Policy uncertainty will continue to increase in 2019. In January this year, the IMF revised its forecasts for global economic growth downwards for 2019 to 3.5 percent (down 0.2 percent from its October 2018 estimates). The risks of policy shocks – Brexit, the increase in protectionism, the US-China trade war, a pseudo-Cold War between the US and Russia, just to name a few – remain significant for the global economy. Nevertheless, despite the forecasted slowdown, a recession is not expected.

China’s economy will keep decelerating. The IMF revised its forecast for Emerging Market growth this year to just 4.5 per cent, whilst UBS estimates that Emerging Market growth will be 4.8 percent (down from 5.1 percent in 2018). China is at the root of much of the slowdown in emerging market economies, with the country being hit in the third quarter of 2018 by its lowest growth rate level in 10 years. China’s growth is expected to fall to 6.3 percent in 2019.

Simmering trade conflicts will intensify in 2019. These conflicts are a cause for concern as they stand, but the dangers of further escalating these trade wars, triggered by an increasingly erratic US Administration, could substantially lower growth forecasts for the year. As a result, one expects increasing complexity surrounding supply chain engineering.

At the same time, regions will intensify Free Trade Agreements. The EU and mega-regional blocks will continue trying to forge closer ties, from the on-going negotiations for concluding a Regional Comprehensive Economic Partnership Agreement (RCEP, made up of 16 members across Asia, including China), to the recent entry into force of the EU-Japan Economic Partnership Agreement (on 1 February 2019), the EU’s expected entry into force of the EU-Vietnam Free Trade Agreement (concluded in 2016 but pending ratification in the EU), the EU’s intensive negotiations with a number of ASEAN members (Indonesia, Malaysia, The Philippines), and Africa’s effort to conclude a pan-African Continental Free Trade Area (AfCFTA) by the end of the year.

Rising debt and tightening money policy will lead to pressures on short-term capital. In addition, high debt levels in the US, Europe and Japan, linked to a potential interest rate hikes by key central banks, pose threats to the global economy. Amongst those expected to raise rates are the US Federal Reserve, the Bank of Canada, and a few Emerging Market central banks – such as those in Brazil, India and Russia. The Bank of England was also expected to raise rates, although the latest growth forecasts and policy uncertainty around the Brexit process may delay any interventions for a number of years.

Finally, oil prices are set to rise and commodity prices to fall. Oil prices should rise on the back of the crisis in Venezuela and the impact of sanctions against Iran, even if booming production in the US will offset some of these downward pressures on oil prices. Other commodities are predominantly on the downside, given slowing demand growth and rising supply.

In summary, the risks of 2018 are likely to be exacerbated in 2019, and present some real challenges for Emerging Markets which are well integrated into the global economy, as is the case for Mauritius.

What does it mean for an open economy like Mauritius?

Commodity prices may favour Mauritius. Whilst an increase in oil prices is likely to hurt the economy, lower commodity prices are expected to play to Mauritius’s advantage, even if its overseas agro-industry investments in Africa may be net losers.

Trade preference will continue to be eroded with a series of EU negotiated agreements coming into force in 2019 and 2020 with fiercely competitive countries from South-East Asia. Cambodia on the other hand, might lose its EBA status (pending a final decision in 6 months), which may favour Mauritius’s textile industry.

Multilateral trade negotiations are more necessary than ever, in the face of tariff escalations. The WTO will hold its biennial Ministerial Conference in Kazakhstan at the end of 2019, and Mauritius needs to find allies in the developing world and across Emerging Markets to move the negotiations forward in the Trade in Services Agreement (TiSA) and the new E-commerce initiative, both of which would substantially benefit the Mauritian economy.

Brexit will continue to pose a threat to Mauritius exports in 2019. On 31 January this year, an ESA-UK Economic Partnership Agreement, modelled on the EU-ESA EPA, was signed by the ESA Member States, of which Mauritius is member. The entry into the force of the agreement will happen once the UK leave the EU. While this does maintain predictability in the rules governing trade with the UK, it will not change the uncertainty surrounding the UK’s economic growth in 2019, nor reduce the complexity of Mauritian exports which transit trough the UK to enter the EU.

The adoption of the Internet of Things (IoT) and Industry 4.0 will accelerate in 2019, as manufacturers, distributors and retailers look to increase digitisation to deliver visibility and efficiencies across their supply chains. We have already seen major demand from companies for consulting services in analytics and the introduction of enabling technologies to disrupt traditional business models. Mauritius needs to also consider the implications of Industry 4.0, the future of work more generally and the ability of Mauritius to compete in higher human capital industries.

The need to integrate AI and machine learning tools to capture risks better and improve optimisation of trade and investment investments, is something we are already feeling in the demand from clients. Smart algorithms and self-teaching systems to parse the wealth of information at our disposal will deliver many benefits to the supply chain including understanding and mitigating potential risks with supply chain stakeholders, ensuring compliance, and monitoring reputations of supply chain organisations, particularly through the traceability benefits from using blockchain technology.

Finally, two major threats for 2019 are those related to sustainability and inclusivity.

The key challenge for Mauritius will be to boost inclusive economic growth. As highlighted by a recent IMF mission in Mauritius in January 2019, real GDP growth is forecasted to reach 3.9 percent in 2019. Uncertainty regarding the elections may slightly dampen investment, though public sector investment is likely to grow faster. The growth forecasts are driven by expected strong performance in the financial services, construction, and tourism industries. The need for Mauritius to consider carefully how to make growth inclusive and promote light manufacturing, agro-industries, as well as other services sector will be important going forward.

Adapting to climate change and sustainable development ought to be high on the policy agenda, but in an election year, is unlikely to be so. We can anticipate temperature rises to continue (according to Climate Central, the last five years have been the hottest 5 years on record), while Mauritius will experience increasing pollution of the seas, air and land, over-construction, continued water and power outages, traffic congestion, as well as flooding and cyclones, amongst others. There is an ever increasing need to invest in adaptation technologies to combat climate change challenges. While we all are reminded of these problems every day, there remains little evidence that any serious effort is being made to combat the threat to Mauritius’s very existence. Perhaps 2019 could be turning point for focusing on more meaningful policies?

By Paul Baker, CEO at International Economics Consulting Ltd. This article was published in the Business Magazine Mauritius (13-19 March 2019 – Issue 1379).