Geoeconomics Bi-Weekly: Inflation, Earthquakes, and Wine

State of the Global Economy  

While inflation has dropped considerably since its peak in 2022, it remains above many central banks’ 2% target. Per estimates from JP Morgan, core inflation in advanced economies fell to 3% in the second half of 2023 but has since increased to 3.5% in the first quarter of 2024. Finishing the “last mile” of the fight is proving difficult for many. 

In the United States, the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, rose 2.5% on an annual basis in February, up from 2.4% in January. Core PCE registered at 2.8%, a slight decline from 2.9% in January. But despite the sticky inflation, U.S. consumer sentiment appears to be improving. The University of Michigan's benchmark Consumer Sentiment Index rose to 79.4 in March, the highest rating since July 2021. While the United States’ post-COVID economic recovery has outpaced that of other advanced economies, U.S. consumers have generally felt glum about the economy, a disconnect first described by Kyla Scanlon as a “vibesession.”   

Meanwhile, Europe received some good news on the inflation front this week. The consumer price index (CPI) inflation gauge fell to 2.4% in March from 2.6% in February, narrowing in on the European Central Bank’s (ECB) 2% target. Core CPI also fell from 3.1% in February to 2.9% in March. While the ECB meets next Thursday to decide on interest rates, the bank has indicated it will likely not begin cutting rates until June. Many southern European economies such as Portugal, Spain, Italy, and Greece have performed well compared to traditional economic powerhouses such as Germany, easing pressure on the ECB to cut rates quickly. 

Across the Pacific, China received some positive news amidst its myriad of economic issues. China’s official manufacturing purchasing managers index (PMI) indicated the manufacturing sector expanded for the first time since September 2023, while the private Caixin and S&P Global survey recorded a 13-month high in manufacturing activity. Meanwhile, China’s services sector registered its largest expansion since June. The updates came as China hosted the annual China Development Forum, where Chinese leaders laid out their future growth plans to executives from around the world hoping to draw investment.  

Around the World 

Attacks in the Red Sea continue to disrupt global trade, boost inflation: Just over three months after the Yemen-based Houthi’s attacks on merchant shipping began, transit through the Red Sea has decreased by approximately 50%. Prior to the attacks, about 12% of global trade traversed the vital waterway and, despite an international response, there are few signs of imminent relief. Shipping giant Maersk expects disruptions to persist into the second half of the year. The disturbance to global trade continues to have both regional and global implications. Revenue for the Suez Canal has fallen by half, further pressuring Egypt’s already distressed economy, while JP Morgan estimates that the disruptions could add 0.7% to global goods inflation over the first half of 2024.  

Chinese manufacturing subsidies distort global competition; green energy tech a prominent example: While China’s economy is struggling in many regards, its exports are surging, rising 7 percent in January and February compared to last year. But the glut of output in China is lowering prices for these goods worldwide, undercutting foreign firms and drawing scrutiny from foreign governments. In one prominent example, global solar panel production now outpaces demand by as much as 300% due to soaring Chinese exports, lowering the price of solar panels so much that they are now being used to build fences. In response, the European Union announced an investigation into Chinese subsidies of solar energy companies, while U.S. Treasury Secretary Janet Yellen traveled to China this week to express the United States’ concerns. 

Earthquake in Taiwan highlights semiconductor supply chain vulnerabilities: Taiwan suffered its strongest earthquake in the last 25 years on Wednesday, underscoring the importance of diversifying supply chains for critical technologies. Taiwan produces over 60% of the world’s semiconductors, including 90% of the most advanced chips. Fortunately, damage caused by the magnitude 7.4 quake was less than originally feared due to Taiwan’s early warning system and seismic building codes. TSMC, the world’s largest semiconductor manufacturer, evacuated some personnel before resuming operations within a day. Still, the quake is a stark reminder of the risks of concentrating chip production on an island that is both prone to earthquakes and a geopolitical hotspot. The United States, whose share of global semiconductor production stands at just 12%, is investing billions to shore up domestic chip manufacturing and mitigate these risks. 

Chinese tech giant Huawei sees profits soar despite heavy U.S. sanctions: Last week, Shenzen-based telecommunications firm Huawei reported annual profits of $12 billion in 2023, more than double its profits in 2022, raising questions about the efficacy of U.S. sanctions. Huawei has been under U.S. export restrictions since 2019 and, while these restrictions had a short-term impact—Huawei reported a 70% drop in profits in 2022—the company appears to have recovered. Just last fall Huawei released the Mate60 5G smartphone, despite U.S. export controls designed to cut off Huawei’s access to 5G technology. Economic sanctions have become a go-to foreign policy tool for the United States, though their effectiveness is hotly debated. While some view them as a potent foreign policy tool, others question their long-term effectiveness as companies are likely to find workarounds. 

China lifts tariffs on Australian wine as tensions thaw between the two nations: In a sign of easing tensions between Australia and China, China announced Thursday that it would lift the tariffs on Australian wine it imposed three years ago. Following the tariffs, Australian wine sales to China plummeted from over $1 billion in 2020 to less than $30 million in 2021. China first implemented restrictions on Australian exports ranging from timber to lobsters after Australia supported an international inquiry into China’s handling of the coronavirus. Within two years, China’s share of Australia’s exports fell from 33% to 27.6%. Tensions began to thaw last year as Australia withdrew complaints it had lodged with the World Trade Organization and reverted course on the cancellation of a Chinese company’s 99-year lease of the northern port of Darwin. In turn, China has gradually lifted trade restrictions on goods such as coal, barley and timber. 

What we’re watching 

• April 10 – Japanese Prime Minister Kishida visits the White House for an official state visit to discuss U.S.-Japan security and economic ties. 
• April 11 – The European Central Bank meets to decide on interest rates. 
• April 19 – Elections begin in India, the world’s largest democracy and 5th largest economy. Current Prime Minister Narendra Modi’s BJP party is expected to win comfortably. In the last decade of Modi’s rule India’s economy has doubled and its stock market has tripled, though wealth inequality has widened as many Indians struggle to find work.