Second Quarter 2019 Economic and Wood product News

2019 3rd q


Please Note: This is an abbreviated version of the Stratfor forecast that focuses on regions of interest for wood product trade implications. Please follow this link if you wish to see forecasts for Europe, Africa and South America.

The U.S.-China Trade War Will Drag On. While there is a small window for a truce between U.S. President Donald Trump and Chinese President Xi Jinping, there is a stronger likelihood that the White House will follow through on its threat to impose tariffs on remaining Chinese imports. Nearly every move China makes to push back and cope with tariff pressure, including ramping up state backing for strategic industries and retaliating against U.S. businesses, will drive the two economic giants further apart as the trade war continues to damage the global economy.

Iranian Retaliation Will Raise the Risk of a Military Confrontation. Iranian retaliatory moves against the United States, including the resumption of nuclear activities and threats to shipping in the Strait of Hormuz, will raise the threat of U.S. punitive strikes on Iran. Even though the White House intent will be to limit offensive action and avoid bogging itself down in another politically unpopular war in the Middle East, the potential exists for a more serious escalation. Short of the negotiation Trump envisioned for Iran, progress could be made toward establishing a deconfliction channel via third-party mediators.

A High Stakes Tech Battle Will Drive Fragmentation in the Global Tech Sector. Far-reaching U.S. export restrictions against Chinese telecom giant Huawei Technologies Co. will nearly paralyze the company in the near term, and it could strengthen the White House’s ongoing campaign to deter other countries from working with Huawei on 5G roll outs. Even if the United States agrees to a partial relaxation of its ban against Huawei, China will move full steam ahead to accelerate indigenous semiconductor development and software alternatives to its Western competitors. At the same time, U.S. regulators will ramp up their investigations of U.S. tech giants over antitrust, privacy and data protection concerns.

Mexico Faces an Uphill Battle to Appease Trump and Avert Tariffs. Though Mexico narrowly averted U.S. tariffs by pledging to do more on border security, it is not out of the danger zone yet. Mexico will fall short of meeting Trump’s demand that it chokes off migrant flows, and Trump will likely rely on tariffs, or at least the threat of tariffs, as his preferred enforcement tool.

5 key themes.JPG Risk Will Create Significant Headwinds for the Global Economy.

Global economic growth estimates are headed for another downgrade in the third quarter. Intensifying U.S. trade conflicts with China, along with the lingering threat of a major disruption to North American trade, will continue to sap investor confidence and drive a U.S. Federal Reserve decision to ease interest rates. The Chinese yuan is likely to depreciate past 7 to the dollar, though China’s Central Bank will intervene to avoid a much steeper devaluation that would accelerate capital flight and apply stress on a number of emerging markets. Between slowing consumer demand and a higher risk of supply disruptions from a potential Iran conflict, oil markets will remain in flux.

Brexit Chaos and Italy Will Weigh on Europe. The United Kingdom will get a new hardline prime minister, who will inevitably hit a wall with Brussels when negotiating the terms of the United Kingdom’s future relationship with the European Union. The risk of a no-deal Brexit will rise through the quarter, but the likely result will be more delays and possibly a path to early elections. And even as Rome manages to dodge EU sanctions over its ballooning deficit, Italy’s fiscal policies, weakening banking sector and fragile government coalition will continue to stress the European Union.

Great Power Competition Will Create Opportunity But Mostly Risk for Middle Powers. As U.S. competition with Russia persists, Poland will be able to take advantage of the White House’s strategic focus on Eastern Europe, advancing plans to rotate more U.S. troops through Poland and pushing for targeted U.S. sanctions against Nord Stream 2. Turkey and India, meanwhile, will remain in the White House’s crosshairs over their energy relationships with Iran and defense ties to Russia, with New Delhi facing the additional threat of tariffs this quarter.

Military-Backed Transitions in North Africa Face Major Hurdles. The fall of legacy dictators in Sudan and Algeria have emboldened opposition groups hungry for political change. The military s of each country trying to manage the tumultuous transition will struggle to satisfy opposition demands while navigating elite power spats behind the scenes. Sudan will rely more on brute force to quell unrest, while Algeria’s more diverse set of power brokers will likely become mired in political negotiation as unrest persists.

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Section Highlights

  • There is a small window for a trade truce, but the White House is more likely to escalate its trade war and broader strategic competition with China.
  • Iranian retaliation against the White House’s maximum pressure campaign will raise the risk of U.S. punitive strikes against Iran.
  • Mexico will continue to live in fear of tariffs as the country falls short of Trump’s demands for choking off migrant flows.
  • Rising trade frictions, the potential for military conflict in the energy-vital Persian Gulf and growing political uncertainty will create major geopolitical headwinds for the already-slowing global economy.

The U.S. “Tariff Man” Strikes Again

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U.S. President Donald Trump, the self-proclaimed “Tariff Man,” is likely to be the single most important source of geopolitical risk to the global economy in the third quarter of 2019. A deepening standoff with China increases the probability that Trump will follow through with threats to impose 25 percent tariffs on all remaining Chinese imports. Tariff threats against Mexico over auto imports will continue to linger at a time during which global trade risk creates headwinds for global economic growth. Trump nonetheless appears to be operating under the assumption that the U.S. economy is on solid enough footing to justify tariffs, both as a wide-ranging negotiating tactic and to drive down the U.S. trade deficit.

global impacts

Of all its trade battles, the United States will maintain a particularly hard line on China as Washington’s strategic competition with Beijing deepens on nearly all fronts. A deliberate attempt by the White House to cripple Chinese tech giant Huawei Technologies Co. has narrowed what little middle ground there was last quarter for a trade compromise. And for every U.S. action designed to coerce Beijing into making greater concessions, there will be a Chinese reaction that pushes the economic giants further apart in the negotiation. For example, U.S. trade assaults on China will prompt Beijing to increase financial support for strategic sectors, such as the semiconductor industry, directly violating a U.S. demand to reduce state support and level the playing field for foreign businesses. Chinese tariff retaliation and possible boycotts of U.S. goods will counteract Washington’s demand for China to buy more American products to reduce the U.S. trade deficit. Chinese attempts to push back against the United States by selectively blacklisting and fining American firms only feeds into a familiar White House complaint: that China actively discriminates against foreign businesses.

Washington will not ease up on Beijing over the quarter, but every U.S. action will have a Chinese reaction.

A potential Chinese restriction of rare earth exports will amplify threats to U.S. commerce that the White House is citing to legally justify Section 301 tariffs in the first place. And the unavoidable depreciation of the yuan from the stress of the trade war will be used by the White House to name and shame China as a currency “manipulator” bent on disadvantaging U.S. exporters. This burning economic dispute is meanwhile unfolding against a backdrop of rising security tensions in the South China Sea and growing pushback against Beijing in China’s periphery, where the United States has the potential to apply sanctions against the Chinese government and its affiliates in the name of protecting human rights and democracy.

estimated costs

This geopolitical climate does not bode well for Trump and Chinese President Xi Jinping to reach a breakthrough in negotiations when they meet at the G-20 summit in Japan in late June. Beijing will keep the door open for future dialogue, and Trump still has the option of buying more time in the negotiation before resorting to all-encompassing tariffs. But the window for a truce is closing fast, and Xi and Trump will have enough political backing to prolong their economic war well beyond the quarter.

trade war scenarios

While Mexico has been among the main beneficiaries of the U.S.-China trade war, it has now found itself squarely in Trump’s trade cross hairs. Having narrowly averted tariffs this time around, Mexico’s government is facing a tight timeline and an uphill battle to appease the U.S. president. Given the Mexican national guard’s questionable ability to crack down on migrant traffic coming across its southern border — coupled with escalating unrest in parts of Central America and the reluctance of countries in the region to overhaul their asylum laws — the best Mexico City may be able to hope for is a temporary lull in migrant flows as smugglers adapt to expanded border controls. Moreover, Mexico’s already robust trade relationship with the United States and lack of market-based purchasing does not leave much room for the current administration to make a showy concession to Trump by increasing agricultural imports.

Fearing a descent into recession, Mexico will carefully avoid a confrontation with the United States this quarter as it tries to steer clear of costly tariffs.

Trump’s tariff threats against Mexico could resurface around July 22 and again on Sept. 5, when the Mexican government is supposed to deliver to the White House its progress report on curbing illegal border crossings. Already on the edge of recession, Mexico will be careful to avoid a confrontation with the White House to steer clear of costly tariffs. After more than a quarter of a century of tariff-free trade on the U.S.-Mexico border, the economic impact of just 5 percent tariffs on Mexican imports, as Trump earlier threatened, would be tantamount to ripping up the North American Free Trade Agreement and returning to average World Trade Organization-level tariffs for most sectors. Supply chain disruptions would reverberate across the auto, electronic, industrial and food sectors. Furthermore, U.S. agricultural producers would be singled out for retaliatory tariffs, and Congress could even regain momentum to challenge the president’s trade authority — though a veto-proof majority on such a measure would be far from assured. Even if Trump avoids the heavy economic and political toll that comes with disrupting North American trade through tariffs, the uncertainty that comes with merely keeping the threat alive will continue to erode investor confidence.

The threat of auto tariffs will meanwhile continue to loom large as Trump waits for U.S. trading partners to come to him with a “solution” by November, in the form of voluntary export restraints and/or acceptance of U.S. quotas. While Japan has a better chance of negotiating a trade compromise with the White House that includes agriculture and autos, EU leaders, too divided and consumed with horse-trading over political positions in the European Union for most of the quarter, will resist the White House’s ultimatum on restricting auto exports to the United States. As a result, there won’t be much movement in Continental trade negotiations with the Trump administration.

The psychological impact of Trump’s tariff weaponization strategy will linger well beyond the quarter.

The White House has already raised the WTO’s hackles by stretching the definition of national security to justify a variety of tariffs, all while discrediting the global trade body’s authority to arbitrate trade disputes. With a Dec. 10 deadline pending for the United States to lift its siege on the WTO Appellate Body or else drive it into paralysis, European leaders will prepare for the worst and work on convincing other WTO members to sign onto an ad hoc solution that would have former WTO appeals judges settle trade disputes under WTO arbitration rules until a compromise — likely with the next White House — can be found.

The European Union’s creative workaround at the WTO points to a growing assumption among U.S. allies and adversaries alike that negotiation with the current White House may be futile. Erratic U.S. negotiating tactics and the elusiveness of a final, negotiated settlement will bruise business confidence and investor sentiment globally. Ham-fisted diplomacy will also convince a number of powers, including China, Europe and Iran, that seeing out the result of the 2020 U.S. election makes more strategic sense than entertaining heavy concessions in a negotiation with the Trump White House over a deal that may or may not last.

Geopolitical Risk Bludgeons the Global Economy

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In the face of yet another major tariff escalation, China will erect stronger capital controls and draw on its reserves to defend its currency, the yuan. China’s Central Bank will intervene to avoid a steep and sudden devaluation because a depreciation beyond 7 yuan to the dollar will exacerbate China’s economic slowdown and place greater stress on emerging market currencies. Heavy downside risk from the White House’s trade wars will drive the U.S. Federal Reserve to ease interest rates this quarter.

A variety of competing factors will slow but not quite stall the global economy in the third quarter.

The European Central Bank has already abandoned plans to tighten monetary policy this year as crises of the European Union’s own making roil the bloc. We do not think this quarter will end in a no-deal Brexit, but an escalation of political chaos in the United Kingdom, along with a drawn-out confrontation between Rome and Brussels over Italy’s expansive fiscal policies, will continue to sap at European growth amid rising global trade frictions.

For energy markets, between the opposing forces of slowing consumer demand and the threat of military conflict in the Persian Gulf creating a sharp supply disruption, oil prices will remain in flux. When the Organization of Petroleum Exporting Countries meets early in the quarter (with its expanded retinue of crude-producing partners, a collective known as OPEC+), Saudi Arabia and Russia will drive an agreement to extend production cuts into the second half of the year as the world’s biggest oil producers try to contend with rising U.S. inventories and weaker global demand.

Great Power Competition Drives Global Tech Fragmentation

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An aggressive U.S. move in the second quarter to ban Huawei from selling and operating in the United States and, more importantly, to proscribe U.S. tech suppliers from working with the company goes well beyond trade leverage and fits into a broader White House strategy to cripple China’s tech giants as a U.S.-China battle for technological dominance intensifies. If Xi and Trump agree to de-escalate the trade war this quarter, the White House could offer a selective and partial relaxation of export controls on goods and/or licenses that fall outside of highly strategic applications — specifically, dual-use technologies that could be used for security, surveillance or defense purposes. Pressure from affected U.S. businesses and ongoing court challenges could also have the effect of weakening U.S. restrictions against Huawei.

Regardless of their country of origin, global tech companies will find themselves on the firing line as the U.S.-China trade dispute heats up.

Uncertainty surrounding the U.S.-China trade negotiation and the viral nature of U.S. export law, in which even a minimal amount of U.S. components, software and technology could subject a company to sanctions, will accelerate Chinese efforts to shore up indigenous semiconductor development. Huawei will further seek to roll out an independent operating system for smartphones to maintain the company’s global market share. China will struggle to reduce its reliance on major international chip providers — such as Intel Corp., Samsung Electronics and the Taiwan Semiconductor Manufacturing Company (TSMC) — that are now liable for U.S. sanctions. But over time, the rise of Chinese competitors in the chip manufacturing sector and the roll out of Chinese software alternatives — such as Huawei’s mobile operating system challenger to iOS and Android — are likely to contribute further to the fragmentation of the global tech sector.

telecom operators

Ongoing U.S. diplomatic efforts to pressure countries in Europe, Latin America and Southeast Asia into imposing similar bans against Huawei equipment on national security grounds are already stalling. This is because most countries are unwilling to tolerate the much higher costs and implementation delays for 5G networks that would come with blacklisting Huawei. But the broad reach of U.S. export controls against Huawei will now give many of these governments and relevant telecommunications partners pause as they weigh a much bigger compliance risk in dealing with the Chinese firm.

Even as its efforts to defang Chinese tech leaders gain momentum, the U.S. government has also made a point of targeting the exact Silicon Valley tech giants that Washington relies on to outperform China in a global race for technological supremacy. In line with Stratfor’s 2019 Annual Forecast, bipartisan momentum is quickening behind U.S. efforts to scrutinize Big Tech over antitrust, privacy and free speech concerns. Google and Facebook are likely at the top of the list for the Federal Trade Commission and the Justice Department, which share oversight duties over the United States’ largest tech firms. U.S. tech companies will also remain a prominent target in the European Union, where Ireland has launched a probe into Google for violating the European Union’s General Data Protection Regulation on privacy protections.

The White House Struggles to Find Order in Its Cluttered Foreign Policy

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As well as juggling trade wars, the White House will also have to balance competing foreign policy priorities. Iran remains at the top of that list. The Trump White House is operating under an assumption that its ability to choke off Iranian exports and inflict heavy economic pain on the Islamic Republic will drive Tehran to the negotiating table or, better yet, instigate a grassroots overthrow of the clerical regime. Neither is likely to happen, though — and certainly not this quarter. At most, Tehran could rely on third-party mediators to establish a “cooling off’ channel with the United States as military frictions rise. Trump appears well aware of the political flack he would receive by committing the United States to yet another massive military conflict in the Middle East and so is likely to exercise some restraint in trying to avoid a costly military scenario with Iran. But there are several triggers that will arise this quarter, such as Iran telegraphing threats to shipping in the Persian Gulf and restarting parts of its nuclear program, that will embolden White House hawks to argue for punitive strikes against Iran.

iran response

potential responses

A lingering threat of military confrontation between the United States and Iran will detract from Washington’s focus on its burgeoning great power competition with both China and Russia. Beyond high-stakes economic battles, the potential for skirmishes between the United States and China in the South China Sea and in the Taiwan Strait will rise as the U.S. Navy and Coast Guard steadily expand their footprint in China’s near abroad. Russia, meanwhile, will oscillate between instigator and mediator in multiple theaters that have the potential to dominate the White House’s attention. While Russia already provides significant political and economic backing to Iran and Venezuela, it can always dial up military support should it see an opportunity to generate leverage against a highly distracted White House. U.S. attempts to coax Russia and China into a trilateral strategic arms control treaty are unlikely to gain much momentum this quarter as arms buildups continue on all sides.

The White House will have its hands full this quarter when it comes to foreign policy — Iran, Russia, China, Venezuela, North Korea and Afghanistan all require Washington’s attention in differing measures.

Unlike most countries dealing with the current White House, North Korea is trying to accelerate negotiations while Trump is still in office. Now that the United States has little choice but to plan for a military contingency around Iran, Pyongyang will have more room to push the line on missile testing while trying to break through a stalemate in negotiations. North Korean leader Kim Jong Un remains confident that Trump would rather keep North Korea in diplomatic limbo and call it a foreign policy win than return to a military confrontation with Pyongyang.

When compared to a prospective nuclear-equipped nation, Venezuela inevitably falls much lower on the list of U.S. foreign policy priorities. Even as the persistent threat of another coup attempt and the specter of greater Russian involvement in Venezuela will vie for Washington’s attention, the White House is unlikely to risk a messy military intervention at this stage to force regime change. A steady intensification of U.S. sanctions and ongoing back channel dialogue with military leaders to try and crack the rule of President Nicolas Maduro will be the White House’s preferred method of managing Venezuela as the country descends further into chaos.

Additional Forecasts

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These Stratfor assessments provide additional insights for the Quarter

Key Dates to Watch

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  • June 25-26: OPEC+ members meet in Vienna, Austria.
  • June 28-29: Chinese President Xi Jinping and U.S. President Donald Trump are expected to meet at the G-20 summit in Japan.
  • Early July: The United States could follow through on threats to impose tariffs on $300 billion worth of Chinese goods.
  • July: If the U.S. economy continues to grow, this month will mark the longest U.S. economic expansion in its history.
  • July 7: The 60-day deadline Iran gave to the European Union expires, after which time Tehran vowed a partial nuclear restart.
  • July 22: 45-day review of the U.S.-Mexico deal on border security.
  • 5: 90-day review of the U.S.-Mexico deal on border pacificKey Trends for the QuarterMore InformationChina Hunkers Down for an Economic StormTime is running out for the United States and China to call another trade cease-fire ahead of the G-20 summit in Japan in late June, and both sides appear to be digging their heels in for the long fight. In an extreme and very plausible scenario in which the United States follows through with threats to impose additional 25 percent duties on nearly all remaining Chinese imports, China could suffer a 1 percent hit to its gross domestic product (GDP) and millions of job losses over the next two years. If the White House and Beijing fail to reach a truce, China will stoke nationalist fervor to withstand the economic hardship — at the risk of inciting anti-U.S. boycotts and protests that could escalate beyond Beijing’s intent.If the U.S. follows through with threats to impose additional 25 percent duties on remaining Chinese imports, China could suffer a 1 percent hit to its GDP and millions of job losses in the next two years.US China trade imbalanceChina will also boost domestic infrastructure spending and even employ risky property stimulus measures in rural areas and lower-tier cities to avoid social disruptions from unemployment ahead of the 70th anniversary of the People’s Republic’s founding. Enacting such measures also means Beijing will struggle to contain debt risks in the coming months as fiscal burdens rise for local governments and bureaucracies. The extreme tariff scenario will most likely see China’s currency depreciate past 7 yuan to the dollar, creating more currency stress for emerging markets but also forcing the Chinese central bank to intervene to prevent sharp depreciation. Read more about why China will expand stimulus measures to ensure employment stability.U.S.-China Confrontation SpreadsIn the next quarter, the United States will maintain its strategic offensive against China in the Asia-Pacific through a more assertive security posture. It will also lobby support from allies and partners to counter Beijing’s claims over the South China Sea and Taiwan as well as commit to regional infrastructure development. The risk of U.S.-China collisions — both literal and figurative — will increase as Beijing feels pressured to respond to Washington’s intensifying maneuvers in the Taiwan Strait. Contentious activity in the South China Sea will also grow as the U.S. Navy increasingly challenges China’s coast guard and maritime militias and vice versa. Separately, unrest in Hong Kong over an extradition law could provide an opportunity for the United States to exert targeted trade or sanctions pressure.taiwanHoping to muster waning public support ahead of the Taiwanese 2020 presidential election, Taiwan’s ruling Democratic Progressive Party will lobby Washington for elevated security and diplomatic support while ramping up pro-independence narratives. Possible visits by senior U.S. Cabinet officials to Taiwan, completion of pending arms sales or a resumption of trade talks will draw Chinese military intimidation — including increased patrols and flyovers — risking escalation around the Taiwan Strait. Read more about Taiwan’s position in the U.S-China competition.Regional Powers Find Footing in the Middle

    A number of countries in the Asia-Pacific region will be caught in the middle of the great power competition between the United States and China. Australia and Japan broadly align with the United States when it comes to restricting Chinese investments in each country’s tech sector, but they draw the line at engaging in maritime Freedom of Navigation operations and overt support for Taiwan (though enhanced security cooperation with regional states is a given). Tokyo may aid Washington’s efforts to counter Beijing’s Belt and Road Initiative by financing and providing technical expertise to participants to help scrutinize projects underway. But Tokyo will not limit its own infrastructure and technological cooperation with China, seeking instead to set up a security mechanism with Beijing to manage East China Sea tensions.

    Many countries caught between the United States and China in the Asia-Pacific region are choosing to play both sides, with varying degrees of success.

    With the United States embroiled in a trade confrontation with China, and having struck a tenuous deal with Mexico, U.S.-Japan trade talks will proceed slowly, allowing Tokyo to focus first on elections before having to deal with Washington. Meanwhile, U.S. lobbying to block Chinese tech giant Huawei’s 5G rollout and other infrastructure projects will face further constraints among smaller states in the Indo-Pacific region. Southeast Asian states — besides Vietnam — will avoid provoking Beijing out of necessity, despite cooperation with the United States. Read the latest Stratfor assessment on Japan’s rising role as a regional third power.

    The U.S. Muddles Through on North Korea

    The U.S.-North Korea dialogue will remain open throughout the quarter. Although no breakthrough toward a deal is expected, neither side is willing to fully derail the talks, thereby avoiding the risky escalatory cycle of previous years. Washington will deprioritize its outreach to Pyongyang to free resources to deal with Iran and Venezuela. To ensure that it remains on the U.S. radar, North Korea will continue missile testing only in a manner calculated to exert pressure but not run afoul of the Trump administration. However, a miscalculated weapons test could empower White House hard-liners. China and Russia will continue to support Pyongyang’s outreach to the United States in the interest of stability. Amid trade tensions, China will be more willing to slacken enforcement of sanctions on North Korea, prioritizing economic lifelines. However, U.S. President Donald Trump’s personal commitment to a North Korea deal leaves open the small possibility of the United States offering a compromise deal of incremental sanctions relief. To learn more about why the U.S.-North Korea outreach still has momentum, read Stratfor’s assessment on the matter.

    Additional Forecasts

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    These Stratfor assessments provide additional insights for the Quarter


    Key Dates to Watch

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      • June 28-29: Chinese President Xi Jinping and U.S. President Donald Trump are expected to meet at the G-20 summit in Japan.
      • Early July: The United States could follow through on threats to impose tariffs on $300 billion worth of Chinese goods.
      • July: The United States will decide on whether to sell 66 F-16V fighter jets to Taiwan.
      • July or August 2019: Japan will hold upper house elections with the potential for lower house snap elections.
      • July 27: North Korea’s Day of Victory in the Fatherland Liberation War holiday marks the signing of the Korean War armistice.
      • September: Taiwan will conduct “Indo-Pacific Democratic Governance Consultations” with the United States.  south asia.JPGKey Trends for the QuarterMore InformationIndia Grapples With Its Economy and Foreign PolicyArmed with a renewed electoral mandate, Indian Prime Minister Narendra Modi faces daunting domestic and foreign policy challenges this quarter, including a cooling economy and rising trade frictions with the United States. With quarterly GDP growth falling to a four-year low, India’s government will focus on reviving consumption by stimulating demand in the country’s vast rural hinterland and jump-starting private investment. To reassure concerned investors, Modi will take baby steps toward reforming India’s restrictive land and labor laws, though implementing these politically sensitive measures — which are aimed at creating tens of millions of jobs — is a task that will stretch far beyond the quarter.south asiaKey Trends for the QuarterMore InformationIndia Grapples With Its Economy and Foreign PolicyArmed with a renewed electoral mandate, Indian Prime Minister Narendra Modi faces daunting domestic and foreign policy challenges this quarter, including a cooling economy and rising trade frictions with the United States. With quarterly GDP growth falling to a four-year low, India’s government will focus on reviving consumption by stimulating demand in the country’s vast rural hinterland and jump-starting private investment. To reassure concerned investors, Modi will take baby steps toward reforming India’s restrictive land and labor laws, though implementing these politically sensitive measures — which are aimed at creating tens of millions of jobs — is a task that will stretch far beyond the quarter.Indias cooling economyIndia’s relationship with the United States presents a major foreign policy challenge for New Delhi. When it comes to dealing with Washington’s trade demands — specifically, lower tariffs to grant better access to U.S. firms exporting to India — New Delhi has limited retaliatory options. It will, therefore, avoid escalating the ongoing trade dispute beyond tit-for-tat measures — such as imposing $235 million in retaliatory tariffs — against the United States, which is India’s largest export market. The fate of the dispute will ultimately depend on the White House and whether it chooses to launch a Section 301 investigation into Indian tariffs that it complains are too high. For India, trade tensions with the United States heighten the importance of entering regional trade blocs such as the Regional Comprehensive Economic Partnership (RCEP), a grouping of 16 countries, including China (though disagreements over market access between New Delhi and Beijing persist).

        The United States wants to ensure its allies align with its objectives, especially when it comes to managing China, Russia and Iran. India imports Iranian oil — albeit in small quantities — and Russian arms, which puts New Delhi in the cross hairs of Washington’s Countering America’s Adversaries Through Sanctions Act (CAATSA). While India will reduce its oil purchases from Iran (potentially to nothing) and pay in rupees as opposed to dollars, New Delhi is highly dependent on Russian military equipment. Though it will not curtail its arms purchases from Russia, India is actively seeking to procure U.S.-made equipment, which will likely be enough to avoid CAATSA sanctions in the third quarter. And though India still counts China as its main strategic rival, the two will maintain calm on their disputed frontier as each country wrestles with other issues abroad. Even so, New Delhi’s strategic and economic competition with Beijing will advance across South Asia as India cultivates deeper ties with Sri Lanka, the Maldives, Bangladesh and Nepal through a mix of foreign aid, diplomacy and security cooperation — in keeping with Modi’s “Neighborhood First” policy. Pakistan, of course, will remain the outlier: talks, at least publicly, are unlikely this quarter since Modi rode to power on an anti-Pakistan platform.

        Washington Wants an Afghan Deal by September

        Though the war in Afghanistan rages on, the Taliban will remain in negotiations with the United States because dialogue offers the surest path to clinching the insurgency’s paramount objective: the withdrawal of foreign forces. For its part, Washington will remain committed to talks in the hopes it can seal a peace deal ahead of Afghanistan’s presidential elections in September.

        The sticking point for negotiations has always been the sequencing of demands: The Taliban insist that U.S. forces leave Afghanistan first, whereas Washington wants a Taliban cease-fire, counter terrorism pledge and dialogue with the Afghan government first.

        us talibanIf, however, a deal eludes both parties this quarter, it will be because of the fundamental disagreement over the sequencing of their respective demands: The Taliban will insist that the United States first announce a withdrawal of forces, whereas Washington will demand a Taliban cease-fire, counterterrorism pledge and commitment to hold talks with the Afghan government. Iran could choose to spoil any peace deal, too, if it anticipates a U.S. military strike against it. The country could ramp up its support for the Taliban, emboldening the insurgency on the western fringes of Afghanistan. Iran would, however, seek to balance such a move with its need to maintain good relations with Kabul. Beyond Iran, regional actors including Russia, China and Pakistan — the Taliban’s key external sponsor — will support efforts to enable a durable resolution to the long-running conflict.

        Pakistan Endures Rising Opposition to Austerity Measures

        Though Pakistan’s government will face a social and political backlash arising from the government’s austerity measures — which are tied to the International Monetary Fund’s $6 billion loan — its survival won’t be at stake. Prime Minister Imran Khan recognizes the importance of maintaining military support for his political survival, so he will accommodate the army’s demands, principally delegating control over foreign and defense policy with respect to India and Afghanistan. A key constraint against protests over high inflation will be the sidelining of leaders from Pakistan’s two main opposition parties — the Pakistan People’s Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N).

        Unpopular austerity measures will create social and political fallout, but thanks to the support of the armed forces, the government will hold strong through the quarter.

        But even if protests grow, the army not only has the ability to control public disorder but can silence dissent in the media as well. Khan and the army want to avoid anything that could hurt business confidence in Pakistan, especially as the country’s $300 billion economy prepares for an abrupt slowdown. For Pakistan, projecting an image of stability abroad is paramount.

        pakistan foriegn exchange

      • Additional ForecastsMore InformationThese Stratfor assessments provide additional insights for the Quarter

        Key Dates to Watch

        More Information

        • June 16-21: The Financial Action Task Force (FATF) will meet in the United States.
        • July 1: The fiscal year will begin in India, Pakistan and Bangladesh.
        • July 5: India’s government will present its federal budget.
        • Sept. 28: Afghanistan will hold presidential elections.
        • Unknown: Kashmir will stage state elections (unscheduled but due this year).
        • Unknown: The next round(s) of U.S.-Taliban talks will be announced.


        Apr 17, 2019 | 15:50 GMT

        chinese pensioners

        China: Urban Worker Pension Fund Will Be Empty by 2035, Study Finds

        What Happened: China’s urban worker pension fund will be empty by the year 2035 due to a shrinking workforce and insufficient contributions, according to findings by the World Social Security Center at the Chinese Academy of Social Sciences, Caixin reported April 15.

        Why It Matters: China is facing a demographic cliff in the coming years similar to other Asian countries, which is aggravated by the legacy of its one-child rule as well as lax enforcement, local mismanagement and various exemptions to promote employment. The ongoing economic slowdown has only compounded efforts to get the system back on track.

        Background: The urban worker fund was established in 1997 and is designed to replace roughly 59 percent of an employee’s salary on retirement through individual and employer contributions.

        Read More:

        pension coverage



        China turns again to infrastructure to support growt

        Reliance on old economic driver reflects failed efforts to boost private companies


        FT Confidential Research              June 12, 2019


        The Chinese government has turned again to infrastructure to support a slowing economy facing a barrage of threats, not least a worsening bilateral relationship with the US.

        By itself, a tentative loosening of infrastructure project funding rules might not be enough to stabilize an economy that may be growing near the lower bound of the 6 to 6.5 per cent range the government is targeting for this year.

        But a joint party-state announcement published on June 10 suggests that the leadership is prepared to do more to shore up the economy, even if this means giving more ground on its “critical battle” to tackle financial system risk.

        The announcement also suggests recognition by policymakers that attempts to boost the economy by cutting taxes and encouraging sectors such as private companies, while closing off critical funding channels, have had limited success. Tougher action may be necessary and may be forthcoming, as pressure on the economy builds into the second half of the year.

        Local governments have been given more scope to use debt to capitalize infrastructure projects that meet official investment criteria. Specifically, funds raised through the sale of special local government bonds may be used to help meet capital requirements, usually set at 20 to 25 per cent of financing. The government this year earmarked Rmb 2.15 trillion ($310 billion) in sales of such bonds, which pay out from project cash flows rather than from fiscal resources.

        Although this year’s quota was increased from Rmb 1.35 trillion, strained local government finances — worsened by the collapse of land sales — and constraints on shadow finance have hurt their ability to finance infrastructure spending, just as the government needed this to support the economy.

        china infrastructureAlong with the real-estate industry, government-led investment in areas such as transport and utilities has been a key driver of growth in the modern Chinese economy, accounting for more than a quarter of total investment activity this year.

        Looser project financing rules will help, but probably not by much. Just over Rmb 1 trillion in local government bonds have been sold so far this year, and only 6 per cent of the funds raised have gone to the kinds of projects, including transport and electricity investments, targeted in this latest announcement (most goes towards preparing land for auction and the redevelopment of slum areas).

        If the proportion of funding going to qualified infrastructure projects were to rise to 10 per cent of the total for the remainder of this year, it would imply an extra Rmb 456.4 billion in additional infrastructure investment, once additional leverage is calculated in. This suggests that investment growth would rise to just 5.6 per cent, compared with the 3 per cent growth recorded in January-April.

        The announcement did not spell out how much of the funding would go to meeting project capital requirements. However, a more aggressive, if less likely, scenario is that all funding from special bond sales is permitted to go towards such projects, excluding that going towards land preparation and slum area renovation. This would imply an extra Rmb 1trillion in infrastructure investment this year, enough to lift investment growth to nearly 9 per cent, and nominal GDP growth by 0.7 percentage points.

        This is the fourth time since 2004 that rules have been tweaked to increase the ability of local governments to invest in infrastructure. Not coincidentally, this includes adjustments in 2009 and 2015, when China’s economy faced the threat of a hard landing.

        Allowing more special bond funds to flow to infrastructure would have a more meaningful impact on economic growth in the short term, whereas incremental steps to give back more money to households and business through tax cuts have not.

        infrastructure  projects.JPGThe danger of such a policy is that local governments would be emboldened to borrow more. Although the joint announcement was explicit in its warning to keep debt levels under control, local governments will be forced to tread a very fine line.

        On the other hand, the balance of economic risks is continuing to shift — US president Donald Trump has threatened to raise tariffs on all Chinese imports into the US if Xi Jinping does not meet him at the G20 leaders’ meeting in Osaka at the end of this month.

        Our latest survey of small, private companies shows weak appetites to invest because of prevailing economic conditions, while People’s Bank of China data released on Wednesday showed that total social finance, a broad measure of funding conditions, grew just 10.5 per cent in the first five months of this year, in line with the average of the previous 12 months.

        A recovery in infrastructure investment growth would at least help cushion the blow of a deepening trade war and might also deliver the confidence boost necessary to convince private companies to invest more.

        The risk of storing up yet more problems for the future has again taken a back seat.

        He Wei, Finance Researcher, FT Confidential Research

        FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.

        China: Transformation of the Nanxun wood industry

        naxun industry parkJune 20, 2019

        Source: ITTO/Fordaq

        Major changes have taken place in the Nanxun timber industry over the past few years. Naxun leads a significant trend in China manufacturing to reduce their environmental footprint and gain huge gains in productivity. The main change has been the shift from family workshops to modern factories, from single product lines (plywood and veneers) to diversified solid wood flooring, home furnishing and the adoption of ‘clean green’ manufacturing.

        Nanxun District of Huzhou City in Zhejiang Province has become one of the most important flooring production bases in China. More than 300 flooring manufacturers are located there.

        The old-style manufacturing created pollution. In particular, the use of volatile organic compounds (VOCs) was not well managed. To address this a ‘Special Action Plan for Environmental Pollution Control in Wood Industry’ was formulated in Nanxun District in 2017.

        This says no production shall be allowed if the production processes do not meet the requirements of environmental protection standards. Nanxun District government has acted to close or relocate many industries. Of the 3,922 wood enterprises listed in the City, over 80% have been forced to close, the balance have undertaken renovation measures.

        The changes have promoted the development of industrial clusters and the surviving enterprises have become bigger and stronger and the environment continues to improve.

        Data show that the emission of volatile organic compounds (VOCs) from wood product enterprises in Nanxun districts has been reduced by more than 2,000 tonnes and the tax revenue has increased by more than Rmb 600 million.

        China recognizes WFC technology in new Green Building Standard

        eric wongBy Eric Wong

        Managing Director, Canada Wood China

        June 5, 2019

        Posted in: China

        green buildingWood Frame Construction Technology (WFC) has officially been recognized for the first time by China’s Green Building Evaluation Standard as a viable solution for the country’s green building credit rating. This is another milestone for WFC in China on the government regulations front after a series of prefabrication policies favourable to wood has been published in the past few years.

        The newly revised standard, printed in May and scheduled to be implemented in August 2019, includes WFC as one of the three building solutions along with concrete and steel systems. It also awards credits to wood frame solutions for being an innovative construction technology. The new standard also introduces the entry Certified Level, making it aligned with the LEED certification system and offering more accessible eligibility. This also means that green building standard is likely to be implemented as de-facto compulsory measures in the future.

        In 2006, the Chinese Ministry of Housing and Urban-Rural Development (MOHURD) released its first Evaluation Standard for Green Building, otherwise known as the Three Star System. Different from LEED’s total points rating system, the Chinese system requires that a building must obtain a certain number of points in all rating categories to qualify for a star rating.

        Based on the 2006 Evaluation Standard for Green Building, MOHURD further revised the document the standard in 2015, vowing that 30% of all newly constructed buildings will be green by 2020. However, the 2015 revision still did not specify whether WFC was considered a green building solution.

        In recent years, unremitting lobbying efforts by Canada Wood China contributed to the official recognition of WFC in a series of policies and industrialized construction standards. MOHURD realized that WFC should also be a part of green building policies and standards, and started working on revising the Three Star System again in 2018, merely three years after its second iteration.

        The standard is expected to be revised again in 2020. Canada Wood China will maintain close communications with MOHURD to ensure the inclusion of WFC content in the revised standard.

        China Economic Update

        eric wongBy Eric Wong

        Managing Director, Canada Wood China

        May 6, 2019

        Posted in: China

        China’s economy continued to slow in 2019, with Q1 GDP growth at 6.4%, compared to 6.6% in 2018. However, the growth is slightly higher than market expectations. This is attributed to higher factory production, which has benefited from additional tax cuts, infrastructure spending, and other government fiscal stimulus.

        The Caixin China General Manufacturing PMI rose to 50.8 in March 2019 from 49.9 the previous month, beating market expectations of 50.1. The latest reading was the first increase in manufacturing activity in four months and the strongest since July 2018.

        2019 Economic Outlook

        Many organizations raised their economic forecast for China in April. OECD forecasted in its recent report that China’s economic growth will be above 6% percent this year and next. The IMF raised its forecast to 6.3% from the previous 6.2%.

        Yet, analysts warned it was too early to put a timetable on when there will be sustainable turnaround, adding further policy support was needed to maintain momentum in the world’s second-largest economy. Many had expected a recovery only in the second half of 2019, according to a recent Reuters report. Beijing set a 2019 economic growth target of between 6 and 6.5 percent in March.

        Looking ahead, China’s economy continues to be under pressure this year. The trade conflict with the United States and related uncertainties ranked as the top risk to China’s economy, according to the Economist Intelligence Unit.


        The Construction Sector

        In March, on average home prices in 70 major Chinese cities increased, indicating a recovery in the property sector amid government controls to curb speculation and prevent an overheated market.

        Total investment in real estate increased 9.5 percent year-on-year in 2018, and continued the strong momentum in March 2019, with growth of 11.8 percent year-on-year.

        investment real estateHowever, total floor area completed in 2018 was flat (4,135 million sq. m, down 1.3% from 2017), of which 2,784 million sq. m (-0.7%) was residential.

        CAD/CNY was on a downward trend in Q1 2019, compared to Q4 2018. The currency hit below five briefly on March 7th and 8th but bounced back to the level of 5 afterward.

        China Wood Imports (cited from China Bulletin)

        According to information released by Mucairen, there were 117,183 wagons of log and lumber imported from Russia to the Manzhouli port (border with Russia) in 2018, a decline of 13% over 2017.

        Furthermore, there were an estimated 7,300 wagons in total for both log and lumber that arrived in Manzhouli in January 2019, a decline of 20% compared with January 2018, the lowest volume in five years.

        Softwood lumber inventories at Taicang port and the surrounding area were 1.48 million cubic meters in late February 2019, up 370,000 cubic meters or 33% compared to last month. It was the second consecutive monthly increase. The inventory level of SPF was 500,000 cubic metres, a surge of 200,000 cubic metre, or 67% from last month.


        MLIT Streamlining Fire Regulations for Wooden Buildings

        fumotoBy Hidehiko Fumoto

        Deputy Director and Manager Technical Services, Canada Wood Japan

        June 5, 2019

        Posted in: Japan

        fire test

      • Full Scale 3-Storey Wooden School Building Fire Test on February 22, 2012 in TsukubaAs reported in this blog in August 2018, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) amended the Building Standard Law to streamline fire-related regulations for wooden buildings. One of the streamlined requirements was to allow mass timber to be visually exposed in midrise buildings. Another amendment was to allow the architects to design any wooden buildings as long as the building height is 16 m or less (Article 21 in BSL: Building Standard Law). The BSL used to require 1-hour quasi-fire resistive performance in case that the building height and the eaves height exceed 13 m and 9 m, respectively. The BSL amendments were announced in June 2018 and are going to be enacted in June of this year, after the MLIT releases the relevant enforcement orders and the notifications. It is anticipated that the demand and supply of wooden large-scale buildings are accelerated by these amendments.TwitterLinkedInSummary 2018 Non-Residential Construction Marketjapan non resCanada Wood Today | The Canada Wood GroupSummary Review of 2018 Japan Housing StartsshawnBy Shawn LawlorManaging Director, Canada Wood JapanApril 5, 2019

        Posted in: Japan

        In 2018 total housing starts declined 2.2% to 942,370 units. Wooden housing fell 1.1% to 539,394 units. As a percentage of overall housing, wooden homes increased to 57.2%, the strongest showing in over three decades. Of all housing, post and beam starts were the most resilient: falling 0.5% to 409,873 units. Non-wood others starts fell 3.0% to 284,103 units. Platform frame starts declined 2.6% to 116,988 units. Wooden prefab fell 5.8% to 12,533 units and total prefab fell 5.5% to 131,406 units. In terms of relative market share prefab housing fell half a percentage point and 2×4 housing was essentially stagnant at twelve and a half percent.

        In recent months, we’ve been seeing some strength in single family custom ordered and speculative housing starts as we lead up to the implementation of the consumption tax hike of 8% to 10% coming in October of this year. Market feedback is indicating that construction activity should pick up over spring and summer. The strength in single family housing is also leading to a recent slight increase in overall average wooden floor area. On the downside, the environment for wooden multi-family apartments has been challenging. One of the key things we are hearing is that in 2018 the Ministry of Finance implemented some tightening measures for regional lenders which is resulting in significantly higher mortgage down payments for property developers. These credit restrictions appear to be restraining multi-family starts and the issue could be with us for some time.

        Urban Regeneration, Led by Wood Frame Construction. – Completion of Korea’s Tallest Hybrid Wood Building

      • taiBy Tai JeongCountry Director, Canada Wood KoreaJune 5, 2019Posted in: Koreakorea clt
      • Urban regeneration is quickly becoming the most important core value and the best urban management method in Korea’s urban policies. In response to the rising demand for more urban buildings, the National Institute of Forest Science (NIFoS) introduces the wood frame construction to the city in order to set an example of how tall wood hybrid building can be part of the urban regeneration project for the improvement of declined or underdeveloped areas in the city.korea clt 2
        This recent completed 5-story project in Youngju-si Gyeongsangbuk-do, which is the tallest wood hybrid building in Korea was celebrated by NIFoS on March 23, 2019. The case for this project is driven by the significant environmental benefits that wood building can provide to create safe and livable space for urban residents.korea hybrid showcase
      • The wood structure of this building reaches 18 meters high with a 19.12 meters concrete core. The Korean Building Structure Code limits the maximum height of wooden buildings to eighteen meters at the ridge and fifteen meters at the eave. The rest of the above ground structural system of this building consists of reinforced concrete for core and CLT panels, Glulam posts and beam and I-joists for floor and non-load bearing wood frame infill walls. Under the current fire code, buildings between five and twelve stories are required to reach two-hour fire ratings for most of the main structural components of buildings. For the construction of this building, NIFoS successfully tested and achieved two-hour fire resistance rating for CLT wall and floor panels and glulam posts and beams.In a KBS broadcasting video, Dr. Kim Se-Jong from Institute of Forest Science said, “The building was exposed to 1,000 degrees of heat for 2 hours and the structure endured the environment.”“A special engineering technique was used to tackle the weight issue as the higher a building gets, the heavier it is. The new building is also found to be more earthquake resistant than steel-framed or reinforced concrete structures. Lumber’s elasticity disperses the force of impact, making wooden buildings more resistant to quakes.” Dr. Kim added.Another example includes the four-story research building constructed in Suwon, Gyeonggi-do. This research building was constructed for NIFoS’ use and it is Korea’s first modern and large scaled building entirely built with wood.NFOS
      • NIFoS has already announced a plan for building a ten-storey wood multi-unit dwelling by the year 2022, which will require amending the structural code to allow higher wooden buildings in Korea. The experience and knowledge gained and accumulated from this project will be instrumental for future wood building projects.TwitterLinkedInPrevious article  Next articleKorea Economy Updatetai
      • By Tai JeongCountry Director, Canada Wood KoreaApril 5, 2019Posted in: KoreaSouth Korea’s economy grew 2.7% in 2018, marking a six-year low amid sluggish investments, but its gross national income per capita, a gauge of the population’s purchasing power, exceeded the $30,000 mark for the first time – be more specific, $31,349, up 5.4% on-year.The latest figures are considered crucial for the South Korea economy amid the prolonged slow economic growth, as the $30,000 mark is generally considered an entry line for top-tier economies.
        South Korea ranked 9th in per capita GNI among countries with 20 million or more people, standing next to the US, Japan, Britain, France, Germany, Canada, Austria, and Italy.

        On GDP growth, facility investment fell to a nine-year low of 1.6% in 2018 as cooling global demand for semiconductors discouraged companies from expanding their factory lines.

        Construction investment tumbled 4% as the Seoul government has been making efforts to calm down the overheated housing market. The 4% drop marked the sharpest contraction since 1998 when the sector plunged 13.3% amid the Asian financial crisis.

        The construction sector retreated 4.2%, marking the first negative growth since 2012, while services rose 2.8% in 2018.

        Private spending rose 2.8%, the highest in seven years, while government spending jumped by an 11-year high of 5.6% in 2018 on its efforts to prop up the economy.

        Exports, which account for around 50% of the GDP, rose 4.2%, up from a 1.9% increase in 2017, while growth in imports slowed down to 1.7% from 7%.

        The exchange rate for Canadian Dollar averaged at 848.98 won in February 2019, down by 1.17% from 859.00 in February 2018 and slightly up by 0.76% from 842.59 in the previous month.


        Summary of Korean Housing Start

        taiBy Tai Jeong

        Country Director, Canada Wood Korea

        May 6, 2019

        Posted in: Korea

        Due to declining construction investment amid the ongoing government intervention to curb rising house prices and cool down the overheated housing market, South Korea’s housing starts for 2018 decreased 16% to 81,300 buildings and decreased 13.5% to 470,706 units.

        Housing permits in a number of buildings and units for 2018 also decreased by 15.3% and 15.2% respectively from a year earlier.

        korea housing starts comparisonIn 2018, the number of wood building starts and permits decreased by 15.1% and 26% respectively. This was due to the overall slowdown of the housing market together with the more stringent requirements for seismic design on small scale buildings and soundproof floor requirement in Dagagu house.korean wood building permits

      • Reflecting the market response to the government’s real estate regulations, the home purchase sentiment has dwindled to the lowest level in nearly six years. The Seoul’s Weekly Apartment Supply-demand Index stood at 73.2 as of Feb. 11.Note:
        Measured on a scale of 0 to  200, with 100 indicating neutral status, the index refers to the ratio of apartments available for transactionsTwitterLinkedInFor latest Canada Wood market summaries in Asia see this link, a rising star in wood exports
      • Friday, 2019-06-21 11:33:16
      • NDO – With its abundant potential in wood processing, Vietnam is emerging as a major exporter of finished wood products in the global wood market. However, the local wood industry is being challenged by shortages of imported materials which may affect its future exports. Thu Ha reports.Since early this year, Hoang Vinh Wood Processing JSC in the southern province of Binh Duong, which is Vietnam’s wood export hub, has been mobilising all its 500 employees to work at full speed to meet the company’s contracts signed with a partner from France, worth US$20 million. The contracts must be fulfilled by early next month.Last year, the firm reaped total export turnover of US$50 million, up 20% year-on-year, from some European and Asian markets.In its business strategy, this firm will likely establish a joint venture with a partner from the Republic of Korea (RoK). “If the joint venture is established, we will be able to boost our exports significantly,” the company’s director Nguyen Hoang Vinh told VIR. “Currently, both sides are in negotiations and we hope a deal will be reached by the third quarter of this year.”Nguyen Ton Quyen, vice chairman of the Timber and Forest Product Association of Vietnam (VIFORES), told VIR that many foreign firms are seeking to co-operate with Vietnamese firms, like the potential Korean partner of Hoang Vinh, to boost exports to their nations.

        “The wood industry’s export turnover has been rising strongly over the past few years, with US$7 billion in 2016, US$7.66 billion in 2017, and US$8.48 billion last year. Moreover, when Vietnam and the EU approve their shared Forest Law Enforcement, Governance and Trade Voluntary Partnership Agreement (FLEGT-VPA), Vietnam’s exports to the EU, one of its key export markets, will likely soar,” Quyen said.

        The FLEGT-VPA is aimed to help improve forest governance, address illegal logging and promote trade in verified legal timber products from Vietnam to the EU and other markets.

        Signed in October 2018, Vietnam and the EU are now working with each other towards taking the deal into effect this year.

        Rising star

        IMM Mission, funded by the EU and managed by the International Tropical Timber Organisation, stated, “Vietnam is emerging rapidly as a major player in international wood markets, both as an importer of wood materials and as a large exporter of finished wood products”

        Vietnam signed FLEGT-VPA early this year and this presents unique opportunities, IMM said.

        The IMM’s role is to use trade flow analysis and market research to independently assess trade and market impacts of VPAs in the EU and partner countries.

        EU imports from Vietnam consist almost entirely of wooden furniture, with trade in this commodity strengthening this year after a dip in 2017. The twelve-month rolling total for EU furniture imports from Vietnam increased from 220,000 metric tonnes at the end of 2017 to 232,000 metric tonnes in November 2018, according to the IMM.

        “Another potentially significant trend is that Denmark started to import larger volumes (up to 2,500 metric tonnes per month) of waste wood (for biomass energy) from Vietnam this year,” the IMM stated.

        During her recent working visit to Vietnam, Heidi Hautala, Vice President of the European Parliament, told VIR that after the VPA takes effect, it will turn Vietnam into a more attractive investment spot for European wood investment, which remains humbly now.

        “The VPA process and implementation will add to the confidence of European businesses in Vietnam’s business environment,” she said. “This will help Vietnam attract more investment from the EU, which is tending to increase now.”

        “Currently the European consumers and businesses have growing demand for imported wood products with fairly transparent production and origins,” she said. “This will further prompt European investors to come to Vietnam to both implement projects directly and co-operate with local partners in exports. I am seeing many European businesses making plans to expand business and investment into Vietnam.”

        Under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which took effect for Vietnam on January 14, 2019, and the Vietnam-EU Free Trade Agreement, which is expected to be signed soon, almost all import tariffs will be eliminated, offering great potential for Vietnam’s wood exports, and for foreign firms to come to Vietnam to invest in the wood industry.

        In 2018, Vietnam has about 3,200 enterprises engaging in exporting wood and wood products, including 529 foreign-invested enterprises which earned a total export turnover of nearly US$4 billion.

        “Not only foreign firms, but many local ones have also been performing very well, and have secured export orders until the end of the second quarter of this year,” Quyen said. “While enterprise production is improving, the global demand for Vietnam’s wooden products are strongly rising, focusing on key markets including the US, China, Japan and the RoK.”

        Last year, Vietnam’s wood exports turnover strongly increased from many markets, such as France (25.5%), Japan (16%), Malaysia (100%), the RoK (48%), and the US (17.5%).

        The US, Japan, China, and the RoK purchased over around 80% of Vietnam’s total wood exports.

        Nguyen Viet Vinh, Director of Vinh Hanh Furniture JSC in the south-central province of Binh Dinh, told VIR that this firm’s export turnover hit US$17 million last year – up about 18% over 2017. The figure is expected to be about US$10 million in the first half of 2019, up 20% year-on-year.

        “We expect the figure will be about US$20-22 million in this year. We will continue seeking more export markets, in addition to our existing markets of Japan and the US, so that we can reach our target of US$25-27 million by 2020,” Vinh said.

        VIFORES’s Quyen said many other firms are also performing very well in exports. For example, the export turnover of Nam Dinh Export Foodstuff and Agricultural Products Processing is expected to rise from US$50 million last year to nearly US$55 million this year. Meanwhile, many other firms like Tien Dat, Dai Thanh, Cancia Pacific, Hiep Long, Minh Phat and Phu Tai are also expected to reap export turnovers of US$30-50 million this year, up 10-15% year-on-year.

        Early this year, Prime Minister Nguyen Xuan Phuc said the wood industry has grown by over 800% over the past 10 years. He ordered it to reach an export turnover of over US$11 billion worth of wood and forestry products in 2019.

        Shortages of materials

        However, one of the biggest challenges facing Vietnam’s wood industry is the upcoming shortages of imported material supplies, which will affect the country’s future wooden exports.

        Currently, Vietnam must largely depend on foreign supplies to ensure its local production. Annually, it spends US$1.7-1.8 billion importing timber materials, which are largely from Laos (60% of round and sawn timber – the main timber for production), Cambodia (70% of precious timber), Papua New Guinea, and Africa.

        According to a wood industry report from VIFORES, Handicraft and Wood Industry Association of Ho Chi Minh City, and Forest Products Association of Binh Dinh, Vietnam will face major shortages of timber materials from these markets.

        For example, Laos, which used to export nearly one million cubic metres (m3) of round timber to Vietnam annually, has stopped exporting timber materials since May 2017.

        The policy has almost curbed all timber supplies from Laos for Vietnam. The volume of round timber has reduced from 322,000 m3 in 2015 to 36,000 m3 in 2016, and 6,000 m3 in the first half of 2017.

        In another case, Cambodia’s government is planning to more strictly control the country’s timber exports.

        According to the report, timber supplies from Papua New Guinea and Africa are facing issues regarding timber quality and legality, which are also affecting Vietnam’s wood processing and exports.

        Hoang Vinh Wood Processing JSC is also suffering from wood materials. “We are trying to find new sources from EU. Though if the new sources offer at higher prices, we will have to accept, meaning that we may have to increase product prices,” said this firm’s director Vinh.

        VIFORES’s Quyen said his association and businesses have been working with many partners in the US, France, Finland, some other EU nations, Japan, and New Zealand about wood material supplies.

        “These are Vietnam’s new wood material suppliers. They even come to Vietnam to seek supplying contracts. Despite higher prices, materials from these markets have higher quality and clearer origins,” Quyen said.

        Price drops in China for logs, decrease less in India. Some export sawn timber products suffering big price drops. Local market remains very stable

      • scott17th Jun 19, 9:16amby Scott DownsNew Zealand lumber
      • The CFR sale prices for New Zealand logs in China has dropped -US$4 to -US$6 over the last month, with A grade logs now selling at around US$130 per JASm3.The weakening of the NZD against the USD through May somewhat buffered the drop for the June At Wharf Gate (AWG) prices offered to log suppliers at NZ ports. The average drop in AWG prices was -US$5-6 per JASm3. The Chinese Yuan (CNY) has recently stabilised against the USD providing some relief to the Chinese log buyers. The NZD however has recently strengthened against the USD, and if this continues will have an adverse effect on July AWG prices.The markets for sawn timber produced by New Zealand mills has not changed from last month. The large Clear1 grade boards are selling well in Europe and parts of the US, but there is too much volume of the smaller Clear2 grade and knotty grades in Asia. Volume is still moving but at much lower prices.The domestic market for sawn timber remains very stable.

        Due to the drop in the AWG log prices the PF Olsen Log Price Index for June decreased -$2 to $128. The index is currently $1 below the two-year average, $2 above the three-year average, and $10 higher than the five-year average.

        Domestic Log Market

        Log Supply and Pricing

        Prices for domestic log sales in June are mostly unchanged from May as we move to the end of Quarter 2. Most mills anticipate some relief in log prices in Quarter 3 due to the lower export log prices. Most mills will start to get more discerning over the quality of log they receive as the economic returns between the sawn timber grades is widening. The larger pruned and structural grades are selling well but marketing the rest of the log is a struggle.

        The domestic market for sawn timber has remained stable with settled weather through May. The start of the winter season will see demand drop in some sectors. We are seeing more finger joint, mouldings and other remanufactured products being imported from China and this will place pressure on supply.

        Export Log Markets


        Total softwood log stocks across China have reduced slightly from last month to around 3.8 million m3. Daily uplift from the ports is averaging about 78,000 m3 per day so demand is still reasonably healthy. Construction activity in China has started to slow with the start of the hottest months of June and July.  Most industry commentators expect the China government to introduce some stimulation spend into the construction market, but it will take a few months before the effect is felt in the log market.

      • china softwood by region
      • The CFR sale prices for pine logs in China dropped a further -US$4-6 through May and the A grade sale price is now around US$130 per JASm3.Supply of softwood logs from other countries continues to reduce. Logs from the US have been hit with further tariffs of up to 25% introduced by China’s Ministry of Finance on June 1st within the Harmonized Tariff Schedule (HMS). The Southern Yellow Pine (SYP) from the South East of the US had already significantly reduced and is now just a trickle of container volume. There has been more volume from the Pacific North West, but this is now expected to slow considerably.Many harvesting operations in South America have stopped and this will also reduce softwood supply into China. Current stocks in China are being heavily discounted in an effort to move this stock before the hot sticky season in China. The smaller sized South American softwood logs are more perishable than the New Zealand pine logs.India

        The Indian market for New Zealand pine logs has held up better and not completely followed the China CFR trend. The CFR price for ‘A grade’ New Zealand pine logs is US$147 to US$150 per JAS m3. The INR has traded consistently between Rs 69.4 to RS 70.0 for 1 USD. Domestic prices for sawn New Zealand  pine are Rs 511/CFT in Kandla and Rs 511/CFT in Tuticorin. Demand is lower in Tuticorin.

        Low inventories due to low volume of shipment from New Zealand to India has kept the market price relatively firm. In March, April and May only three break bulk vessels per month were shipped. The arrival of a vessel with Uruguay pine is expected around mid-June, and there is a bit of anxiety around penalty on fumigation on arrival and the quality of the cargo.

        South African pine is consistently supplied at 10,000 m3 per month in containers between Kandla, Tuticorin and Calcutta. It is priced at US$135 per tonne for P40 (pruned with a 40 cm small end diameter) and US$135 per tonne for A Grade. Due to problems of fungus and log quality it does not have a significant impact on the New Zealand pine log market.

        SYP from the US is holding at US$123 for 12” minimum and US$118 for 10” minimum.

        The previous government was re-elected with a resounding majority and that significantly reduced any potential for market volatility. It should augur well for the construction sector as many of the projects and initiatives of the government can continue unabated. The Indian Government is also expected to announce initiatives to lure Foreign Institutional Investors (FIIs) into real estate and the construction sector to boost the economy.

        The only macroeconomic negative is that the recent Indian GDP growth figures of 5.8% are much lower than the expected 6.5%. The banking industry corrections with tougher rules around availability of bank funding for business has had an impact. One of the major log exporters of New Zealand pine to India, Aubade New Zealand Ltd, believe that the correction phase is almost completed, and the coming year should see better business prospects. The Indian Reserve Bank is reducing the key policy rate to spur domestic growth and private investment and the results will be visible in the second half of this year. They predict public sector banks will adopt a more conservative less helpful approach whereas private banks will step-up to lend to businesses.

        Exchange rates

        The New Zealand Dollar (NZD) weakened against the United States Dollar (USD) through May and this partially buffered New Zealand forest owners from the falling CFR log prices in China. The NZD has recently strengthened against the USD. As stated last month and worth reiterating, how the NZD and the CNY fare against the USD over the next couple of months will have a significant impact on AWG prices at New Zealand ports.

      • FX NZ-CN-USOcean FreightOcean freight rates from New Zealand to China have increased +US$2-3 for vessels on shorter term charter. Congestion at New Zealand ports is adding costs of up to +US$2-3 per JAS m at times. There is often 6-8 log vessels waiting at Tauranga Port for a berth. Freight rates to India have been relatively stable with rates holding at US$34-36 per JAS m3.
      • baltic handysize
      • Source: Investing.comThe bunker prices have also peaked and show a downward trend, with a slight recent increase.Singapore Bunker Price (IFO380) (red line) versus Brent Oil Price (grey line)
      • Singapore bunker price
      • The Baltic Dry Index (BDI) is a composite of three sub-indices, each covering a different carrier size: Capesize (40%), Panamax (30%), and Supramax (30%). It displays an index of the daily USD hire rates across 20 ocean shipping routes.  Whilst most of the NZ log trade is shipped in handy size vessels, this segment is strongly influenced by the BDI.The graph of the BDI over the last year below shows the recent increase in the BDI. (The handysize is about 35% of the global shipping fleet). As mentioned in Wood Matters last month this increase in the BDI is an indication that raw materials are growing in demand around the world, but not in the handysize vessels that are predominantly used to cart logs.

    BDIDue to the drop in the AWG log prices the PF Olsen Log Price Index for June decreased $2 to $128. The index is currently $1 below the two-year average, $2 above the three-year average, and $10 higher than the five-year average.PF olsen

    • Basis of Index: This Index is based on prices in the table below weighted in proportions that represent a broad average of log grades produced from a typical pruned forest with an approximate mix of 40% domestic and 60% export supply.
    • Taiwan Economic OutlookJune 18, 2019

      Growth decelerated slightly in Q1, following Q4 2018’s already feeble showing. Weaker domestic demand was behind the print, as private consumption growth ticked down while government consumption contracted. On the flipside, investment growth picked up thanks to a solid rebound in private investment. Meanwhile, though export growth slowed, imports decelerated faster, leading to an improved contribution to headline growth. Looking at Q2, PMI data for April-May suggests the manufacturing sector remains weak amid low tech demand and the shadow of the trade war. This is confirmed by a further contraction of export orders in April and of exports in May, indicating external sector weakness will likely continue beyond Q2. Moreover, Taiwan is very vulnerable to potential U.S. tariffs on Chinese tech products, even though it could benefit somewhat from manufacturing firms repatriating production from mainland China. (Please note that I clipped the tables out of this article to reduce the length. If you want to see the tables, please refer to: 

      Taiwan Economic Growth

      Growth will likely slow this year due to trade uncertainty and lower tech demand. The possible imposition of U.S. tariffs on Chinese tech imports is a key downside risk as Taiwan is heavily involved in the Chinese electronics supply chain. Nevertheless, public infrastructure investment, coupled with low unemployment and inflation, should support domestic dynamics. Focus Economics panelists forecast GDP growth of 2.0% in 2019, which is down 0.1 percentage points from last month’s forecast, and 2.0% again in 2020.

    • taiwan econ data
    • taiwan econ data 2
    • FDI flows into emerging markets fall to lowest levels since 1990sSlowing globalization and weaker economic growth blamed for pullback

      FDI flows

    • Foreign direct investment in emerging markets has plunged to its lowest level this century as mounting trade tensions build on weakening economic growth in the developing world.FDI, which involves buying companies and building new facilities, fell to just 2 per cent of gross domestic product across emerging and frontier markets last year, according to the Institute of International Finance, which tracks cross-border capital flows. This compares with a peak of 4.4 per cent in 2007, immediately prior to the global financial crisis, as the first chart shows.

      non res FDI

    • The trend, which could further sap weakening economic growth in emerging markets, plays into a narrative of declining globalization at a time when growth in global trade is also juddering to a halt.“FDI fell particularly strongly last year as trade policy uncertainty escalated, but also as part of a broader retrenchment of all types of capital flows in the context of the spike of risk aversion, especially in the fourth quarter,” said Guillermo Tolosa, economic adviser at Oxford Economics, a consultancy.

      flagging direct investment

    • Murat Ulgen, global head of emerging market research at HSBC, who forecast FDI flows would tumble to just 1.5 per cent of EM GDP this year, added: “Given the lingering concerns about global economic activity on the back of rising trade tensions, FDI flows are likely to remain weak in 2019.”Sergi Lanau, deputy chief economist at the IIF, believed a series of factors had conspired to cause a “secular decline” in FDI in emerging markets since the financial crisis, whether measured in traditional terms or in “true” terms — stripping out reinvested earnings to focus on “new” investment flows — a metric the IIF prefers, illustrated in the second chart.


      First, rising commodity prices boosted investment in mining FDI, “which in some countries accounts for a very large share of total FDI,” in the immediate aftermath of the crisis. However, this has fallen back, in line with commodity prices.

      Second, Mr Lanau said the 2000s “were a period of strong growth for developed market banks, which invested heavily in subsidiaries in EM”. However, “the world looks very different now for banks,” he added.

      Third, significant house price increases in emerging markets between 2003 and 2007 led to a rise in real estate based FDI, “a major category in many countries”.

      True FDI also in decline

    • All three factors “have a lot to do with a period of exuberant asset prices across the board in the run-up to the global financial crisis,” Mr Lanau said, while “years of quantitative easing and low interest rates have encouraged hot money flows to EM,” giving an advantage to portfolio investment over FDI.“It is not clear to me that these factors are set to reverse any time soon. If anything, growing trade tensions and nationalist political forces around the world will make a turnaround in FDI to EM more difficult,” he added.

      Mr Tolosa argued there was a strong correlation between FDI inflows into emerging markets and the degree to which EM economic growth outstrips that of the developed world, a differential that has tumbled from 6.1 percentage points in 2009 to just 2.3 points last year, shown in the third chart.

  • Well thanks for wading through this quarterly news blog sampling The Donald Parallel Universe-Happy Summer Everyone!
  • trump

First Quarter 2019 Economic and Wood Product News

The steam has gone out of globalization

A new pattern of world commerce is becoming clearer—as are its costs

global snail

Print edition | Leaders

Jan 24th 2019

WHEN AMERICA took a protectionist turn two years ago, it provoked dark warnings about the miseries of the 1930s. Today those ominous predictions look misplaced. Yes, China is slowing. And, yes, Western firms exposed to China, such as Apple, have been clobbered. But in 2018 global growth was decent, unemployment fell and profits rose. In November President Donald Trump signed a trade pact with Mexico and Canada. If talks over the next month lead to a deal with Xi Jinping, relieved markets will conclude that the trade war is about political theatre and squeezing a few concessions from China, not detonating global commerce.

Such complacency is mistaken. Today’s trade tensions are compounding a shift that has been under way since the financial crisis in 2008-09. As we explain, cross-border investment, trade, bank loans and supply chains have all been shrinking or stagnating relative to world GDP (see Briefing). Globalization has given way to a new era of sluggishness. Adapting a term coined by a Dutch writer, we call it “slowbalisation”.

The golden age of globalization, in 1990-2010, was something to behold. Commerce soared as the cost of shifting goods in ships and planes fell, phone calls got cheaper, tariffs were cut and the financial system liberalized. International activity went gangbusters, as firms set up around the world, investors roamed and consumers shopped in supermarkets with enough choice to impress Phileas Fogg.

Globalization has slowed from light speed to a snail’s pace in the past decade for several reasons. The cost of moving goods has stopped falling. Multinational firms have found that global sprawl burns money and that local rivals often eat them alive. Activity is shifting towards services, which are harder to sell across borders: scissors can be exported in 20-ft  containers, hair stylists cannot. And Chinese manufacturing has become more self-reliant, so needs to import fewer parts.

This is the fragile backdrop to Mr Trump’s trade war. Tariffs tend to get the most attention. If America ratchets up duties on China in March, as it has threatened, the average tariff rate on all American imports will rise to 3.4%, its highest for 40 years. (Most firms plan to pass the cost on to customers.) Less glaring, but just as pernicious, is that rules of commerce are being rewritten around the world. The principle that investors and firms should be treated equally regardless of their nationality is being ditched.

Evidence for this is everywhere. Geopolitical rivalry is gripping the tech industry, which accounts for about 20% of world stock markets. Rules on privacy, data and espionage are splintering. Tax systems are being bent to patriotic ends—in America to prod firms to repatriate capital, in Europe to target Silicon Valley. America and the EU have new regimes for vetting foreign investment, while China, despite its bluster, has no intention of giving foreign firms a level playing-field. America has weaponized the power it gets from running the world’s dollar-payments system, to punish foreigners such as Huawei. Even humdrum areas such as accounting and antitrust are fragmenting.

Trade is suffering as firms use up the inventories they had stocked in anticipation of higher tariffs. Expect more of this in 2019. But what really matters is firms’ long-term investment plans, as they begin to lower their exposure to countries and industries that carry high geopolitical risk or face unstable rules. There are now signs that an adjustment is beginning. Chinese investment into Europe and America fell by 73% in 2018. The global value of cross-border investment by multinational companies sank by about 20% in 2018.

The new world will work differently. Slowbalisation will lead to deeper links within regional blocs. Supply chains in North America, Europe and Asia are sourcing more from closer to home. In Asia and Europe most trade is already intra-regional, and the share has risen since 2011. Asian firms made more foreign sales within Asia than in America in 2017. As global rules decay, a fluid patchwork of regional deals and spheres of influence is asserting control over trade and investment. The European Union is stamping its authority on banking, tech and foreign investment, for example. China hopes to agree on a regional trade deal this year, even as its tech firms expand across Asia. Companies have $30 trillion of cross-border investment in the ground, some of which may need to be shifted, sold or shut.

Fortunately, this need not be a disaster for living standards. Continental-sized markets are large enough to prosper. Some 1.2 billion people have been lifted out of extreme poverty since 1990, and there is no reason to think that the proportion of paupers will rise again. Western consumers will continue to reap large net benefits from trade. In some cases, deeper integration will take place at a regional level than could have happened at a global one.

Yet slowbalisation has two big disadvantages. First, it creates new difficulties. In 1990-2010 most emerging countries were able to close some of the gap with developed ones. Now more will struggle to trade their way to riches. And there is a tension between a more regional trading pattern and a global financial system in which Wall Street and the Federal Reserve set the pulse for markets everywhere. Most countries’ interest rates will still be affected by America’s even as their trade patterns become less linked to it, leading to financial turbulence. The Fed is less likely to rescue foreigners by acting as a global lender of last resort, as it did a decade ago.

Second, slowbalisation will not fix the problems that globalization created. Automation means there will be no renaissance of blue-collar jobs in the West. Firms will hire unskilled workers in the cheapest places in each region. Climate change, migration and tax-dodging will be even harder to solve without global co-operation. And far from moderating and containing China, slowbalisation will help it secure regional hegemony yet faster.

Globalization made the world a better place for almost everyone. But too little was done to mitigate its costs. The integrated world’s neglected problems have now grown in the eyes of the public to the point where the benefits of the global order are easily forgotten. Yet the solution on offer is not really a fix at all. Slowbalisation will be meaner and less stable than its predecessor. In the end it will only feed the discontent.

For more on slowbalisation, listen to The Economist Asks, our weekly podcast.

Cause for concern? The top 10 risks to the global economy 2019

A report by The Economist Intelligence Unit

chess play

© The Economist Intelligence Unit Limited 2019

The outlook for the global economy is worsening. Given concerns over slowing growth in key economies, including China and the EU, and the wider impact of a trade war between the US and China, The Economist Intelligence Unit expects global growth to decelerate from 2.9% in 2018 to 2.8% in 2019 and 2.6% in 2020. However, even when taking into account this downbeat assessment, there remain a number of risks emanating from three key areas that could drive growth even lower than we
currently forecast in 2019-20.

First, geopolitical uncertainty is on the rise and will remain a source of significant risk, potentially impacting trade, financial markets and the oil sector. The impact of the increase in populist and nationalist leaders in recent years has yet to become fully apparent; however, it has already contributed to growing protectionist sentiment that could escalate and widen the current US-China trade war, with a damaging effect on the global economy. On top of slowing global growth and rising geopolitical
uncertainty, there are also significant vulnerabilities in large economies—including sizeable debt burdens in China, the US and Italy, among others—and also in emerging markets, which are, in some cases, highly exposed to global trade and capital flows. If badly managed, these frailties have the potential to significantly accentuate any downturn as the global economy cools.

Lastly, a longer-term shift in global power dynamics, particularly regarding the rise of China in competition with the US, ensures that security risks continue to threaten global economic stability. Moreover, while there remain long-standing territorial disputes and conventional military threats, the security landscape continues to develop, as technological innovation adds new dimensions and more complex requirements. With various sources of risk in play, policymakers and businesses attempting to
operate in such an uncertain environment will need to devote greater resources to contingency plans,which in itself is likely to constitute a drag on global growth.

In the latest edition of this report, we offer a snapshot of our risk-quantification abilities by identifying and assessing the top ten risks to the global political and economic order. Each of the risks is outlined and rated in terms of its likelihood and its potential impact on the global economy. We also provide operational risk analysis on a country-by-country basis for 180 countries through our Risk Briefing, and detailed credit risk assessments on 131 countries via our Country Risk Service. Together,
these products enable our clients to anticipate and plan for the main threats to their organisations,supply chains and sovereign creditors. We offer robust risk modelling, scenario analysis and daily events scanning for the threats and opportunities that abound in today’s global economy.

Global Risks in order intensity

Global Risks in order intensity 2

A US-China trade conflict morphs into a full-blown global trade war

Moderate risk; Very high impact;

Risk intensity = 15

China and the US have started negotiations to resolve the current trade dispute, and the US government has decided to suspend further increases in tariffs on US$200bn-worth of Chinese goods. Talks are likely to yield a limited trade deal—involving Chinese purchases of US agricultural and energy products, but with only broad commitments to domestic economic reform, particularly over structural issues, including technology transfer and intellectual property. While this will avoid an escalation in tensions for now, a full-blown trade war between the US and China remains a significant risk to the global economy, owing mainly to the fact such a deal will lack the necessary enforcement measures to ensure Chinese commitment to the structural reforms demanded by US negotiators. Moreover, beyond bilateral protectionism, there remains a risk that trade conflicts will escalate on additional fronts in the coming years, to the extent that global trade could actually decline, with major knock-on effects for inflation, business sentiment, consumer sentiment and, ultimately, global economic growth. Currently, the most immediate risk emanates from threats by the US president, Donald Trump, to impose additional tariffs on imports of EU cars, which would result in a broader trade conflict as the EU attempts to defend its interests. However, there are further related risks. Given rising negative sentiment over national security concerns from countries such as Germany, the UK, Canada and Australia towards Chinese network providers such as Huawei, there is a risk that a number of additional countries could be dragged into a technology trade war, with international companies’ supply chains disrupted by split global network coverage. As global growth slows, this scenario could also be triggered if a number of countries were to decide to impose broad-based import tariffs and subsidize local industries in order to combat international protectionism. In either of these cases, we would expect global trade to shrink, inflation to rise, consumers’ purchasing power to fall, investment to stagnate and global economic growth to slow.

Trade Risks

US corporate debt burden turns downturn into a recession

Moderate risk; High impact;

Risk intensity = 12

Falling consumer sentiment and manufacturing activity indicators highlight the worsening outlook for the US economy as it faces the effects of a trade war with China, the impact of a lengthy government shutdown in December-January and an eventual turn in the business cycle. Nonetheless, the economy’s fundamentals remain fairly robust, with economic growth at an estimated 2.9% in 2018, and inflation slowing to 1.9% year on year in December, despite gradually rising wage growth. In addition, the Federal Reserve (the central bank) moved to a more cautious approach to monetary policy in early 2019. Therefore, although we expect economic growth to slow to 2.3% in 2019 and to just 1.5% in 2020, our central forecast is that the US will avoid a damaging recession in 2019-20. However, along with a number of external headwinds, such as the trade war and slowing growth in Europe, domestic financial sector vulnerabilities could make the downturn much deeper than we currently expect. Fueled by a prolonged period of ultra-low interest rates, corporate debt as a percentage of GDP has surged to just under 47%, higher than the previous peak during the global financial crisis in 2008-09. In addition, the quality of this debt has fallen, with over half of US corporate debt rated BBB—the lowest investment grade—and about 60% of loans were issued without maintenance covenants in 2018. As a result, a downturn could lead to an increasing number of firms cutting investment and hiring, while also struggling to meet debt repayments, as their profits decline and as ratings agency downgrades lead investors to withdraw funding to corporations. In this scenario, a US recession would greatly exacerbate a global slowdown, with countries affected by declining US demand for goods and weakening investment.

Us Corporrate Investment grade

Contagion spreads to create a broad-based emerging-markets crisis

Moderate risk; High impact;

Risk intensity = 12

Many emerging markets suffered currency volatility in 2018, primarily as a result of US monetary tightening and the strengthening US dollar. In a few instances, such as Turkey and Argentina, a combination of factors, including external imbalances, political instability and poor policy making, led to full-blown currency crises. More recently, however, the pressure on most emerging markets’ capital accounts has eased, as the US Federal Reserve has adopted a more cautious monetary policy stance. Nonetheless, market sentiment remains fragile, and pressure on emerging markets as a group could re-emerge if market risk appetite deteriorates further than we currently expect. One trigger for this could be if a number of major emerging markets were to fall into crisis, either through domestic issues and/or the impact of external pressures such as the US-China trade war. Indeed, several are already at risk, including Brazil, Mexico and South Africa. Alternatively, investors could flee emerging markets if the recent currency crises in Argentina and Turkey escalate into full-blown banking crises as the rising value of foreign-currency debt leads to defaults (although this appears unlikely). In this scenario, capital outflows from emerging markets could become more indiscriminate and severe, forcing countries with external imbalances to make painful adjustments, with the most vulnerable falling deep into crisis. Emerging-market GDP growth would fall sharply as a result, weighing on the global economy.

emerging markets exchge

China suffers a disorderly and prolonged economic downturn

Low risk; Very high impact;

Risk intensity = 10

In China, a shift towards looser macroeconomic policy settings is under way as a result of the escalating trade conflict with the US. This will support domestic demand in the short term, but in the process previous goals of lowering unsold housing stock and corporate deleveraging are receiving less emphasis. There is a risk that, in the government’s efforts to support the economy, policy missteps will be made. The stock of domestic credit remained at over 230% of GDP at the end of the third quarter of 2018, a major vulnerability. Although it is likely that the authorities would make every effort to prevent a funding crunch in any bank, even a hint of banking sector distress could cause problems, given the boom in debt over recent years. Resolving these issues, particularly as the trade conflict with the US also weighs on economic activity, could prove challenging, forcing the economy into a sudden downturn. The bursting of credit bubbles elsewhere has usually been associated with a sharp deceleration in economic growth and, if this were accompanied by a house-price slump, the government might struggle to maintain control of the economy—especially if a slew of small and medium-sized Chinese banks, which are more reliant on wholesale funding, were to falter. If the Chinese government were unable to prevent a disorderly downward economic spiral, this would lead to much lower global commodity prices, particularly in metals. This, in turn, would have a detrimental effect on the Latin American, Middle Eastern and Sub-Saharan African economies that had benefited from the earlier Chinese-driven boom in commodity prices. In addition, given the growing dependence of Western manufacturers and retailers on demand in China and other emerging markets, a disorderly slump in Chinese growth would have a severe global impact—far more than would have been the case in earlier decades.

Supply shortages lead to a globally damaging oil-price spike

Low (Medium?) risk; High impact;

Risk intensity = 8

Market fears of oil-supply shortages have eased since the US granted six-month sanction waivers to eight of the key purchasers of Iranian oil in December. Along with higher output from Saudi Arabia and Russia, and global growth concerns, this has caused the price of dated Brent Blend to fall to close to US$60/barrel, compared with highs of over US$80/b in September. However, the risk of major supply disruptions remains. Should the US manage to crack down efficiently on Iran’s “ghost tankers” and also strike deals with other importers to switch their supplier bases away from Iran once the waivers have expired, Iran’s oil exports could drop well below the 1.2 million barrels/day that we currently expect in 2019-20. To combat this, Saudi Arabia and Russia have the capacity to ramp up supply, and US shale production could also fill the gap. However, as spare production capacity is used up to cover Iranian cuts, it will become more difficult to cover a sudden and sizeable cut to supply elsewhere, particularly in volatile countries such as Libya and Venezuela. As a result, prices could soar to well above the US$80/b seen in 2018, with producers unable to increase output sufficiently to put a lid on price rises. Such a scenario would push up inflation and weigh on global growth.

brent oil price

Territorial or sovereignty disputes in the South or East China Sea lead to an outbreak of hostilities

Low risk; High impact;

Risk intensity = 8

The national congress of the Chinese Communist Party in October 2017 was a milestone in terms of China’s overt declaration of its pursuit of great-power status, setting the goals for China to become a “leading global power” and have a “first-class” military force by 2050. The president, Xi Jinping, is keen to develop China’s global influence, probably sensing opportunity during a period of US retrenchment. How China intends to deploy its expanding hard-power capabilities in support of its territorial and maritime claims is a source of growing concern for other countries in the region. In the South China Sea the sovereignty of a number of islands and reefs is in dispute. Several members of the Association of South-East Asian Nations (ASEAN) have sought to strengthen their own maritime defense capabilities amid increasingly aggressive moves by China to place military hardware on the disputed territories. A partial abdication of US leadership of global affairs could embolden China to exert its claimed historical rights in the South China Sea. Distinct possibilities include an acceleration of China’s island reclamation measures and the declaration of a no-fly zone over the disputed region. There is also a risk that an emboldened Mr Xi will step up his government’s efforts to unify Taiwan with mainland China, with the president having previously noted that the cross-Strait issue was one that could not be passed “from generation to generation”. Were military clashes to occur over any of these issues, the global economic consequences would be significant, as regional supply networks and major sea lanes could be disrupted.

disputed island groups

Cyber-attacks and data integrity concerns cripple large parts of the internet

Moderate risk; Low impact;

Risk intensity = 6

Public, corporate and government faith in the internet as a source for global good is under strain. Revelations of major data breaches across a range of social media, and the use of that data for propaganda, are likely to see social media companies facing tighter regulation in the coming years. Meanwhile, cyber-attacks continue apace. In March 2018 the US blamed Russia for a cyber-attack on its energy grid. At a similar time there was a sustained attack on German government networks. Although these attacks have been relatively contained so far, there is a risk that their frequency and severity will increase to the extent that corporate and government networks could be brought down or manipulated for an extended period. Cyber-warfare covers a broad swathe of varying actors, both state-sponsored and criminal networks, as well as differing techniques. Recent data breaches and cyber-attacks could well be part of wider efforts by state actors to develop the ability to cripple rival governments and economies, and include efforts to either damage physical infrastructure or gain access to sensitive information as a means to influence democratic processes. These breaches of security have shaken consumer faith in the security of the internet and threaten to put at risk billions of dollars of daily transactions. Were government activities to be severely constrained by an attack or physical infrastructure damaged, the impact on economic growth would be even more severe.

cyber attacks

There is a major military confrontation on the Korean peninsula

Very low risk; Very high impact;

Risk intensity = 5

There was a pick-up in diplomatic activity on the Korean peninsula in 2018, peaking with a historic summit in June between Mr Trump and the North Korean leader, Kim Jong-un, in Singapore. Decades of carefully planned approaches between the US and North Korea have failed, but there is a glimmer of hope that a more improvised and personal approach by two unorthodox leaders could make progress, with a second meeting between the two scheduled for late February. However, we maintain the view that there are irreconcilable differences between the US and North Korea on both the pace and the breadth of denuclearization. Although recent statements by the US Department of State have hinted at a slight easing of demands for complete, verifiable and irreversible denuclearization by 2020—the end of Mr Trump’s term—US goals nevertheless remain significantly at odds with the North’s long-term commitment to its nuclear programme. Any realistic denuclearization (which would be a step-by-step programme) would require 1020 years of sustained engagement. Such levels of bilateral trust are unlikely to be achieved under the current administration. Our core forecast is that the US will eventually be forced to revert to a containment strategy. However, should the diplomatic talks fall apart, the Trump administration could see this as justifying a more aggressive stance, including strategic strikes on the North. This option has been publicly favored by some of Mr Trump’s close advisers, such as John Bolton, the national security adviser, who was at the summit on June 12th with Mike Pompeo, the secretary of state. Under such a scenario, North Korea would almost certainly retaliate with conventional weaponry and, potentially, short-range nuclear missiles, bringing devastation to South Korea and Japan, in particular, at enormous human cost and entailing the destruction of major global supply chains.

conflict risak magnitude

Political gridlock leads to a disorderly no-deal Brexit

Low (medium?) risk; Low impact;

Risk intensity = 4

Although a withdrawal agreement between the EU and the UK was finalized at an EU summit on November 25th, it was initially rejected by UK members of parliament in a vote in mid-January, and only received parliamentary backing in a later vote on condition that the Irish border backstop be renegotiated. (The backstop stipulates that the UK would remain in a customs union with the EU indefinitely should a trade agreement preserving an open Irish border not be found.) However, the EU has so far rejected any reopening of withdrawal agreement negotiations. With so little room for maneuver before the March 29th deadline, we think that the UK prime minister, Theresa May, will be forced to delay Brexit by requesting an extension of the Article 50 window. The alternative would be to crash out of the EU without a withdrawal agreement and transition arrangements in place, which the government and parliament would wish to avoid. Were a no-deal Brexit to occur, we would expect this to trigger a sharp depreciation in the value of the pound and a much sharper economic slowdown in the UK than we currently forecast. In addition, the EU has indicated that under a no-deal scenario it would treat the UK as a “third country”, leading to tariffs, border checks and border controls, a stance that the UK would probably respond to in kind. Although some contingency plans have been made, the hit to UK and EU trade and investment under a disorderly no-deal scenario is likely to go beyond just the negative impact on EU economies and prove sizeable enough to dent global economic growth.

govt impact assessment

Political and financial instability lead to an Italian banking crisis

Low (medium?)risk; Low impact;

Risk intensity = 4

After growth in the preceding 14 quarters, the Italian economy contracted in both of the final quarters of 2018, constrained by a mixture of domestic political and economic uncertainty, tightening liquidity conditions and the worsening global trade outlook. In the light of this, we expect real GDP growth to slow from 0.8% in 2018 to just 0.2% in 2019. There is, however, a risk of a much deeper recession should investor confidence lead to another spike in bond yields. Triggers for this could include an early general election being called, following the possible splintering of the fragile governing coalition, or another budget stand-off (we expect weak economic growth to result in a much larger budget deficit than the stipulated 2% limit agreed with European Commission). With government debt already at over 130% of GDP, and a significant amount still held by domestic banks, this could, in turn, lead to a banking crisis, given the already-weak state of the country’s banks. As Italy is Europe’s third-largest economy, such a scenario would weigh on the region’s overall GDP growth, risk contagion to other European banks holding Italian assets and lead to volatility in global financial markets.

Italy debt

Canadian lumber makes inroads in Huzhou, China

alex wu

By Alex Wu

Wood in Manufacturing, CW China

March 5, 2019

signing ceremony

A Sino-Canadian timber co-operation event organized by Canada Wood China was held on January 23, 2019 in Huzhou City of eastern China’s Zhejiang Province. The goal was to help the city diversify its wood sourcing channels amid a bruising U.S.-China trade war.

Canada, as one of the world’s largest lumber producers and exporters, boasts abundant timber resources that can be used in both industrial building and manufacturing. Canadian lumber provides a big opportunity for timber companies in Huzhou as they seek new trade partners since China announced an additional 10 percent tariff on imported wood products and logs from the United States in September 2018 as a response to Washington imposing new tariffs on Chinese goods.

The matchmaking event attracted 58 people, including Katrin Spence, vice chancellor of the Consulate General of Canada in Shanghai; representatives from wood associations (including Canada Wood China and the Quebec Wood Export Bureau); Canadian wood suppliers like Interfor and Canfor, as well as wood materials and production companies in Huzhou.

The event came after Canada Wood China worked for months with its two partners, the China Council for the Promotion of International Trade (CCPIT) Huzhou Committee and the Canadian Consulate General in Shanghai.

The CCPIT Huzhou signed co-operation agreements with Canada Wood China and the Quebec Wood Export Bureau during the event. The deals are designed to enhance communication and promote trade activities between companies in Huzhou city and Canada.

The majority of Huzhou’s wood imports are from North America. In the first 11 months of 2018, imported wood products from the United States were valued at around 662 million yuan (CAD$130 million), accounting for 33.5 percent of the city’s total wood imports.

Chongqing Yuanlu Community Center nabbed International Design Award

lance tao

By Lance Tao

Director of Communications, Canada Wood Shanghai

March 8, 2019

Posted in: China

Chongqing Yuanlu Community Centre (Click here for gallerydesigned by Jie Lee from Challenge Design, won the International Design Award on March 4. The news was announced at the 15th annual Wood Design Awards ceremony held by the organizer, WoodWORKS! BC at the Vancouver Convention Centre. A total of 10 projects from China running under this category were shortlisted in the final award.

The project, sitting next to Longxing Ancient Town in southwestern China’s Chongqing, consists of three buildings of different sizes side-by-side on the hillside. Wood is used in the Chongqing Yuanlu Community Center to closely link space and structure. Exposed Canadian Douglas fir glulam provide a crucial visual element on the interior while the order and form similar to traditional Chongqing sloping roofs are adopted for expression.

“I should say thanks to the judges and really appreciate that our project is recognized by this prestigious award. Projects in China could not accomplish this high achievement without Canadian government and Canada Wood China (CW China)’s consistency in promoting wood frame construction in China, as well as the technical support that they provide to the market, “said Jie Lee, chief designer of the Chongqing Yuanlu Community Centre (in picture), adding that they will co-operate with CW China to boost modern wood architectures in China.

China makes up two-thirds of award nominees in the International Wood Design category this year. These nominees feature in the resort and public service sectors. Seven of the projects are in eastern China, including two in Shanghai. The remaining three projects are in central and southwestern China.

In total, 103 projects in 14 categories (including designs, environmental performances, western red cedar, wood innovation, engineer, and architecture) were nominated this year. Submissions are from the United States, China, South Korea and Tajikistan, in addition to British Columbia.

A diversity of projects of various types and sizes demonstrating outstanding architectural and structural achievement using wood are among the nominees. They include a research laboratory, an energy facility, a winery, First Nations structures and mid-rise projects, according to the award’s press release.

To celebrate wood design projects at home and abroad, the Wood Design Awards are presented by Wood WORKS! BC, the Canadian Wood Council and its member associations; with funding support from Natural Resources Canada and Forestry Innovation Investment.

Click here to learn more about the 10 China Nominee Projects for the 2019 Wood Design Awards.

‘PRIMO VILLAGE’, Rental House Exclusively for U.S. Army Civilians

Sunny Kim

By Sunny Kim

Program Manager / Market Development & Market Access, Canada Wood Korea

January 3, 2019

Posted in: Korea

As the transfer of the U.S. military facilities in Yongsan Seoul to Pyeongtaek Gyeonggi-do is picking up speed, the housing market for U.S. army civilians is heating up. In the market, the ‘PRIMO VILLAGE – Rental House Exclusively for U.S. Army Civilians’, a village with 45 housing units developed by Gahee Development in Eumbong-myeon, Asan-si, is drawing attention.
PRIMO VILLAGE, In-cheol Jeong, the president of Gahee Development said, “These are rental houses for U.S. army civilians and designs specifically for American housing culture is most important. PRIMO VILLAGE, was designed in the US and constructed with the best materials imported from North America and Germany.”
One of the major materials used is ICYNENE foam, an insulation material imported from Canada that is increasing in popularity in Korea.


For latest Canada Wood market summaries in Asia see this link

chinese affordable housing.JPG

Rising borrowing costs, increased government regulation and volatile stock markets playing a role, along with dwindling demand from Chinese buyers


Updated: January 4, 2019

Asia is finally succumbing to the global property slowdown that’s jolted homeowners and investors from Vancouver to London, with markets in Singapore, Hong Kong and Australia showing fresh signs of softening.

The economic ramifications could be serious. Lower house prices and higher mortgage rates will not only dent consumer confidence, but also disposable incomes, S&P Global Ratings said in a report last month. A simultaneous decline in house prices globally could lead to “financial and macroeconomic instability,” the IMF said in study released in April.

While each city in the region has its own distinct characteristics, there are a few common denominators: rising borrowing costs, increased government regulation and volatile stock markets. There’s also dwindling demand from a force so powerful it pushed prices to a record in many places — Chinese buyers.

“As China’s economy is affected by the trade war, capital outflows have become more difficult, thus weakening demand in markets including Sydney and Hong Kong,” said Patrick Wong, a real estate analyst at Bloomberg Intelligence.

Hong Kong

After an almost 15-year bull run that made Hong Kong notorious for having the world’s least affordable property market, home prices have taken a battering.

Values in the city have fallen for 13 weeks straight since August, the longest losing streak since 2008, figures from Centaline Property Agency Ltd. show. Concerns about higher borrowing costs and a looming vacancy tax have contributed to the slide.

hong kong residences

buildings stand illuminated in Hong Kong, China. PAUL YEUNG/BLOOMBERG

The strike rate of mainland Chinese developers successfully bidding for residential sites is also waning, tumbling to 27 per cent in 2018 from 70 per cent in 2017, JLL’s Residential Sales Market Monitor released Thursday showed. Of the 11 residential sites tendered by authorities last year, only three were won by Chinese companies.

“The change in attitude can be explained by a slowing mainland economy,” said Henry Mok, JLL’s senior director of capital markets. “Throw in a simmering trade war between China and the U.S., the government has taken actions to restrict capital outflows, which in turn has increased difficulties for developers to invest overseas.”


Home prices on the island, which regularly ranks among the world’s most expensive places to live, posted their first drop in six quarters in the three months ended December. Luxury was hit the hardest, with values in prime areas sinking 1.5 per cent.

Government policies are mainly to blame. Cooling measures implemented unexpectedly in July included higher stamp duties and tougher loan-to-value rules. Extra constraints since then have included curbs on the number of “shoe-box” apartments and anti-money laundering rules that imposed an additional administrative burden on developers.

It’s all worked to put the brakes on a home-price recovery that only lasted for five quarters, the shortest since data became available.

“Landed home prices, being bigger ticket items, have taken a greater beating as demand softened,” said Ong Teck Hui, a senior director of research and consultancy at JLL. (In Singapore, most people live in high-rise apartments, called housing development board flats. Landed homes by contrast occupy their own ground space.)


Sydney-siders have begun to wonder — what sort of economic fallout will there be from the wealth destruction that comes with the worst slump in home values since the late 1980s?

Average home values in the harbor city have fallen 11.1 per cent since their 2017 peak, according to CoreLogic Inc. data released Wednesday — surpassing the 9.6 per cent top-to-bottom decline when Australia was on the cusp of entering its last recession.

While prices are still about 60 per cent higher than they were in 2012, meaning few existing homeowners are actually underwater, it’s economist forecasts of a further 10 per cent fall that’s making nervous investors think twice about extraneous spending.

The central bank is also worried that a prolonged downturn will drag on consumption and with the main opposition Labor party pledging to curb tax perks for property investors if it wins an election expected in May, confidence is likely to be hit further.

Treasurer Josh Frydenberg on Thursday urged the nation’s banks not to tighten credit any more as the deepening downturn threatens to weigh on the economy.

Shanghai, Beijing

A crackdown on overheating prices has hampered sales and left values in the nation’s biggest cities around 5 per cent below their peak. Rules on multiple home purchases, or how soon a property can be sold once it’s bought, are starting to be relaxed, and there are giveaways galore as home builders try to lure buyers.

One developer in September was giving away a BMW Series 3 or X1 to anyone wishing to purchase a three-bedroom unit or townhouse at its project in Shanghai. Down-payments have also been slashed, with China Evergrande Group asking for just 5 per cent compared with the usual 30 per cent deposit required.

“It’s not a surprise to see Beijing and Shanghai residential prices fall given the curbing policies currently on these two markets,” said Henry Chin, head of research at CBRE Group Inc. An index that measures second-hand home prices in Beijing has been falling since September while one that tracks Shanghai has been on the decline now for almost 12 months, he said.
Mar 13, 2019 | 11:00 GMT

7 mins read

China Opts for Tax Cuts to Jolt Its Economy Awake


(KEVIN FRAYER/Getty Images)


  • With its economy slowing, China will rely more on fiscal policies — including tax relief — to re balance its economy to bolster private consumption and investment.
  • However, tax relief, coupled with the overall slowdown, will result in tighter budgets for local and central governments, particularly in the central and western regions.
  • Beijing will issue more local bonds, increase fiscal transfers and expand the local tax base with new property tax reforms to ease local governments’ financial burden.

Spurred in part by its slowing economy, China is gathering steam in its efforts to re balance its tax structure. During the country’s annual legislative session this month, Chinese Premier Li Keqiang announced an expanded 2 trillion-yuan ($298 billion) reduction — or 10 percent of China’s total government budget revenues last year — in taxes and fees for individual taxpayers and private business this year. Together with a smaller package last year, the measures could free 100 million individual taxpayers (mainly lower- and middle-class citizens) from income tax and lower the tax burden for private enterprises by as much as 20 percent. The tax package is designed to ease the growing financial stress on private businesses and kick-start flagging consumption amid the Chinese economy’s struggles with high debt and the lack of impact from traditional government-led investments.

The Big Picture

In the decade since the global financial crisis, Beijing has relied on expanded credit to develop infrastructure and the property market to ameliorate economic pain amid a slow-moving economic transition. But as China faces multiple challenges, including an extended economic slowdown, the U.S. trade war and diminishing returns from its previous stimulation policies, Beijing is turning more toward different fiscal policies to address economic challenges.

See 2019 Second-Quarter Forecast

See Asia-Pacific section of the 2019 Second-Quarter Forecast

See China in Transition

Although the central government is on a relatively sound financial footing, growing imbalances (overall revenue sources are slowing — or even declining — while expenditures are growing) mean local governments will bear the brunt of the expected shortfall, since many are already wallowing in high debt. In response, Beijing will use various methods, including fiscal transfers, more bond issuance and the cultivation of new tax bases, to plug the gap; yet these measures have their drawbacks, ensuring that China’s continued economic slowdown will limit just how far Beijing can go in righting the ship.

Providing Tax Relief

Beijing’s resort to tax cuts speaks volumes about China’s present reality. But following a decade long credit boom, the majority of which flowed into government-led infrastructure projects and property investments, the costs of the expansion are now outweighing the benefits. Beyond high debts and excessive industrial capacity in state-owned sectors, as well as over speculation in the property market, policies that funneled capital into state-owned enterprises instead of the private sector — the focus of most production and innovation — hurt the latter. At the same time, China is finding itself in a tight squeeze as it tries to incentivize domestic spending (a critical aspect of Beijing’s attempts to re balance) due in part to rising mortgage and overall household debt, which have grown the last three years. Essentially, now that quick-fix solutions are no longer as effective as before, China’s leaders have no choice but to resort to less-palatable measures to put the country back on track to sustainable growth.

china provincial financing self sufficiency.jpg

Still, tax cuts for corporations and households alone are unlikely to deliver the same effects as credit expansions or state-led investment spending. Although the relief will certainly help alleviate the burdens for companies and individuals, its net impact will be relatively light since the extended economic slowdown will deter consumption and private investments at a time when many small- to medium-sized private corporations are struggling to make ends meet. Last year, for example, overall industrial profits contracted for several key manufacturers in the information technology, automotive and other sectors, even though the government offered 1.3 trillion yuan in tax relief. Likewise, this year’s tax package, which amounts to roughly 2 percent of gross domestic product, is only expected to generate 0.5 percent in GDP growth. In other words, if China’s tax strategy is to succeed, Beijing must complement its supplementary policies with a more sustainable approach to support the real economy so consumers can spend and companies can expand their business scale and capital expenditures.

Tightening the Belt

Given the limited impact of the tax cut, the government will have to continue pumping money into infrastructure and investments and pursue other monetary policies to stimulate the economy. The challenge for China, however, is that it must do so against the backdrop of slowing, and perhaps even declining, overall revenue sources. Central government revenues have already slowed for two years straight, even dipping into the negative a few times in the final months of 2018 as a result of the decelerating economy and the tax cut.

chinas provinces local debt lelvl

Provincial and regional governments, meanwhile, are likely to come under greater stress. Significantly, land sales, which accounted for roughly half of local governments’ total revenue sources in 2017, slowed sharply in 2018 because of continued restrictions on the property market. Partly as a result of these limitations, nearly half of China’s provinces reported slower growth in local fiscal revenues last year. (Tianjin, meanwhile, even reported falling revenue.) And unless the government takes action to boost the real estate market in the coming months by loosening restrictions preventing homeowners from buying additional property or engaging in speculation, continued economic stress will likely further weaken provincial governments’ fiscal position, just as tax cuts are taking effect and other expenditures are growing.

Chinas local govt budgets.jpg

Ultimately, the growing fiscal stress has compelled both the central and local governments to tighten the belt this year. At present, China has forecast a budget deficit of 2.8 percent of GDP for 2019 — a figure that is far below that of many other major countries like the United States (3.9 percent) and Japan (3.7 percent) — but the final number is likely to be much higher. In the recent legislative session, nearly all provincial and regional governments reduced their projections for revenue growth this year, with several provincial governments, even those in wealthy coastal regions, looking to tighten bureaucratic expenditures by as much as 5 percent this year. In less prosperous regions, including Guizhou in the southwest or Inner Mongolia in the north, the target for cuts is as high as 10 percent. And with many provinces and regions already facing debt stress (especially those in the central and west with weaker financial abilities), fiscal constraints will add further challenges, undermining their ability to maintain economic and, by extension, social stability.

Coping With the Stress

To address the problem, Beijing has increased this year’s local government bonds by 3.08 trillion yuan, a 41 percent rise year on year. Officially, local government debts remained at a healthy level of 18.4 trillion yuan, or 20 percent of GDP, at the end of 2018, but the true figure is estimated to be as much as 40 trillion yuan. In the end, with the fiscal stress unlikely to abate in the next two years, the local bonds essentially presage a greater local debt burden.


Chinas local vs central financial structure

The current tax structure, which is based on a 1994 tax reform, has widened the fiscal imbalance between the central and local governments, privileging the former. But because local governments must foot the bill for the tax reduction and the growing fiscal burden, these jurisdictions will have greater cause to demand that Beijing increase fiscal transfers — even though such payments could erode the central government’s financial strength in the long term. In 2017, 80 percent of the central government’s revenue found its way to local governments, accounting for roughly 40 percent of local jurisdictions’ total expenditures. Among the country’s 31 provinces, just a handful of them — primarily eastern or coastal regions such as Beijing, Shanghai and Guangdong — are close to fiscal self-sufficiency, thereby allowing them to contribute to the central government’s coffers. But as tax bases in these wealthy regions begin to evaporate, the growing outflow in financial transfers could also create disagreements between Beijing and these wealthy regions, as well as among local governments themselves.

Beijing, meanwhile, has been attempting to cultivate new tax bases by increasing dividends from state-owned companies, exercising tighter fiscal enforcement and finding new sources of tax, especially the long-discussed property tax. While the efforts to find new tax bases could raise the ire of the state-owned companies, the property tax could further hit the moribund property sector and, thus, the economy at large. With its economy facing strong headwinds, China will struggle to implement the necessary measures, leaving it on course for a more precarious position down the road.

Putin’s Russia Embraces a Eurasian Identity

By Eugene Chausovsky

Senior Eurasia Analyst, Stratfor





  • In the years to come, demographic change will further distinguish Russia from the West culturally and politically and more strongly emphasize its unique Eurasian identity.
  • Russia’s prolonged standoff with the West will spur Moscow to develop closer economic and security ties with countries in the eastern theater, particularly in the Asia-Pacific and the Middle East, as Moscow seeks a greater balance in its relations between East and West.
  • In the long term, China’s rise will temper Russia’s shift to the East and could bring about an eventual rapprochement with the West, with Moscow’s maneuvering between the Western and Eastern poles serving to shape the Eurasian aspect of Russia’s identity.

In a New Year’s message to U.S. President Donald Trump, Russian President Vladimir Putin wrote that Russia was “open to dialogue with the United States on the most extensive agenda.” The message was a hopeful one for 2019, written to close out a year in which relations between Russia and the West continued to deteriorate along numerous fronts. Russia’s standoff with the West will likely only intensify this year. A key evolution in Russia’s strategy — indeed, in Russia’s very identity — over the course of the Putin era is a big reason why.

The Big Picture

Since Vladimir Putin came to power nearly 20 years ago, Russia has developed a Eurasian identity and strategy that has made it increasingly distinct from the West. Looming demographic changes and Russia’s foreign policy maneuvering between the West and China will only solidify its Eurasian identity in the years to come.

See Russia’s Internal StruggleSee The Fight for Russia’s BorderlandsSee Moscow Looks to the East

From the Cold War to ‘Eurasianism’

To understand this evolution, it is important to understand the context in which Putin came to power nearly 20 years ago. When he was appointed acting Russian president on Dec. 31, 1999, his country was reeling from a decade of chaos and instability following the collapse of the Soviet Union. The economy was in shambles, the political system had fragmented, a separatist conflict raged in Chechnya, and oligarchs in many ways had become more powerful than the state. Even the country’s very territorial integrity was at stake.

Over the next decade, Putin reined in the oligarchs and re-established a strongly centralized state. He squashed the Chechen conflict with a combination of brute military force and political maneuvering. And the economy, with the help of strong energy prices, surged. Putin’s consolidation of power on the domestic front enabled Russia to reassert itself across the former Soviet periphery and beyond.

Russia’s resurgence as a regional power brought it into greater confrontation with the West, as Moscow sought to stop and reverse the spread of European Union and NATO membership and Western influence into the European borderlands and re-establish its own influence and integration efforts. These dynamics were seen in the Russia-Georgia War in 2008 and intensified with the Euromaidan uprising in Ukraine in 2014. The result has been a prolonged and growing standoff between Russia and the West, with its involvement in the conflicts in Ukraine and Syria, plus military buildups and Western sanctions bringing Moscow’s relations with Europe and the United States to their lowest point since the Cold War.

In the two decades since Putin ascended to the presidency, a distinct Russian identity emerged under him, one that can be called “Eurasianism.” This identity includes components of a political ideology and a foreign policy strategy that are rooted in Russia’s position in both Europe and Asia, and in geopolitical imperatives that long predate Putin. It’s an identity key both to understanding Russia’s policies now, and forecasting what can be expected in the years to come.

Eurasianism as a Political Ideology

An important political attribute of Eurasianism in the Putin era — one in line with Russian tradition — is the pursuit of collective stability over individual liberty. For most Russians, the country’s chaotic experiment with democracy and capitalism in the 1990s proved that Western-style structures were not appropriate or effective within Russia. The political culture that has arisen under Putin is incompatible in many ways with the liberal, democratic values of the West. Indeed, Moscow sees support by the United States and the European Union for pro-democracy and human rights movements inside Russia as subversive attempts to weaken it.

Russia is run as a centralized state, with Putin representing himself as a strong, decisive leader who holds together a country that otherwise would splinter apart. While the Kremlin frequently cracks down on protests and independent media, it does allow selective demonstrations and at times will even concede to certain demands — such as allowing direct elections or adjusting unpopular pension reforms — if it comes under enough pressure.

Under Putin, Russian nationalism has replaced the universal Communist ideology of the Soviet Union. However, because he must incorporate the country’s more than 150 ethnic minorities — Tatars, Chechens, Ukrainians, Armenians and so on — into this nationalism as well as its ethnic Russians, Putin manages Russia’s nationalist tendencies carefully. Orthodox Slavs are not the only face of Russia, and Putin risks alienating the country’s minority groups and undermining the stability he has worked to reinstate if he pursues a nationalist line too strongly. The same is true for religion: Muslims in Russia number in the millions, and many are concentrated in the volatile North Caucasus region.

Projected pop change eurasia

Russia’s minority populations also are growing, while the ethnic Russian population is decreasing. Ethnic Russians made up about 77 percent of Russia’s population, according to the last official census taken in 2010, but their low birthrates (1.3 children per woman, on average) means the ethnic Russian population will decline at a faster rate than Russia’s Muslim population, which has a birthrate of 2.3 children per woman. Increased migration from the Caucasus and Central Asian states, which are also growing in population, will be necessary to meet Russia’s labor needs and will swing the country’s demographics even further. Russia will become less Slavic and Orthodox and more Asian and Muslim in the coming years, further distinguishing it culturally and politically from Europe and the West. The need to promote Russian nationalism — the greatness of Russia itself, not ethnic Russians — will only intensify.

Eurasianism as a Foreign Policy Strategy

Because Russia lacks significant natural barriers, a constant throughout its history has been the need to maintain a regional power to establish buffer space both in the east and west to protect its Moscow-St. Petersburg core. Thus, Moscow wants to keep the former Soviet republics in its fold — not necessarily officially, but certainly in a de facto manner.

It is no coincidence that the countries most closely aligned with Russia are members of the Eurasian Economic Union and its military counterpart, the Collective Security Treaty Organization, the two primary integration blocs created in the Putin era. These states share numerous features with Russia in terms of their Eurasian character — strong leaders, state-dominated economies and an emphasis on stability over democracy. They also share strong suspicions of the West and its promotion of democracy and human rights.

Ideally for Russia, every state in the former Soviet Union would be part of the Eurasian union. But states like Azerbaijan, Uzbekistan and Turkmenistan have chosen to remain neutral, while other states, including the Baltic countries and more recently Ukraine, have sought a pro-Western path. Russia’s goal is to align each of the countries in the former Soviet periphery with Moscow or at least keep them neutral. If not, Russia will aim to undermine their pro-Western governments and their Western integration efforts. The intent of the United States and its EU and NATO allies to deprive Russia of this sphere of influence is a key factor behind Moscow’s enduring standoff with the West

eurasian econ union

Eurasianism as a foreign policy concept is not limited to the lands immediately surrounding Russia. It extends to those countries that also behave in contradiction to Western liberal values and/or Western interventionism, and can include European countries that have illiberal tendencies. One example is Hungary, whose government Russia works to support in order to undermine EU unity on issues such as sanctions against it. The common thread is that Russia seeks to cooperate with countries challenging the U.S.-led world order, or at least stoke division within U.S.-allied blocs like NATO and the European Union.

Under Putin, Moscow has worked to build other economic and security relationships, not only to replace or supplement its weakened ties with the West, but also to enhance its global position as a counterweight to the West, and especially to the United States. One such place has been Syria. Russia’s intervention on behalf of Syrian President Bashar al Assad is motivated by its historical ties to the country, including maintaining a naval base at Tartus, and a strategic interest to combat the spread of the Islamic State. But just as importantly, Russia wanted to draw a red line around efforts by the West, and by the United States in particular, to force regime change in Syria. Russia’s intervention was not to save al Assad per se, but rather to serve notice to the United States that it still carried enough military and diplomatic heft to hold its own in the conflict.

This, in turn, allowed Russia to expand its influence elsewhere in the Middle East. With its economic ties with the United States and the European Union on the downswing, Russia was interested in expanding its arms sales, with Middle Eastern countries like Egypt and Turkey representing promising markets. Russia also wanted to expand its leverage against the United States in a crucial theater to Washington.

Perhaps the most important partner to emerge for Russia in the wake of Moscow’s standoff with the West is China. Russia and China had been steadily tightening their economic and energy ties since the early post-Soviet period. However, the Euromaidan uprising and Russia’s ensuing standoff with the West accelerated the development of the Moscow-Beijing relationship, not only in terms of trade and investment but also on security and military aspects. Russia and China have also coordinated their efforts on political matters when it comes to U.N. Security Council votes on issues like North Korea and Syria, particularly when it means opposing the U.S. position in these theaters.

However, Russia’s shift toward China is unlikely to last forever. China’s own rise and overlapping spheres of influence in Central Asia, the Russian Far East and the Arctic ultimately will limit the extent of their partnership. This could pave the way for a future rapprochement between Russia and the West, particularly as China emerges as a more serious economic and military competitor for both the United States and Russia down the line.

Ultimately, Russia’s maneuvering between West and East will further solidify the Eurasian aspect of its identity. The cohesion of the Russian state and society on the home front and Russia’s ability to overcome external challenges and pressures, whether from the West or China, will serve as key factors shaping the evolution of this identity.

worldwide cost of living

Economist Intelligence Unit

The findings of the latest Worldwide Cost of Living Survey

Cost convergence across continents

For the first time in the survey’s history, three cities share the title of the world’s most expensive city: Singapore, Hong Kong and France’s capital, Paris. The top ten is largely split between Asia and Europe, with Singapore representing the only city in the top ten that has maintained its ranking from the previous year. In the rest of Asia, Osaka in Japan and Seoul in South Korea join Singapore and Hong Kong in the top ten. The Japanese city has moved up six places since last year, and now shares fifth place with Geneva in Switzerland. In Europe, the usual suspects—Geneva and Zurich, both in Switzerland, as well as Copenhagen in Denmark—join Paris as the world’s most expensive cities to visit and live in out of the 133 cities surveyed.

Within western Europe it is non-euro area cities that largely remain the most expensive. Zurich (in fourth place), Geneva (joint fifth) and Copenhagen (joint seventh) are among the ten priciest. The lone exception is Paris (joint first), which has featured among the top ten most expensive cities since 2003. With west European cities returning to the fold, the region now accounts for three of the five most expensive cities and for four of the top ten. Asia accounts for a further four cities, while Tel Aviv is the sole Middle Eastern representative.

Across geographic regions and countries, the survey observed a degree of convergence in 2018 among the most expensive locations. Some of those economies with appreciating currencies, like the US, climbed up the ranking significantly. In seventh and joint tenth place respectively, New York and Los Angeles are the only cities in the top 10 from North America. A stronger US dollar last year has meant that cities in the US generally became more expensive globally, especially relative to last year’s ranking. New York has moved up six places in the ranking this year, while Los Angeles has moved up four spots. These movements represent a sharp increase in the relative cost of living compared with five years ago, when New York and Los Angeles tied in 39th position.

Tel Aviv, which was ranked 28th just five years ago, sits alongside Los Angeles as the joint tenth most expensive city in the survey. Currency appreciation played a part in this rise, but Tel Aviv also has some specific costs that drive up prices, notably those of buying, insuring and maintaining a car, all of which push transport costs 64% above New York prices.

Last year inflation and devaluations were prominent factors in determining the cost of living, with many cities tumbling down the ranking owing to economic turmoil, currency weakness or falling local prices. Places like Argentina, Brazil, Turkey and Venezuela experienced all of the aforementioned conditions, leading to cities in these countries seeing a sharp fall in their cost of living ranking. Unsurprisingly, it is Caracas in Venezuela which claims the title of the least expensive city in the world. Following inflation nearing 1,000,000% last year and the Venezuelan government launching a new currency, the situation continues to change almost daily. The new currency value has varied so much since its creation and the economy was demonetized compelling people to use commodities and exchange services and personal items like clothing, auto parts and jewelry to purchase basic goods such as groceries.© The Economist Intelligence Unit Limited 2019 2

The impact of high inflation and currency denominations is reflected in the average cost of living this year. Taking an average of the indices for all cities surveyed using New York as the base city, the global cost of living has fallen to 69%, down from 73% last year. This remains significantly lower than five years ago, when the average cost of living index across the cities surveyed was 82% and ten years ago was 89%.

US cities rise up to meet European veterans

Much of 2018 was marked by continued strong US economic growth and steady monetary policy tightening by the Federal Reserve (the US central bank), which led to a sharp appreciation of the US dollar. With the dollar strengthening against other currencies, all but two US cities rose up the ranking in 2018. The highest climbers were San Francisco (25th up from 37th previously), Houston (30th from 41st), Seattle (38th from 46th) and Detroit and Cleveland (joint 67th from joint 75th). New York (seventh), Los Angeles (tenth) and Minneapolis (20th) are all ranked in the top 20. Domestic help and utilities remain expensive in North America, with US cities ranking highly in these categories.

On the other side of the Atlantic, despite the euro making gains against the US dollar in 2017, these gains went into reverse in 2018 as economic momentum slowed and the election of a populist coalition in Italy raised new concerns about challenges to European integration. Paris stands out as the only euro area city in the top ten. The French capital, which has risen from seventh position two years ago to joint first, remains extremely expensive to live in, with only alcohol, transport and tobacco offering value for money compared with other European cities. Copenhagen in Denmark, which pegs its currency to the euro, also features in the ten priciest cities in joint seventh place, largely owing to relatively high transport, recreation and personal care costs.

When looking at the most expensive cities by category, Asian cities tend to be the priciest locations for general grocery shopping. European cities tend to have the highest costs in the household, personal care, recreation and entertainment categories—with Zurich and Geneva the most expensive in these categories—perhaps reflecting a greater premium on discretionary spending.


ten most expensive cities

The impact of high inflation and currency denominations is reflected in the average cost of living this year. Taking an average of the indices for all cities surveyed using New York as the base city, the global cost of living has fallen to 69%, down from 73% last year. This remains significantly lower than five years ago, when the average cost of living index across the cities surveyed was 82% and ten years ago was 89%.

US cities rise up to meet European veterans

Much of 2018 was marked by continued strong US economic growth and steady monetary policy tightening by the Federal Reserve (the US central bank), which led to a sharp appreciation of the US dollar. With the dollar strengthening against other currencies, all but two US cities rose up the

ranking in 2018. The highest climbers were San Francisco (25th up from 37th previously), Houston (30th from 41st), Seattle (38th from 46th) and Detroit and Cleveland (joint 67th from joint 75th). New York (seventh), Los Angeles (tenth) and Minneapolis (20th) are all ranked in the top 20. Domestic help and utilities remain expensive in North America, with US cities ranking highly in these categories.

On the other side of the Atlantic, despite the euro making gains against the US dollar in 2017, these gains went into reverse in 2018 as economic momentum slowed and the election of a populist coalition in Italy raised new concerns about challenges to European integration. Paris stands out as the only euro area city in the top ten. The French capital, which has risen from seventh position two years ago to joint first, remains extremely expensive to live in, with only alcohol, transport and tobacco offering value

for money compared with other European cities. Copenhagen in Denmark, which pegs its currency

to the euro, also features in the ten priciest cities in joint seventh place, largely owing to relatively high transport, recreation and personal care costs.

When looking at the most expensive cities by category, Asian cities tend to be the priciest locations for general grocery shopping. European cities tend to have the highest costs in the household, personal care, recreation and entertainment categories—with Zurich and Geneva the most expensive in these categories—perhaps reflecting a greater premium on discretionary spending.

Prices no and then

A year of currency fluctuations and inflation

Currency fluctuations continue to be a major cause for changes in the ranking. In the past year a number of markets have seen significant currency movements, which have in many cases countered the impact of domestic price changes.

Several emerging markets suffered currency volatility, primarily as a result of monetary tightening in the US and the strengthening US dollar. In a few instances, however, such as Turkey and Argentina, a combination of factors, including external imbalances, political instability and poor policymaking, led to full-blown currency crises. Istanbul, in Turkey, which experienced the sharpest decline in the cost of living ranking in the past 12 months, fell by 48 places to joint 120th. The reason for this drastic decline was the recent sharp slide of the Turkish lira and annual consumer price inflation surging to 25.2% in October 2018.

The impact of currency devaluation was also felt in Argentina’s capital, Buenos Aires, which has joined the bottom ten in joint 125th place. Like Istanbul, the city also fell by 48 places in the ranking following a crisis of confidence in Argentina, resulting in the peso weakening sharply against the US dollar in August.

In contrast, the endemic high cost of living in the French territory of New Caledonia partly reflects a lack of competition, particularly in the wholesale and retail sectors, which are dominated by a small number of companies. These factors drove its capital, Nouméa, 33 spots up the ranks in joint 20th place.

Another big mover, Sofia (currently joint 90th) in Bulgaria, reflects a rise up the rankings of 29 spots.

Bulgaria is an economically stable east European country, which pegs its currency, the Bulgarian lev, to the euro but is yet to join the euro zone. Like many cities in the region, Sofia continues to offer good value for money. Nevertheless, prices for groceries in the capital city are beginning to converge with west European destinations in anticipation of the country adopting the euro currency in the coming years. Growth in food prices (one of the main drivers of 3% inflation in the country for 2018) averaged 2.6% year on year in December 2018. Utility prices (electricity, gas, district heating and water) as well as recreation and culture prices, continued to rise at the slightly higher pace of around 4% over the last 12 months.

biggest movers

Changes at the bottom

The cheapest cities in the world have seen some changes over the past 12 months. Asia is home to some of the world’s most expensive cities, but also to many of the world’s cheapest cities. Within Asia, the best value for money has traditionally been offered by South Asian cities, particularly those in India and Pakistan. To an extent this remains true, and Bangalore, Chennai, New Delhi and Karachi feature among the ten cheapest locations surveyed. India is tipped for rapid economic expansion but, in per- head terms, wage and spending growth will remain low. Income inequality means that low wages are the norm, limiting household spending and creating many tiers of pricing as well as strong competition from a range of retail sources. This, combined with a cheap and plentiful supply of goods into cities from rural producers with short supply chains as well as government subsidies on some products, has kept prices down, especially by Western standards.

Nonetheless, although South Asian cities traditionally occupy positions among the ten cheapest, they are no longer the cheapest in the world. Last year that title was held by Syria’s capital, Damascus, which is ranked second-cheapest this year. The citizens of Damascus might not have felt that the city was getting cheaper, however, with inflation averaging an estimated 28% in the country during 2017. Yet local price rises have not completely offset a near-consistent decline in the value of the Syrian pound since the onset of war in 2011.

This year, Damascus bestowed the title of least expensive city in the world to Venezuela’s capital, Caracas, which saw a significant worsening of economic conditions in 2018, with hyperinflation and a breakdown in public services fueling growing social unrest. The Venezuelan government unified and devalued the official exchange rates in early 2018 in an attempt to reduce currency pressure, but amid hyperinflation, the currency remains hugely overvalued, as reflected in an extremely large black- market premium.

ten cheapist cities

Cheap but not always cheerful

As Damascus and Caracas show, a growing number of locations are becoming cheaper because of the impact of political or economic disruption. Although South Asia remains structurally cheap,

political instability is becoming an increasingly prominent factor in lowering the relative cost of living. This means that there is a considerable element of risk in some of the world’s cheapest cities. Karachi in Pakistan, Tashkent in Uzbekistan, Almaty in Kazakhstan and Lagos in Nigeria have faced well- documented economic, political, security and infrastructural challenges, and there is some correlation between The Economist Intelligence Unit’s Worldwide Cost of Living ranking and its sister ranking, the Global Livability survey. Put simply, cheaper cities also tend to be less livable.

prices now and then bottom ten

A bumpy ride ahead

The cost of living is always fluctuating, and there are already indications of further changes that are set to take place during the coming year. After an encouraging albeit slower 2018, The Economist Intelligence Unit expects 2019 to proceed along similar lines, with global growth slowing further this year and reaching its nadir in 2020. External conditions deteriorated late last year owing to the US- China trade war and externalities related to this are expected to continue throughout 2019.

The strong US dollar observed last year is also not set to last. Since December the dollar has softened and is expected to depreciate further against the euro and the yen from late 2019 onward as the US economy slows more sharply.

After five consecutive years of decline, oil prices bottomed out in 2016 and rebounded in 2017 and 2018, along with other commodity prices. At the very basic level, this will have an impact on prices, especially in markets where basic goods make up the bulk of the shopping basket. But there are further implications. Oil prices will continue to weigh on economies that rely heavily on oil revenue. This could mean austerity, economic controls and weak inflation persisting in affected countries, depressing consumer sentiment and growth.

Equally, 2019 could see the fallout from several political and economic shocks having a deeper effect. The UK has already seen sharp declines in the relative cost of living owing to the Brexit

referendum and related currency weaknesses. In 2019 these are expected to translate into further price rises as supply chains become more complicated and import costs rise. These inflationary effects could be compounded if sterling were to stage a recovery.

There are other unknowns as well. The US president, Donald Trump, has caused some significant upheaval in trade agreements and international relations, which may push up prices for imports and exports around the world as treaties unravel or come under scrutiny. Meanwhile, measures adopted in China to address growing levels of private debt are still expected to prompt a slowdown in consumption and growth over the next two years. This could have consequences for the rest of the world, resulting in further staged renminbi devaluations that would affect the relative cost of living in Chinese cities. The lasting impact of the US-China trade war is still to be judged, but there are already signs of the weaker global economic environment, which is only set to deepen.

Instability and conflict around the world could continue to fuel localised, shortage-driven inflation, which would have an impact on the cost of living in certain cities. Caracas, currently sitting at the bottom of the ranking, has moved down the index significantly in recent years. Equally, exchange- rate volatility has meant that, while Asian cities have largely risen in cost-of-living terms, many urban centres in China, South Africa and Australia have seen contrasting movements from year to year. It is also worth remembering that local inflation driven by instability is often counteracted by economic weakness and slumping exchange rates. As a result, cities that have the highest inflation will often see their cost of living fall compared with that of their global peers.

With emerging economies supplying much of the wage and demand growth, it seems likely that these locations will become relatively more expensive as economic growth and commodity prices recover. However, price convergence of this kind is very much a long-term trend, and in the short and medium term the capacity for economic shocks and currency swings can make a location very expensive or very cheap very quickly.

Background: about the survey

The Worldwide Cost of Living is a biannual Economist Intelligence Unit survey that compares more than 400 individual prices across 160 products and services. These include food, drink, clothing, household supplies and personal care items, home rents, transport, utility bills, private schools, domestic help and recreational costs.

The survey itself is a purpose-built Internet tool designed to help human resources and finance managers calculate cost-of-living allowances and build compensation packages for expatriates and business travellers. The survey incorporates easy-to-understand comparative cost-of-living indices between cities. The survey allows for city-to-city comparisons, but for the purpose of this report all cities are compared with a base city of New York, which has an index set at 100. The survey has been carried out for more than 30 years.


More than 50,000 individual prices are collected in each survey, conducted each March and September and published in June and December. Economist Intelligence Unit researchers survey a range of stores: supermarkets, mid-priced stores and higher-priced speciality outlets. Prices reflect costs for more than 160 items in each city. These are not recommended retail prices or manufacturers’ costs; they are what the paying customer is charged.

Prices gathered are then converted into a central currency (US dollars) using the prevailing exchange rate and weighted in order to achieve comparative indices. The cost-of-living index uses an identical set of weights that is internationally based and not geared towards the spending pattern of any specific nationality. Items are individually weighted across a range of categories, and a comparative index is produced using the relative difference by weighted item.

For more information on the Worldwide Cost of Living Survey visit

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