DAVOS, Switzerland (Reuters) - Brexit should not be viewed in terms of ‘hard’ or ‘soft’ but rather as a complicated process of redistributing sovereignty, S&P Global’s chief economist said on Wednesday.
Speaking in the Global Markets Forum live from the World Economic Forum in Davos, Paul Sheard also said a recent rise in bond yields should be viewed, in principle, as a positive development.
Here are some excerpts from the conversation.
QUESTION: What are your thoughts on the UK’s economic outlook after Prime Minister May’s comments yesterday indicating it would leave the single market?
ANSWER: We’ve already shaved several basis points off our (UK) growth forecasts for the next two years. For the time being it is an uncertainty shock more than anything else. I wouldn’t look at Brexit too much in terms of zero-one, hard-soft etc but more as a complicated process of a recontracting of sovereignty sharing among members. But it is a negotiation so it makes sense for the prime minister to give some clarity and lay out some key principles but also keep some cards close to the chest.
Q: What are your oil forecasts at the moment? Have they or are they likely to be raised now we look to have steadied around $55 a barrel?
A: Our oil experts expect prices to trend upwards over the medium term, on reasonably strong global demand, but to remain capped by the latent supply from shale. I am skeptical about the ability of OPEC to exercise much market power now that shale oil is the swing supply.
Q: Which countries will feel the pressure most from the recent rise in yields?
A: The rise in yields is in principle a welcome development. We just spent X number of years fretting about secular stagnation and low/zero/negative rates. We found that the likes of Turkey, Venezuela and Argentina were among the most notable emerging markets that are vulnerable to a “Fed shock”. LatAm comes out as vulnerable on rates as well as a China hard-landing. Among economies least hit by rising rates are the likes of China, Russia and Brazil, ie the largest domestic demand- oriented economies.
Q: If there is all-out trade war as the kind of worst case scenario, how much would the likes of Mexico’s economy be hit? Canada might be the other big loser too, I guess?
A: In general the economies that would be most hit by a real and sustained trade war would be the smaller EM and export-oriented developed economies. China and the U.S. both have large domestic markets so could sustain growth a bit better. Mexico and other smaller economies in LatAm and in emerging Asia would be big losers. China has a large domestic market but it is at the wrong stage of economic development to want to cut itself off from the global economy.
To read Sheard’s comments on South Africa and Mexico see [L5N1F83W0]
(This interview was conducted in the Reuters Global Markets Forum, a chat room hosted on the Eikon platform. For more information on the forum or to join the conversation, follow this link: here)
(This version of the story was refiled to add name of chief economist, paragraph 2)
Reporting by Kirsten Donovan; Editing by Gareth Jones