• The Invisible Hand

Economics in 2018

We review the main economic developments in 2018 as it comes to a close


Despite stock markets plunging and political chaos in the UK and the US, the world economy has still grown by 3.8% in 2018, the same as in 2017. This continues the recovery in world GDP since the financial crisis. The world economy has grown steadily since 2012 when it grew by 2.5%. World unemployment has followed this trend and has declined to 5.49% in 2018 from 5.53% in 2016. Historically this is at a low level especially compared to between 1995 and 2005. Going into 2019, hopefully the recovery will continue, but this article will look back at 2018 and explain some of the main economic developments.



Fastest growing economy:

Syria: 9.9%

Why?

Syria might seem an unlikely candidate for the strongest growing economy given they have suffered from a catastrophic civil war. However, as the war becomes less intense reconstruction has begun. The civil war has meant the Syrian economy is only one fifth of the level it was before the war. The low base effect means that a small absolute change in Syria’s GDP translates into a large percentage change because of the small initial level. Funds for reconstruction have begun to flow into Syria, especially from expatriates and although thinly spread the government and its departments remain largely intact. Reconstruction has the biggest effect on GDP because there are more efficient purposes for investment. For a developed economy there are diminishing marginal returns to capital because there are fewer good options for investment


Slowest growing economy:

Venezuela: -14.3%

Why?

Venezuela continues to be the worst performing economy in 2018. Their problems stemmed from their economic crisis in 2014. Venezuela has become dependent on oil- 95% of exports were in oil and 95% of the government’s revenue comes from oil. This dependence means Venezuela has never felt the need to develop other industries and uses the dollars it earns from its exports to buy the goods it needs. The crash in GDP occurred in 2014 when oil prices plummeted and Venezuela had to deal with a scarcity of foreign currency reserves. Export revenue plummeted with the oil price which had an impact on the revenue of firms and therefore employment and output. The decline has continued since then because oil prices have remained low, government policy has been chaotic and hyperinflation has disrupted oil drilling. Furthermore, 2.3 million people have fled the country since 2014.


Highest inflation:

Venezuela: 1,299,724%

Why?

Venezuela also wins the unfortunate prize of the highest inflation rate with its prices doubling about every 26 days. Hyperinflation came about due to the economic crisis in 2014. The socialist government was unwilling to accept the economic downturn so they started printing money to pay for infrastructure and welfare systems. They were obsessed with regaining popularity with Venezuela’s poor and they found it harder to get credit by conventional means after it defaulted on government bonds. Hyperinflation has properly set in in 2018 because hyperinflation creates a cycle which is very difficult to break because consumers anticipate price increases so adjust their behaviour accordingly.


Biggest currency fall:

Argentina: -54.0%

Why?

Argentina has suffered recently from high inflation due to successive populist governments printing money to finance wide budget deficits. In 2018, they have also suffered from their worst drought in a decade which slashed the harvests of soybeans and corn. A poor harvest reduces the supply of food so their prices increase. Inflation causes a flight of capital especially in emerging markets. A flight of capital causes a currency depreciation which in turns causes inflation which creates a cycle of currency depreciation. For Argentina which has run budget deficits for decades, this poses a particular problem because it makes foreign debt harder to service. The government has acted by increasing interest rates by 562 basis points (a world record in 2018) and they have received the biggest ever IMF loan of $50bn to boost Argentina’s foreign exchange reserves, so hopefully the currency will fare better in 2019.


Highest current account surplus:

Singapore (19.1% of GDP)

Why?

Singapore is a relatively small country yet it has become a highly developed, free market economy. They are an export based economy which a trade to GDP ratio of about 400% (the biggest in the world). Their exports are mostly in electronics, chemicals and services including wealth management in which they are global leaders. They are also members of many international trade agreements. As well as a substantial visible trade surplus they receive massive inflows of FDI due to its highly attractive investment climate and stable political environment.


Highest current account deficit:

Turkey (-5.9% of GDP)

Why?

Imports are rising due to rising demand for energy resources like crude oil and natural gas. Furthermore, there is an usually low savings rate in Turkey. A current account balance can be expressed as savings minus investment so low savings can account for this structural deficit. In 2018, Turkey’s current account deficit has reached the headlines this year after it sparked off a currency crisis. This crisis has only made the current account deficit worse because outflows of capital are increasing as investors panic.


Best performing stock market:

Brazil BVSP (13.1%)

Why?

Despite stockmarkets across the world falling, Brazil has produced strong returns due to improvements in their domestic economy. In 2018, economic growth has returned to Brazil and inflation and interest rates have remained low. Although moral campaigners have condemned Jair Bolsonaro, his election has cheered investors. His free market ideology involving selling government assets, reforming the tax system and cutting Brazil’s deficit. This has converted into gains in the stock market of 13.1% in 2018.


Worst performing stock market:

China (Shenzhen Composite) (-30.3%)

Why?

Two main causes account for the collapse of China’s stock market. First, fears over the ongoing trade war have reduced confidence in Chinese companies. The government’s response by cutting the amount of reserves held by banks has failed. A de-escalation of the trade war in 2019 could see much of these losses being recovered. Second, there are concerns about China’s domestic economy given its manufacturing sector in December contracted for the first time in more than two years. Traders have also been worried over the government’s crackdown on shadow banking. However, China is less reliant on its stockmarket than other countries and many large companies are not on it. Instead Chinese companies prefer debt as opposed to equity as a source of finance. Therefore, Trump’s celebrations of his trade war crippling the Chinese economy are unfounded.

Best performing stock in the FTSE 100:

Ocado (93.9%)

Why?

We think of Ocado as only an online retailer yet in 2018 it managed to convince investors of their potential as a technology and software firm. Moreover, it has signed many big licensing deals with its Ocado Solutions technology; the biggest of which with Kroger in May saw shares jump 50% overnight.


Worst performing stock in the FTSE 100:

British American Tobacco (-46.2%)

Why?

BAT faced increased regulatory threats in the US and disappointing sales growth for its ‘next generation’ products in Japan. Also, its £42bn acquisition of Reynolds American in 2017 came under fresh scrutiny.

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