Geoeconomics Bi-Weekly: Markets Stabilize After Turbulent Month

State of the Global Economy 

After a period of turbulence, markets around the world bounced back last week as confidence in the U.S. economy increased. Retail sales leapt 1%, the most in 18 months and far above economists’ forecasts for a 0.4% rise, while new jobless claims came in below expectations and consumer sentiment increased. Most importantly, however, the Consumer Price Index (CPI) recorded an annual price increase of 2.9% in July, the first time the inflation gauge fell under 3% since March of 2021. The drop sets the stage for a rate cut at the Fed’s next meeting in September, which Fed Chair Jerome Powell clearly signaled is on the way during a speech in Jackson Hole this morning. 

In the Pacific, markets are closely watching the region’s central banks after the Philippines and New Zealand surprised many last week by lowering interest rates before the Fed. While Thailand, Indonesia, and South Korea all held interest rates steady this week, some analysts expect them and other Asian central banks to cut rates later this year as the global fight against inflation shifts to a new phase. China lowered interest rates earlier this summer to boost economic activity, and new data this week showed some signs of growing consumer spending. Some analysts were skeptical of the data, however, while noting that housing prices and sales continue to plummet.  

Meanwhile in Europe, Eurozone GDP exceeded expectations by growing 0.3% in the second quarter of the year compared with Q1, while inflation edged up slightly. July CPI registered an annual price increase of 2.6%, a slight increase from the 2.5% recorded in June. EU wage growth also slowed sharply in Q2, potentially setting the stage for another rate cut from the European Central Bank (ECB) in September. The United Kingdom, for its part, received some good news as GDP grew 0.6% in Q2, marking the second straight quarter of growth after ending last year in a recession. July CPI in the UK also came in lower than expected at 2.2%, while the unemployment rate unexpectedly dropped from 4.4% in May to 4.2% in June. 

Around the World 

Trade tensions between EU and China continue to escalate: The tit-for-tat tariff cycle between the European Union and China continued this week, as China announced an anti-dumping investigation into imported European dairy products after the EU affirmed its plan to impose levies on Chinese electric vehicle imports. Both sides claim the other provides their industries with an unfair competitive advantage through subsidies. Given the interconnectedness of the EU and Chinese economies, the outbreak of a trade war would challenge many stakeholders, such as the German automobile sector which is highly dependent on the Chinese market. Last year, China was the EU’s third-largest export market, while the EU was China’s largest export market.  

Oil tanker set ablaze in Red Sea as attacks on shipping persist: A Greek-flagged oil tanker traversing the Red Sea was attacked on Wednesday by projectiles and men on small boats, leaving the ship ablaze and adrift. While no group has yet claimed responsibility for the attacks, many suspect is it a continuation of the Yemen-based Houthi’s attacks on shipping in the region. The attacks have forced shipping companies to avoid the Red Sea, a key waterway connecting the Indian Ocean and Suez Canal, raising shipping times and costs: the price of shipping a 40-foot container has more than doubled since April. Policymakers and economists have been especially focused on this issue lately, as the heightened shipping costs may sustain inflation and complicate central banks’ ability to cut interest rates.   

Labor disputes in Canada shut down rail lines, potentially disrupting North American supply chains: Canada’s two largest railroads shut down Thursday morning, locking out 9,000 members of the Teamsters union who operate the trains after the two sides failed to negotiate a new contract. The shutdown could deal a major blow to the North American economy: Moody’s Analytics estimated that it could cost the Canadian economy for than $250 million per day, while nearly a third of the freight handled by the two railroads crosses the U.S.-Canadian border. The labor dispute may be the first of several to disrupt supply chains in the next few months—dockworkers at 36 U.S. east and gulf coast ports are threatening to strike in October after their contract expires. 

The United States announces $1.6 billion CHIPS Act grant to Texas Instruments; plans to disburse final CHIPS Act funds by end of year: The Biden Administration announced $1.6 billion in grants for Dallas-based Texas Instruments last Friday, which the chipmaker will use to construct three new plants in Texas and Utah. The announcement highlights the continued impact of the CHIPS Act as the dispersal of funds draws to a close. To date, the United States has allocated about $33 billion in CHIPS Act awards, leaving approximately $6 billion left which it plans to allocate this year. A study earlier this year by the Semiconductor Industry Association and Boston Consulting Group estimated that U.S. semiconductor manufacturing capacity will grow from 10% today to 14% by 2033 due to the chips act, the first rise in the U.S.’ global share of chip manufacturing in decades. Absent the CHIPS Act, the report estimates the U.S.’ share of global chip manufacturing would have fallen to 8 percent by 2032.  

Debt distress continues to burden developing economies and pressure governments: In the last few weeks, protests have rocked Kenya, Nigeria, Bolivia, and several other nations. While each situation is unique, a common thread unites these protests: deteriorating economic conditions and heavy debt burdens. Much of the developing world faces a growing debt crisis, which limits their ability to invest in their economies—more than 3.3 billion people live in countries that spend more on debt interest payments than education. Without a concerted effort to address this growing issue in the developing world, Western-led institutions risk ceding ground to China, which is looking to capitalize on the crisis by offering rescue loans. Boston University estimates that from 2000-2022, Chinese lenders loaned over $170 billion to nearly 50 African governments. Some analysts, however, argue that China’s loans are predatory and strain these developing economies more than the West. 

What We’re Watching 

• September 17 – The U.S. Federal Reserve meets to decide on interest rates.  
• September 19 – The Bank of Japan meets to decide on interest rates. 

• October 6 – Laos hosts the 2024 Summit of the Association of Southeast Asian Nations.