Respect RCEP – TCB*

*(Taking Care of Business) with apologies to Aretha Franklin

What with Covid-19 and lockdown tiers making the headlines it is easy sometimes to forget the bigger global economic picture. Fifteen countries have recently formed the world’s largest trading bloc, accounting for about 30% of global domestic product (GDP) and 42% of global manufacturing. The Regional Comprehensive Economic Partnership (RCEP) is made up of 10 South East Asian countries, as well as China, South Korea, Japan, Australia and New Zealand.

The trade deal excludes the US, which under President Donald Trump withdrew from the former Trans-Pacific Partnership (TPP) agreement in 2017. RCEP will aid China’s drive to reduce its dependency upon American-led supply chains and will also certainly extend its political and economic influence in the region. RCEP is likely to benefit Japan and South Korea which will gain greater access to the Chinese market. China will gain geo-politically and in technology trade.

RCEP is narrower in scope than the TPP deal with the removal of ‘only’ 90% of tariffs, but the remaining 10% are largely on agricultural goods, a small part of regional trade. It is the sheer scale of the RCEP deal that makes it significant with 15 countries, 42% of the world’s manufacturing and a third of the global population. The new trade block will be bigger than both the US-Mexico-Canada Agreement and the European Union.

The RCEP announcement comes at a time when the UK and EU continue to squabble over Brexit. Perhaps this news will bang heads together and make both parties look at the bigger picture?

China is fast gaining ground on the world’s leading economy – the USA and is reinforcing its dominance over the Pacific region. While Joe Biden’s election win may de-escalate some of the tensions that built up between Beijing and Washington under president Trump, the two super powers still look on a collision course in the long term.

What have we been watching?

The combination of Astra Zeneca’s vaccine announcement and a clearer path to Joe Biden’s presidential transition bolstered global equity markets last week. Hopes of a strong recovery in the US economy and the end of political uncertainty saw the US market hit a fresh record high in the run into Thanksgiving and Black Friday. Until vaccination programmes gain traction, Covid-19 risk remains and US disease expert Dr Antony Fauci warned that America could see a ‘surge upon a surge’ of Covid-19 cases as people return home from the Thanksgiving holiday.

Astra Zeneca and Oxford University confirmed their vaccine to be 70.4% effective in a trial of over 23,000 volunteers with a second dose of half that of the first giving 90% effectiveness. However, just to complicate matters Oxford University acknowledged an error that forced its trial to switch dosing. In addition, the head of Operation Warp Speed, the US funding programme for vaccine development, disclosed that the second sub-group was also limited to people aged 55 or under, a demographic with a lower risk of developing severe Covid-19. Meanwhile, the UK government has secured an additional 2million does of Moderna’s Covid-19 vaccine.

While markets welcomed the vaccine news, in the meantime, many countries are still seeing Covid-19 cases rise. Germany has announced an extension of ‘lockdown light’ and while the UK lockdown ends on 2^nd December there is a lockdown lottery with the majority of England facing either tier 2 or tier 3 restrictions. Meanwhile, the latest survey estimates that the R rate of infection is 0.88 – below 1.0 for the first time since August. The ongoing long-term challenge in containing Covid-19 was also reflected in news from China last week. China’s biggest wholesale market has suspended the sale and storage of chilled and frozen meat as well as seafood after government inspections and several new cases of Covid-19.

A key Trump administration appointee said she would allow President-elect Joe Biden to begin his official transition, paving the way for his team to get access to briefings and other government services needed for the transfer of power. It marked a formal recognition by President Trump’s administration that Biden won the 3^rd November election.

Even Brexit talks have been affected by Covid-19, but final talks have resumed and appear to be going down to the wire with fishing still an ongoing sticking point. Nonetheless, markets remain hopeful of a lastminute deal with reports that the possibility of adding sunset or review clauses into any agreement helping to unlock compromise on some of the more difficult issues, allowing them to be revisited in a number of years. Sterling edged up above $1.33. The EU also has other problems with the budget and recovery fund stand-off with Hungary and Poland continuing.

In the UK, the flash PMI activity reading for November dipped to 47.4, a six-month low. Lockdown 2 hit business sentiment, especially in the service sector, although the outlook was a little more positive helped by the vaccine news. In addition, the service sector will be hit particularly hard by the government’s tier 2 and tier 3 restrictions. Chancellor Rishi Sunak presented his 2020 spending review which contained no real surprises. The Office of Budget Responsibility (OBR) presented three forecast scenarios with the central one suggesting a smaller 11.3% contraction in the UK economy than in the previous forecast but that the subsequent recovery takes longer. There is also a ‘no deal’ Brexit scenario that would knock a further 2% off UK economic growth. The cost of propping up the UK economy during the Covid-19 crisis suggests government borrowing will rise to £394bn – 19% of gross domestic product (GDP) with the debt/GDP ratio at 105% – the highest level since 1959/60!

In Europe, the flash PMI activity indicators for November appear to be signalling a double dip recession in the fourth quarter which, is not surprising given the recent rise in Covid-19 cases and latest lockdown measures. However, some lockdown measures are starting to ease with France allowing non-essential shops to open.

In the US, the flash PMI activity reading for November was the highest reading since 2015 and probably caught the post presidential election jump but would have missed the most recent jump in Covid-19 cases. The recent increase in Covid-19 cases has begun to impact US consumer sentiment. It looks as Joe Biden’s presidency will see Janet Yellen return as Treasury Secretary suggesting the US economy may ‘run hot’ raising the question of whether we will see a pick-up in inflation.

China looks to be the clear Covid-19 winner. China’s PMI activity indicator for November showed manufacturing at a 3-year high while activity in the service sector hit an 8- year high.

Brent oil moved up above $47 on the positive vaccine news.

Finally, a hard-hitting report by the Office of National Statistics finds Britons understand little about economics- they clearly haven’t spoken to readers of Alpha Bites!

Read Last Week’s Alpha Bites – Lockdown Lottery

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Respect RCEP – TCB*

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