What a difference a year makes! I am preparing remarks for the State of the Industry session at the Unified Wine & Grape Symposium in Sacramento at the end of the month and I’m struck by how much the global wine market environment has changed in just a year. Last year’s relatively hopeful situation has given way to threatening storm clouds. Here’s a sneak preview.
#1: Global Shortage to Surplus
2017 was a terrible year for global wine production. There are always a few regions where wine production falls due to weather problems of one sort or another, but this is usually offset by unexpectedly good harvests elsewhere. As this OIV chart shows, however, 2017 saw substantial short harvests in several of the largest producer nations, resulting in the lowest total production in 50 years despite an abundant harvest in the United States.
Shortage is a problem, as I wrote last year, but so is surplus and 2018 brought a return to excess production in a big way. This was especially problematic in the U.S., where finding room for the new vintage was difficult because of the large 2017 harvest already in the tanks.
Because nothing about wine is ever simple, the shortage affected some countries and grape varieties more than others and the surplus does the same. As I wrote last August, the boom in Cabernet Sauvignon planting in California and Washington over the past few years seems to be hitting the market all at once. There is a lot of bulk Cab on the market right now and prices have softened. That’s a problem for growers who counted on prices continuing to rise.
#2: Synchronized Global Expansion Deflates
Last January I was able to report the rare occurrence of “synchronized” global economic expansion, which the Economist magazine captured with this uplifting cover.
It wasn’t really synchronized, because that suggests some coordinating force, but all the largest economies were rising at the same time. As the year unfolded, however, the picture changed dramatically.
China and the United States have not fallen into recession, but both are slowing with problems in key sectors. The U.S. stock market, which is not a good recession predictor, closed out the year with substantial losses and the yield curve, which is, is flatter than you might like.
China’s overall growth rate has declined and some sectors (automobiles in particular) have been hard hit. It is not a good thing when the two engines of global growth are sputtering.
Germany and Japan have experienced down quarters followed by a bounce, avoiding the official recession designation, which requires two consecutive quarters of economic decline. The UK and EU economies are fragile, too, and Italy is a big concern.
What accounts for the sudden change? Well, it might be like the wine grape situation above, where conditions just happened to be positive in 2017 and turned around in 2018. But the intensification of tariff wars and trade disputes is an important factor in the global growth downturn since the shrinking of trade and finance flows (and the movement of people, too) tends to reduce efficiency and stifle growth.
The new year begins with the world economy in a much more fragile condition than 12 months ago and more susceptible to an economic shock. Which explains why financial markets are jittery and everyone is concerned that trouble in the U.S. might start the dominoes falling.
#3: U.S. Recession Worries
There is a lot of talk about the next U.S. recession even though unemployment remains extremely low and many elements of the economy are positive. To be clear, there will eventually be a downturn, but it is impossible to say when it will be or what it will look like.
This Economist cover shows one scenario — up and then down — but there are many others such as a double-dip or a prolonged stagnant plateau such as Japan experienced. One thing I am pretty sure about is that it won’t be a repeat of the 2008 crisis just because the circumstances are so different and the ability of economic policy makers to deal with problems is different, too.
The reason everyone is so nervous is that the list of factors that could trigger a recession is long, starting with those trade wars mentioned above. The financial markets sometimes focus on monetary policy — the Federal Reserve’s slow rise in interest rates. But short term rates are now just barely above the inflation rate, which means that real interest rates are slightly above zero after years of being negative. By historical standards, interest rates are low indeed. It is scary that near-zero interest rates are seen by many as too high. Maybe they are worried because negative rates have encouraged a debt boom.
The federal budget should be in surplus with unemployment so low. Instead we have the highest annual deficits I have ever seen outside of war time or during a recession. When a recession strikes (or, God forbid, there is a war), the deficit will sky-rocket. Just as already-low interest rates would handcuff the Federal Reserve if stimulus is needed, already-high deficits would constrain the federal government. No wonder investors are nervous.
In the meantime, the cost of interest on the debt is staggering and will grow, especially with positive real interest rates. When did we stop caring about the debt and deficit? Incredible.
Storm Clouds Gathering
There are other risks to consider including especially heightened political instability (US, UK, France, Germany, the list goes on) and Brexit, which is an important concern both to the world economy and the world wine economy.
How serious is the situation? What strategies do industry actors need to consider? These are some of the questions we will try to address at the Unified Symposium.