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Jonathan Lye.
  • Column: Letter from Britain

    PUBLICERAD 2018-10-05 AV sverrirthor
    UPPDATERAD: 2018-10-05 16:13

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    Trade wars, stress within the EU and digitisation are placing significant uncertainty on the future of global economic growth.  All three are connected by a common theme; the feeling amongst certain segments of society that they have been left behind. This is compounded by changes to the workforce brought about by digitisation.  The segment of the population that this applies to is steadily growing as professions also find themselves under threat of becoming obsolete.  This leads to an outlook of continued currency and interest rate volatility which results in an increased focus on financial risk management.

    The current US president seems hell bent on unravelling globalisation.  With his America First policy he is determined to install a system of protectionism and tariffs. The latest swathe of tariffs against China came in to place on 24th September, which results in over $200Bn Chinese imports being taxed. This is compounded with his policy of renegotiating agreements with trading partners and walking away from the Trans Pacific Trade Partnership.  The US economy is one of the most self-sufficient economies in the world but this attitude of self-preservation and isolationism is a significant change for the US as a global superpower.

    The disenchanted populous that swept Donald Trump to power is not a phenomenon exclusive to the US.  Across Europe we have seen similar effects with the most recent being the outcome of the Swedish election.  The theme remains the same; a disaffected element of society who have been mobilised by political leaders.  The pan-European impact of this is an existential threat to the EU.  Whilst the UK departing might not be seen a as a big deal by Merkel and Macron, Italy’s 5 Star movement brings a far more significant threat.  If Italy were to continue down the path they are travelling you could see a situation where an exit from the EU becomes inevitable.

    AI, blockchain, robots, Proptech, Fintech are amongst some of the many digitisation buzzwords that are being talked about.  However if you move away from the words and start looking at what is happening in the global economy you don’t have to go far to see the genuine impact of technology.  Whilst it is portrayed as a big bang, it only seems that way to those who are not early adopters.  A tipping point has been reached that means the influence is felt everywhere.  The prevalence of technology in the classroom, contactless payments, semi self-driving cars, Airbnb and Uber all fundamentally disrupt the way we work.  Consequently there is an impact on the future economic success of individuals and society.

    The Swedish economy is well placed to take advantage of digitisation.  As a society that is used to using technology to build trust (Bank IDs are a subject of much mirth with the author) Sweden not only has the skills but it also has the right mindset to benefit.  The current policy of the Riksbank to maintain a weak Krona is aligned with this opportunity as it means that the currency will not undermine the export economy.  However with falling unemployment levels and increased consumer consumption, inflation is increasing putting the bank under pressure to act on interest rates.  A move that is dislocated from the ECB will lead to a strengthening currency which could have a significant dampening effect on the economy.  Most economists agree this is unlikely and the Riksbank will continue with its policy of maintaining a weak currency however the asset price inflation that has occurred certainly weighs against this view.

    The link between politics and markets is clearly illustrated by the movement of sterling.  If Brexit talks are going well for the UK, GBP will strengthen and vice versa.  The major elements of global and European politics lead to the conclusion that we are going to be in a period of sustained uncertainty which will mean a prevalence of market volatility.  High volatility increases the likelihood of extreme moves occurring therefore, its drivers will continue to occupy the minds of decision makers.

    Jonathan Lye
    Director
    Auxilium Financial Risk Management

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