2017 fourth-quar­ter global fore­cast

Financial Nigeria Magazine - - Contents - “2017 Fourth-quar­ter Fore­cast” is re­pub­lished un­der con­tent con­fed­er­a­tion between Fi­nan­cial Nige­ria and Strat­for.

High­lights

·North Korea's nu­clear am­bi­tions will oc­cupy most of the United States' at­ten­tion as Wash­ing­ton searches for ways to halt the progress of Py­ongyang's weapons pro­gramme, even as China and Rus­sia con­tinue to sub­tly prop up their bel­liger­ent neighbour.

·Dis­tracted by North Korea, the United States will not be will­ing to cre­ate an­other headache for it­self by with­draw­ing from its nu­clear deal with Iran. Rus­sia, mean­while, will deepen its in­volve­ment in sev­eral con­flicts around the world to strengthen its own bar­gain­ing po­si­tion in talks with the United States.

·TheWhite House will keep putting its trade poli­cies into prac­tice in the fourth quar­ter, but de­spite its tough talk in the open­ing phase of NAFTA ne­go­ti­a­tions, the United States will have a hard time per­suad­ing Mex­ico and Canada to meet its steep de­mands.

·Across­the At­lantic, Europe will turn to the dif­fi­cult task of re­form­ing in­sti­tu­tions within the Euro­pean Union and eu­ro­zone now that na­tional elec­tions in France and Ger­many have wrapped up.

·Though the world's oil in­ven­to­ries have de­clined, they haven't fallen quickly enough to suit the or­ga­niz­ers of a pact among oil pro­duc­ers to slash out­put, sig­nal­ing the group's likely in­tent to ex­tend the quota beyond March 2018.

The Start of a Dan­ger­ous Race

The United States will head into the last quar­ter of the year fac­ing one of the great­est di­rect nu­clear threats to the Amer­i­can main­land since the Cuban mis­sile cri­sis. Over the past three months, North Korea has stepped up its nu­clear and bal­lis­tic mis­sile tests, lead­ing U.S. in­tel­li­gence of­fi­cials to con­clude that Py­ongyang will ob­tain a re­li­able in­ter­con­ti­nen­tal bal­lis­tic mis­sile (ICBM) ca­pa­ble of car­ry­ing a nu­clear war­head be­fore next year is out.

Wash­ing­ton will race against the clock to find ways to stall North Korea's progress and bring it back to the ne­go­ti­at­ing ta­ble. The United States will likely try to court the sup­port of Rus­sia and China in this en­deav­our as it dou­bles down on em­ploy­ing diplo­matic and fi­nan­cial pres­sure to dis­suade fur­ther weapons tests by Py­ongyang. But get­ting their help will not be easy. Even if the United States casts a wider sanc­tions net to in­clude Rus­sian and Chi­nese firms that trade with or pro­vide fi­nan­cial ser­vices to North Korea, it will not weaken ei­ther coun­try's de­ter­mi­na­tion to pro­tect the sta­bil­ity of the govern­ment in Py­ongyang while ad­vo­cat­ing a pol­icy of en­gage­ment rather than iso­la­tion.

But therein lies the prob­lem.

Di­a­logue between North Korea and the United States presents some­what of a Gor­dian knot. Py­ongyang will agree to talk with Wash­ing­ton only as an equal, and it will not curb its weapons de­vel­op­ment to do so. Py­ongyang is also will­ing to ac­cept the risk of fur­ther sanc­tions, con­fi­dent that its troop pres­ence on the Korean Penin­sula and its bur­geon­ing nu­clear ca­pa­bil­i­ties would pre­clude any mil­i­tary ac­tion against it. Wash­ing­ton, on the other hand, has de­manded that Py­ongyang freeze its nu­clear weapons tests be­fore talks can

be­gin. Wash­ing­ton also views co­er­cion as the most ef­fec­tive method of block­ing Py­ongyang's con­tin­ued weapons de­vel­op­ment. Be­cause the two ad­ver­saries' po­si­tions are in­com­pat­i­ble, their dis­pute will doubt­less es­ca­late in the fourth quar­ter.

As North Korea con­tin­ues to con­duct weapons tests, the risk of U.S. mil­i­tary ac­tion against it will rise. Though the United States could launch a lim­ited strike against North Korea with the as­sets it cur­rently has near the penin­sula, Wash­ing­ton is far more likely to grad­u­ally build up its mil­i­tary pres­ence in the re­gion through­out the quar­ter, giv­ing diplo­matic over­tures and sanc­tions a chance to take ef­fect. And though an ac­ci­dent or close call dur­ing a North Korean mis­sile launch may force the United States or its al­lies to shoot down the de­vice, they will not make the de­ci­sion to ini­ti­ate a more se­ri­ous mil­i­tary in­ter­ven­tion be­fore the end of the year.

The Side Ef­fects of U.S. Tun­nel Vi­sion

A con­ti­nent away, Rus­sia is gain­ing ground in yet an­other re­gional con­flict: the Syr­ian civil war. Loy­al­ist forces, backed by Rus­sia and Iran, broke the Is­lamic State's gru­el­ing siege against Deir el-Zour in Septem­ber. Now those troops will be free to push to­ward the Iraqi border even faster. As they do, the United States will have to main­tain con­tact with Rus­sia to pre­vent the out­break of clashes between their bat­tle­field prox­ies. Closer to home, Wash­ing­ton will have to come to grips with Moscow's pres­ence in a third un­sta­ble en­vi­ron­ment. Venezuela is inch­ing closer and closer to a fi­nan­cial de­fault, and Rus­sia (along with China) is one of the last al­lies the founder­ing coun­try has left. Cara­cas has even asked Moscow to re­struc­ture Venezue­lan debt as U.S. sanc­tions weigh heav­ily on its fi­nances.

As Western Pro­tec­tion­ism Surges, the World Ad­justs

The re­turn of pro­tec­tion­ism will con­tinue to man­i­fest in trade, in­vest­ment and tech­nol­ogy re­la­tion­ships across the globe through the end of the year. As has been true for most of 2017, the United States will lead the charge, par­tic­u­larly with the rene­go­ti­a­tion of NAFTA un­der­way. In fact, Wash­ing­ton has al­ready put forth plans out­lin­ing the ways in which bi­lat­eral trade deals should be im­ple­mented in­stead. It has also called for the in­tro­duc­tion of a U.S. con­tent re­quire­ment in cer­tain sec­tors, stip­u­lat­ing that for­eign goods must con­tain a given share of parts pro­duced in the United States in or­der to qual­ify for re­duced tar­iffs. Wash­ing­ton has even gone so far as to sug­gest an au­to­matic sun­set clause that would ter­mi­nate NAFTA un­der cer­tain cir­cum­stances.

Both pro­pos­als have drawn crit­i­cism from Canada and Mex­ico, but they also have sig­nalled Trump's de­ter­mi­na­tion to sig­nif­i­cantly re­vise the North Amer­i­can pact. De­spite adopt­ing an ag­gres­sive open­ing stance in the talks, how­ever, the United States will not aban­don NAFTA. In­stead, the three part­ners will even­tu­ally reach an agree­ment, al­beit beyond the fourth quar­ter's end.

Over the past few months, the United States has shifted more at­ten­tion to­ward its trade com­plaints with China and South Korea. As a re­sult, dis­putes between Wash­ing­ton and both Asian na­tions will be­come more heated in the months ahead. U.S. in­ves­ti­ga­tions into China's tech­nol­ogy trans­fer re­quire­ments and other prac­tices re­lated to in­tel­lec­tual prop­erty could lay the ground­work for sweep­ing ac­tion against China, in­clud­ing broad tar­iffs. How­ever, such moves likely won't come un­til next year.

The United States may not wait that long to clar­ify its in­ten­tion to pur­sue a case against China through the World Trade Or­ga­ni­za­tion (WTO). If U.S. in­ves­ti­ga­tors dis­cover that Chi­nese tac­tics are in­con­sis­tent with the bloc's rules, Wash­ing­ton will be com­pelled by both its WTO obli­ga­tions and U.S. law to bring the dis­agree­ment to the or­ga­ni­za­tion be­fore uni­lat­er­ally im­pos­ing other puni­tive trade mea­sures. On the other hand, if China's ac­tiv­i­ties are found to hurt Amer­i­can com­pa­nies in ways that are not ad­dressed by WTO reg­u­la­tion, the United States will be able to more swiftly re­spond as it sees fit.

The United States is not the only party con­cerned about Bei­jing's strat­egy for ac­quir­ing Western tech­nol­ogy, ei­ther. In Septem­ber, the Euro­pean Com­mis­sion called for the Con­ti­nent to es­tab­lish more mech­a­nisms for scru­ti­niz­ing in­vest­ment into strate­gic sec­tors from com­pa­nies backed by states out­side the Euro­pean Union – a move clearly aimed at Chi­nese money. Italy, France and Ger­many have each sup­ported this sen­ti­ment as well, fear­ing that the Chi­nese govern­ment may be us­ing the re­sources of the state to en­cour­age takeovers of Euro­pean com­pa­nies to "buy" the core tech­nolo­gies and know-how that un­der­pin the world's mod­ern economies. As usual, France will lead the pro­tec­tion­ist charge within the Euro­pean Union in the months ahead. But Paris' pro­pos­als will cre­ate con­tro­versy among mar­ket-ori­ented coun­tries, such as Den­mark, and East­ern Euro­pean states, which will view with sus­pi­cion any un­der­tak­ing that could rob them of Chi­nese in­vest­ment op­por­tu­ni­ties or in­crease Brus­sels' con­trol over their economies.

Th­ese dif­fer­ences of opin­ion, along with many oth­ers, will be on full dis­play this quar­ter as Europe tack­les the task of re­form­ing the union. Now that crit­i­cal elec­tions in France and Ger­many have con­cluded, the bloc will weigh pro­pos­als to cre­ate a Euro­pean Mone­tary Fund, boost pub­lic in­vest­ment across the Con­ti­nent and in­tro­duce risk-shar­ing mea­sures in the eu­ro­zone. Though Ber­lin is will­ing to find com­mon ground with Paris, Ger­many will spend the re­main­der of the year build­ing a gov­ern­ing coali­tion at home. Even so, the de­bate over Europe's fu­ture that will be­come a defin­ing fea­ture of 2018 will kick off within the next three months.

Amid the resur­gence of eco­nomic na­tion­al­ism in the United States and parts of Europe, the rest of the world will scram­ble to ad­just its ex­pec­ta­tions and strate­gies. The 11 mem­bers left stand­ing in the Trans-Pa­cific Part­ner­ship will con­tinue to hash out a pact with­out the United States, but there is no guar­an­tee that they will find com­pro­mise. The group's large, de­vel­oped mem­bers – Ja­pan, Aus­tralia and Canada – are cer­tainly ea­ger to sign a deal, but their less-de­vel­oped coun­ter­parts may de­mand enough con­ces­sions to pre­cip­i­tate the ne­go­ti­a­tions' col­lapse. The in­cip­i­ent bloc's best chance for suc­cess, then, lies in its speed, sug­gest­ing that talks could progress quickly be­fore the year's end.

With the WTO's bi­en­nial min­is­te­rial meet­ing set to take place in De­cem­ber, coun­tries will likely spend the months lead­ing up to it lob­by­ing for their pet projects. The bloc will also hold an un­prece­dented "mini-min­is­te­rial" meet­ing in Oc­to­ber to try to firm up an agenda for the full sum­mit in Buenos Aires. But this year's con­ven­tion may not be as fruit­ful as some states had hoped. In light of dis­sent from the United States, In­dia and South Africa ear­lier this year, China and Ger­many's hopes of reach­ing a com­pre­hen­sive agree­ment on the fa­cil­i­ta­tion of in­vest­ment have been dashed, as has any chance of a deal to re­strict agri­cul­tural sub­si­dies. Even so, some progress on is­sues such as ecom­merce, pub­lic stock hold­ings and fish­eries sub­si­dies can­not be ruled out.

A Crude Awak­en­ing

Mean­while, the world's oil stock­piles are de­clin­ing, but not quickly enough for global pro­duc­ers' lik­ing. In the United States, one of the most closely watched mar­kets in the in­dus­try, crude oil in­ven­to­ries to­talled 471 mil­lion bar­rels (about 24 per­cent higher than the five-year av­er­age) as of Sept. 22. Such gluts will spur the strong­est ad­vo­cates of pro­duc­tion cuts – Saudi Ara­bia, Rus­sia and Venezuela – to re­dou­ble their ef­forts to ex­tend the quo­tas among OPEC mem­bers and non-OPEC states beyond March 2018. At the same time, they will ratchet up pres­sure on ex­empted OPEC mem­bers Libya and Nige­ria, which have in­creased their col­lec­tive out­put by 622,000 bar­rels per day since the fourth quar­ter of 2016, to join the pact. How­ever, th­ese states are un­likely to sign on. And if the cuts are ex­tended, it won't be long be­fore com­pli­ance among ex­ist­ing sig­na­to­ries starts to weaken.

The United States, for its part, con­tin­ues to see its out­put climb. But by the end of June, U.S. crude pro­duc­tion reached a lit­tle un­der 9.1 mil­lion bpd – just 27,000 bpd higher than its Fe­bru­ary to­tal. This sug­gests that the re­cent growth in U.S. out­put is not as re­silient as in­dus­try ex­perts ini­tially ex­pected. And though the coun­try's pro­duc­tion will keep ris­ing slowly through­out the quar­ter, it will not be cause for de­bate and con­tention among the global pro­duc­ers try­ing to counter the per­sis­tent over­sup­ply in the oil mar­ket.

Photo dis­trib­uted on Au­gust 30, 2017, by the North Korean govern­ment shows what was said to be the test launch of a Hwa­song-12 in­ter­me­di­ate range mis­sile in Py­ongyang, North Korea. (AP)

A pic­ture taken on Septem­ber 23 shows an anti-U.S. rally in Py­ongyang's Kim Il Sung Square.

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