GLOBAL ECONOMY
The good news is that in the four scenarios above, each side is still talking to the other, or may be open to dialogue under some face- saving conditions. A blowup over Brexit might not by itself cause a global recession, but it would certainly trigger a European one, which would then spill over to other economies. The conventional wisdom is that a “hard” Brexit would lead to a severe recession in the United Kingdom but not in Europe, because the UK is more reliant on trade with the EU than vice versa. This is naive. The eurozone is already suffering a sharp slowdown and is in the grip of a manufacturing recession; and the Netherlands, Belgium, Ireland, and Germany – which is nearing a recession – do in fact rely heavily on the UK export market. With eurozone business confidence already depressed as a result of Sino-American trade triggering stagflation (a recession with rising inflation). That, after all, is what happened in 1973 during the Yom Kippur War, in 1979 following the Iranian Revolution, and in 1990 after Iraq’s invasion of Kuwait. In the first case, a full-scale trade, currency, tech, and cold war between the U.S. and China would push the current downturn in manufacturing, trade, and capital spending into services and private consumption, tipping the U.S. and global economies into a severe recession. Similarly, a military conflict between the U.S. and Iran would drive oil prices above $100 per barrel,
tensions, a chaotic Brexit would be the last straw. Just imagine thousands of trucks and cars lining up to fill out new customs paperwork in Dover and Calais. Moreover, a European recession would have knock-on effects, undercutting growth globally and possibly triggering a risk-off episode. It could even lead to new currency wars, if the value of the euro and pound were to fall too sharply against other global consequences. If Fernández defeats President Mauricio Macri and then scuttles the country’s $57 billion IMF program, Argentina could suffer a repeat of its 2001 currency crisis and default. That could lead to capital flight from emerging markets more generally, possibly triggering crises in highly indebted Turkey, Venezuela, Pakistan, and Lebanon, and further complicating matters for India, South Africa, China, Brazil, Mexico, and Ecuador. In all four scenarios, both sides want to save face. U.S. President Donald Trump wants a deal with China, in order to stabilize the economy and markets before his re-election bid in 2020; Chinese President Xi Jinping also wants a deal to halt China’s slowdown. But neither wants to be the “chicken,” because that would undermine their domestic political standing and empower the other side. Still, without a deal by year’s end, a collision will become likely. As the clock ticks down, a bad outcome becomes more likely. Similarly, Trump thought he could bully Iran by abandoning the Joint Comprehensive Plan of Action and imposing severe sanctions. But the Iranians have responded by escalating currencies (not least the U.S. dollar). A crisis in Argentina could also have
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October 2019
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