Fabrice Montagne: Our focus on the UK economy keeps me very busy at the moment, but on a global level the world today seems more complicated than it was six months to one year ago.
We started this year with the story that growth was remarkably synchronised across the world, countries and sectors, but this broke down in recent months.
We saw some signs from China with demands falling a bit sharper than expected and the automobile markets across Europe being in free fall, so there was a kind of perfect storm here from various measures.
"On a global level the world today seems more complicated than it was
six months to one year ago."
Brexit has been more intense then we might have expected.
On average, we are still constructive, the US powers ahead and will do so for at least the next two years. We are on the safe side given the size of the fiscal stimulus.
Our US-based clients and counterparts don’t really care about what is happening elsewhere because they have had the tax reforms, so that is the mood over there and the current powerhouse of the global economy.
Overall it has been trickier to assess the different risks in various sectors and areas.
Fabrice: We are concerned, but we don’t have a definitive answer on the impact of tariffs in the current world.
There are a lot of numbers circulating right now and we have produced our own estimates. The fact is, none of these were done in a world where value chains were so integrated as they are today.
There is the suspicion that the world production chain is perhaps more resilient than it used to be, but it is also much less linear, so we are currently testing the assumption of how well global value chains can resist, how much can they take and how much they can relocate globally.
We are worried but, in the US, we estimate the impact as a fraction of a percentage point – perhaps more in China – but these are the linear effects. If anything is added to this, it might become worse.
Fabrice: It is a very interesting question for which I don’t really have an answer. When Dominic Raab resigned, I was unsure what to make out of it: will he pull down the entire government or not, is it relevant to him becoming Prime Minister somewhere down the line, etc? It is incredibly complicated when trying to work out the various potential outcomes in order to reach a conclusion.
"Businesses must take decisions on imperfect and partial information."
We have decided that we can’t pretend to know what all the outcomes will be, but we know what the worse and average outcomes are and to some extent we know some elements.
The uncomfortable aspect of this is that businesses must take decisions on imperfect and partial information.
In the news we had central clearing houses having to send a letter three months before unwinding contracts – which was December – so we might not have ratification yet, but they may ask their clients to unwind some of their positions. The same is true of manufacturing.
In the future, businesses will have to take investment decisions based on impartial and imperfect information, which means that they will be addressing the worst-case scenario, not the most likely.
The financial sector is preparing for a world where, as of April next year, we don’t have any passporting in place, so we are setting up structures and infrastructures to address this as a worst-case scenario.
If you assume that the most likely scenario is one where we will get a transition period, then nothing will change rapidly but we are still having to prepare for the worst-case scenario.
