Geoeconomics Bi-Weekly: More Red Sea Attacks, an Election in Taiwan, and a New Stock Market Powerhouse

Happy Friday everyone! While the 54th World Economic Forum in Davos last week captured a lot of attention, it was far from the only notable news story. On Wednesday, the European Union announced its reinvigorated approach to economic security, which we will explore next week at CSIS with Executive Vice President Valdis Dombrovskis and Executive Vice President Margrethe Vestager of the European Commission. 

Elsewhere in the world, the past two weeks have seen escalating violence in the Red Sea, an election in one of the global economy’s most critical regions, and the emergence of a new stock market powerhouse. 

Macroeconomic Update 

One of the key economic stories this year is if and when central banks will lower interest rates. As inflation begins to fall in many economies, optimism is increasing and investors have begun betting on when rate cuts will finally come. 

Early signs from 2024, however, indicate that we may have to wait a bit longer. This week, both the Bank of Canada and European Central Bank held interest rates steady, reflecting a continued caution to declare the fight against inflation over. Annual inflation in the Euro Area increased in December to 2.9%, from 2.4% in November, while inflation in Canada increased from 3.1% to 3.4% over the same period. ECB president Christine Lagarde signaled that rate cuts are likely to come in the summer rather than the spring, while the Bank of Canada expects inflation to remain well above its 2% target for the first half of the year.  

Meanwhile, the central banks of the United States and United Kingdom will meet next week. UK inflation unexpectedly jumped to 4% in December from 3.9% in November, the first jump in 10 months. The increase tamed investor expectations that interest rate cuts are imminent. U.S. inflation stayed level at 2.6% in December while core inflation, which strips out volatile food and energy prices, fell below 3% for the first time since March 2021. Late last year Federal Reserve officials indicated that they could cut interest rates as many as three times in 2024, though the market views a rate cut next week as unlikely. 

Stories of the Week 

Shipping volume through Suez Canal plummets as violence in Red Sea region escalates: Weekly traffic through the Suez Canal fell 34% last week compared to the final week of November, as the Houthi’s attacks on merchant vessels in the Red Sea continued to disrupt global commerce. Global shipping prices have risen as much as 38% for some routes in the past week, and the average worldwide cost of shipping a 40-foot container has doubled in the last month. The United States and United Kingdom have carried out at least eight strikes against the Houthis to destroy their capacity to continue these attacks, though the Houthis have vowed to fight on. Other actors such as China and the European Union are getting more involved as well, as the economic fallout of the attacks reverberates throughout the world.  

China meets 2023 growth target, but headwinds loom: Last week in Davos Chinese Premier Li Qiang announced that China’s economy grew by 5.2% in 2023, surpassing the country’s 5% goal. This is more than 2% higher than 2022, reflecting a return to more typical growth following the end of China’s “zero Covid” policies. Still, 5.2% is one of China’s lowest growth rates in decades, and China’s economic prospects face several obstacles including high debt levels and a housing crisis. Demographics remain a looming issue as well—in 2023 China’s population decreased for the second year in a row and it was surpassed by India as the world’s most populous nation. To stimulate the economy in the short-term, the Chinese government stated on Wednesday that it will cut the reserve ratio requirement for banks while hinting at more stimulus measures to come. 

Taiwan elects frontrunner Lai to presidency sparking concern of increased tensions with China: On January 13th, the citizens of Taiwan elected current vice president Lai Ching-te of the Democratic Progressive Party to the presidency. Lai’s stated policy towards China is to maintain the status quo and seek peace and predictability. Still, the status quo is troubling, and China framed the election as “a choice between war and peace.” Markets remain concerned that the result will increase tensions and prompt a Chinese response in the coming months. The election captured global attention due to Taiwan’s central role in the semiconductor supply chain—Taiwan produces over 60% of the world’s semiconductors and over 90% of the most advanced ones.  

Indian stock market surges to become 4th largest in the world: India’s stock market is now the 4th largest in the world by market capitalization, as the world’s fifth-largest economy becomes an increasingly attractive destination for investment. The IMF projects India’s economy to grow 6.3% this year, one of its largest projections for any country. And while a significant portion of India’s GDP is driven by domestic consumption, some of India’s rise may be coming at China’s expense. India is positioning itself as an alternative in the supply chain as businesses and investors grow wary of China, a position the United States has eagerly backed. Still, some economists see economic headwinds in India’s future, such as a growing current account deficit, rising inflation, and growing geopolitical tensions.  

A 41-year high in inflation sparks optimism that the Bank of Japan will normalize interest rates this spring: While the world’s 3rd largest economy is unique in many ways, Japan has also experienced heightened inflation over the last several years. The Japanese government confirmed last week that prices rose 3.1% in 2023 compared to the year before, the largest annual increase since 1983. However, that’s not necessarily bad news in Japan. For decades the nation has experienced low inflation (and at times deflation), which some economists think contributes to Japan’s decades of sluggish economic growth. Policymakers therefore want to encourage more borrowing and spending, and one way they do this is by holding a negative interest rate (meaning depositors pay money to save money). However, investors are optimistic this may soon end. While the Bank of Japan kept interest rates steady at –0.1% on Tuesday, a level it has maintained since 2016, inflation has been over its 2% target for more than a year. The market is expecting the BoJ to abolish its negative rate in its April meeting. 

What we’re watching 

• Jan 30 – The U.S. Federal Reserve announces next interest rate decision. 

• Feb 8 – Pakistanis head to the polls to elect a new president amid record inflation and a heightened security environment after multiple cross-border strikes with Iran. Islamabad was able to avert a debt default last year due to emergency funding from the IMF, but the new government must secure a long-term loan after the current program ends in April. 

• Feb 19 – Israel releases the first estimate of its 2023 Q4 GDP. Estimates for Israeli GDP growth in 2023 and 2024 were slashed following October 7th, which is affecting Israeli’s tech sector particularly hard. The labor force has shrunk as reservists have been called up to serve, and venture capital investment has plummeted.