Ravi Bharadwaj, Senior Market Analyst, Western Union Business Solutions, looks at global developments as a prelude to 2014.
The sand beneath market participants’ feet is changing rapidly. Long held beliefs of the global economic trajectories, central bank policies, and corporate growth forecasts, were dealt a decisive blow during November. Revelations in this year’s penultimate month are sure to spell a flood of opportunity and volatility for all corporates.
Chief among these revelations was the European Central Bank’s eye-popping decision to cut its key lending rates in half from 0.5% to 0.25% in their early-November meeting, spelling challenging ramifications for European corporates. The move was backed by a central bank under siege, fighting, terrified by the region’s paltry inflation, employment and growth trends.
Particularly concerning were record high unemployment rates which could spell a feedback loop of consumer led risk-aversion and heightened political friction. The balkanized process of fiscal policy coordination wasn’t helping, as states vying for growth opportunities through deficit spending were routinely given the cold shoulder. Taken together, Eurozone firms will have to continue wrestling against weak top-line growth in the year ahead, while fending off ballooning market volatility.
Statements out of the Reserve Bank of Australia (RBA) and Bank of Canada in November, for example, bludgeoned their respective currencies (both central banks turned down the dials on their previously balanced monetary policy outlooks). While the RBA noted a weakened mining sector due to the slowdown in China, the Bank of Canada blamed broader global economic weakness for Canada’s weak export growth. The developments were a boon to exporters from these resource-rich economies, though importers needed to hedge their cash flows proactively in order to blunt the downside risks from the markets.
A slowed and uncertain outlook is playing itself out in myriad ways, such as a drop in U.S. retail sales on “Black Friday,” the day following Thanksgiving that traditionally delivers robust sales. This year showed both lower total volumes and lower average ticket purchases.
This all reflects a pullback in U.S. consumer confidence. The disappointing early results may signal a weak U.S. holiday shopping season, sending a cold winter shudder across firms. The U.S. unemployment rate stood at 7.3%, according to reports in early November, furthering a tepid mood. While the U.S., China, and India’s Q3 GDP growth were better than expected, Brazil and Russia’s growth slowed, indicating cloudy, mixed results felt around the globe.
All is not forlorn though. Central banks in the U.K. and the U.S. surprised market participants in November with traces of optimism, possibly promising sooner-than-forecasted hikes to their interest rates. Healthy GDP growth, rosy employment gains, and benign price pressures in the U.S. will likely mean up to 50% improved sales growth in the U.S. in 2014 for corporates spanning all industries. While the trade-weighted U.S. dollar remained stable near its 2013 midpoint, the U.K. pound screamed upward like a rocket. With several rosy measures of U.K. economic growth and burgeoning optimism from business surveys, businesses in many parts of the island economy are ramping up their long-term capital investments. Their timing could not be better, as additional growth in the U.K. will likely raise the pressure on the Bank of England to push interest rates up from their current, historically low levels.
As we approach the New Year, businesses will be watching economic indicators carefully. Given the anticipation of changing policies, it will be illuminating to see how monetary and fiscal policies shift the agenda for corporates in 2014. Meanwhile, as companies wrap up their year-end, volatility is likely to be on their minds as a new constant in 2014. To avoid letting volatility become a driving factor on profit margins, companies can look at their anticipated cash flow for the year and take steps now to ensure they have locked in favorable rates.