of a highly fragmented political race; Turkey, by far the most fragile of the lot, will see its economic crisis deepen as a result of political resistance to reform, magnified by worsening relations with the United States.

The EU Contends with Italy and Brexit. Italy will unnerve markets with its plans for fiscal expansion, but market pressure will keep Rome within the European Union's deficit limits. And as the Brexit deadline approaches with no resolution in sight, we'll be watching for EU political leaders taking over from technical negotiators to try and avert a no-deal exit.

Storm Clouds Over the Korean Peninsula. Familiar threats will resurface as the U.S.-North Korea talks stumble, but the war of words is unlikely to degenerate into a full-blown military standoff this quarter. South Korea, China and Russia will sustain engagement with Pyongyang to stymie Washington's maximum pressure tactics.

No Respite for Beleaguered Iran. The Iranian economy will continue to reel from sanctions as the United States, Saudi Arabia, the United Arab Emirates and Israel forge ahead with a strategy to weaken Iran regionally. Tehran will still be able to manage internal unrest resulting from the economic pressure and will take care to avoid military escalation with the United States in the Persian Gulf. However, the power struggle within Iran's leadership will only intensify.

Russian Weakness Will Be Exposed in Syria. The limits of the Kremlin's influence in Syria will be exposed as Moscow tries to advance a proposal to end the civil war, thereby containing Iran and mitigating Russia's own risk in the conflict zone. While Moscow seeks to draw Washington into broader negotiations, increased U.S. sanctions on Russia this quarter will sour the negotiating climate, though some progress on arms control is possible.

Smoothing out the Bumps in China's Belt and Road Initiative. Beijing will attempt to transform growing resistance to its Belt and Road projects into an opportunity to temper frictions with neighbors by lowering its own profile and drawing in third-party investors. India, meanwhile, will prioritize bilateral arrangements with key countries, rejecting any bloc alliances to counter China as New Delhi tries to balance against its more powerful neighbor.

The AMLO Era Begins in Mexico. Mexico's new president, Andres Manuel Lopez Obrador, will lay the groundwork for an emerging political dynasty. He has grand plans to build ties with energy companies and teachers unions, increase public spending and recentralize the role of state-owned oil company Petroleos Mexicanos, or Pemex, and intends to harness referendums and his congressional majority to cement power. These efforts together will take Mexico down a more populist and nationalist path.

Ethiopia Drives Big Change in East Africa. Ethiopia's bold prime minister will plow ahead with moves to consolidate power internally and normalize ties with neighbors externally, with an eye toward stabilizing the country's more restive regions and expanding economic linkages to the sea.

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