It’s that time of year again. Herewith are my economic and business predictions for 2019. Making them was harder than usual, given the headline-a-minute turmoil of 2018 – thank you, Donald Trump – that is bound to continue in 2019.
Stock markets: More of that crunching sound
Tech stocks will keep getting whacked. In spite of the big selloff in 2018, the majority of tech stocks and the FAANG plays – Facebook, Amazon, Apple, Netflix and Google parent Alphabet – remain overvalued. Take Netflix. Despite its fall from US$400 a share in July to US$250 in December, it still trades at about 85 times forward earnings; ditto Amazon. There has not been enough correction in their corrections.
Facebook, however, may soon find its bottom after a horrendous year that saw its shares fall by 30 per cent, dropping its price-to-earnings ratio to a non-insane 17 times. As the tech market deteriorates, the ride-hailing services Uber and Lyft will speed up their initial public offerings before it’s too late, and the flood of new tech equity will put another damper on valuations. The good news is that the tech crunch will reduce the Grand Canyon-sized wealth divide. It was the richest who got into the tech sector early and the selloff will cost them billions – not that anyone will feel sorry for them.
Economies: Politicians and central bankers running scared
Growth will deteriorate pretty much everywhere as the markets soften and the Donald Trump-inspired trade wars prove relentless. European growth will fall the most, because of the never-ending Brexit saga (see next item) and the return of recession in populist-governed Italy, the euro zone’s third-largest economy. Italy’s economy shrank in the third quarter of 2017, its first contraction since 2014, and unemployment is rising again. With growth waning, neither the U.S. Federal Reserve nor the European Central Bank will raise rates in 2019, and the Fed, which hiked rates four times in 2018, may even cut them. The ECB won’t dare to boost rates – its key lending rate is zero per cent – especially since its quantitative easing program faces extinction. With central bankers afraid to hike, governments will come under pressure to stimulate the economy. But after years of watching sovereign debt loads soar, their ability to run expansionary budgets will be severely curtailed. In other words, none of the old economic tricks will come to the rescue.
Brexit: Kicking the can so far down the road it’s invisible
As the British economy shows sign of stress and Prime Minister Theresa May proves incapable of nailing down parliamentary approval for a comprehensive Brexit deal, a way will be found to delay the official March 29 Brexit date. An extension of the European Union’s Article 50 deadline, which gives any EU state the unilateral right to withdraw from the EU, would be possible – provided that all of the 27 other EU states agree. The extension might last two or three years, during which time the government will change, Ms. May will vanish and Brexit will fade from view like a bad dream. There will be no second referendum on Brexit before March. There’s no time for one.
Oil: Up it goes after Saudi Arabia stops reading Donald Trump’s tweets
In early 2018, Saudi Arabia, the driving force behind the OPEC cartel, gave every indication that it would support high oil prices. The Saudi Energy Minister even suggested that rising global demand could well push prices to US$100 a barrel. By September, Brent crude, the international benchmark, hit US$85 and it was starting to look like the cheap oil era was coming to an end. Donald Trump fixed that, using a barrage of tweets to demand that the Saudis open the spigots to bring prices down (“Opec continues to rip us off,” he charged). After the Saudis murdered Washington Post journalist Jamal Khashoggi in October in Istanbul, the kingdom seemed more eager than ever to meet Mr. Trump’s wishes and oil kept sinking, with Brent hitting US$53 in late December, a drop of 18 per cent for the year.
But as Olivier Jakob of Swiss oil consultancy Petromatrix noted, the Saudis are now minded to pay less attention to Mr. Trump as he disengages from the Middle East – he announced just before Christmas that U.S. troops will be pulling out of Syria – and Mr. Khashoggi’s murder becomes yesterday’s horror story. Mr. Jakob believes the Saudis will cut supplies in 2019 and he’s probably right. Oil will rise as a result, but it might not climb far as global economic growth wanes and talk of a recession fills analysts’ blogs.
Auto: Let the bad times roll
Most auto industry forecasts remain bullish in spite of Mr. Trump’s trade wars, tariffs on steel, ever stricter pollution-control requirements and millennials’ apparent lack of interest in owning cars. Don’t believe it. The auto industry is facing a downturn and if you doubt that, look at General Motors’ defensive measures in November, when it announced the closure of its Oshawa, Ont., factory and four U.S. plants. In Europe, the canary in the coal mine is Jaguar Land Rover, the Indian-owned maker of luxury cars and SUVs and Britain’s largest auto maker. The company reported a loss of £90-million ($156-million) in the third quarter and is ditching thousands of workers. Where it will find the billions needed to restructure the company and launch new vehicles is an open question. Industry consolidation seems inevitable as the lesser car groups prove incapable of raising the fortunes needed to transition to electric cars and autonomous driving. Here’s betting that at least one big auto maker will lose its independence in 2019, and a few small ones.
Bonus business and non-business predictions:
Boy wonder car racer Charles Leclerc, now driving for Ferrari, will become a contender for the Formula 1 championship. Liverpool will win the 2019 Champions League (it was the runner-up in 2018); Greek tennis hotshot Stefanos Tsitsipas will make it to the Wimbledon final. Washington Post owner Jeff Bezos, bored of his Amazon success, will buy another big-name newspaper, not necessarily in the United States. Retail stores will make a comeback, just as paper books have. Melania Trump will divorce her husband.