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Special Lunch with Coface Economist

The ECCT co-hosted a Special Lunch together with the France Taiwan Chamber of Commerce and Industry (CCIFT) on the topic "After black swans rocked last year, will 2017 be a year of white swans?" with guest speaker Jackit Wong, Economist for Coface Asia Pacific.

Brexit and the election of Donald Trump were what the speaker referred to as the "black swan events" of 2016. While there is hope that 2017 will be a better year for the global economy, there are risks. Looking at the pattern of the past five years shows that the IMF, World Bank as well as private banks have tended to be optimistic at the start of year but have later had to revise downwards overly-optimistic forecasts.

Despite the black swan events of 2016, 2017 got off to a good start. Stock markets have risen and business confidence has been boosted in the United States by President Trump's promise of an increase in infrastructure spending and a cut in the corporate tax rate to 15% (which would, if it comes to fruition, be lower than both Hong Kong and Singapore). Coface expects global GDP to rise by 2.8% in 2017, up from 2.5% in 2016. Growth is expected to be driven mostly by China and emerging markets. China is expected to account for 1% of global growth, emerging markets 0.9%, the United States 0.4% and the Eurozone 0.3%.

However risks include an interruption in the price recovery of commodities (which drives growth in emerging markets). Wong noted that oil prices came off recent lows and started to rise in late 2016 and 2017 after OPEC producers decided to cut production. However, prices have fallen again recently on speculation that the gap between supply and demand will grow. Meanwhile US shale gas producers continue to show no signs of slowing down.

It is uncertain if Trump's plans will be implemented. Even if they are, the economic impact will not be felt at least until next year. Given a relatively slow start of around 1% GDP growth in the first quarter of 2017, it is difficult to foresee US growth exceeding 2% this year (Coface forecasts 1.9%).

On monetary policy, the Federal Reserve has signalled two more modest interest rate rises in 2017. If, for some reason they do not follow through, this is likely to cause the US dollar to depreciate. There is also a small risk that the Fed would raise rates more than expected in response to inflation. Should this happen, the dollar would appreciate, which could prompt capital inflow to the US from countries like Taiwan. This would then have the potential to upset the recovery (currently underway) in Taiwan.

Coface also expects GDP growth of less than 2% (1.6%) for the Eurozone in 2017. This is assuming that Marine Le Pen (leader of France's National Front) does not win the presidential election in France. Le Pen has pledged to hold a referendum on whether or not France should stay in the European Union (Frexit). According to Coface's analysis, there is still only a remote possibility that she will win and even if she does, she would need parliamentary approval to proceed with the referendum. Coface economists predict disaster for many French corporations if France were to exit the EU and euro (using a devalued national currency, they would not be able to pay back their debts).

China's GDP growth is expected (and predicted by China's own leaders) to moderate to around 6.5% in 2017. Coface expects the People's Bank of China to have a less accommodative monetary policy and impose tighter credit conditions. This is in response to the steadily rising credit to the private non-financial sector since around 2010.

A high proportion of the companies surveyed by Coface offer credit sales, although the percentage has fallen below 80% in the latest (2016) survey. In addition, the average credit terms offered increased significantly to 68 days in 2016. More worrying are the figures for overdue days. 15.9% of respondents had credit sales overdue by more than 150 days. According to Coface's experience, approximately 80% of ultra-long overdue amounts (over 180 days overdue) are not paid back at all. If payments are not made for too long, companies have cashflow problems and eventually face bankruptcy. This would have ramifications for the broader economy. The sectors most at risk from long overdue issues in China are the chemical and construction sectors.