Photo: aerial-drone via Adobe Stock
After the European Central Bank (ECB) cut interest rates earlier this month, attention turned to the other central banks in Europe with impending interest rate decisions. Last week, the Swiss National Bank cut interest rates for the second time, while the central banks of Norway and Sweden held rates steady (Sweden lowered interest rates for the first-time last month, while Norway’s central bank indicates that it will not begin cutting rates until next year). The most watched central bank, however, was the Bank of England (BOE), which held interest rates level last week at 5.25%. The decision came despite a drop in inflation—the day prior, the Consumer Price Index (CPI) registered an annual price increase of 2% in May, down from 2.3% in April and in line with the BOE’s 2% inflation target. Policymakers at the BOE emphasized that it must see evidence that 2% inflation is sustainable before it will lower rates.
In the United States, inflation ticked down slightly. The Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, registered an annual price increase of 2.6% in May, down 2.7% in April. Core PCE came in at 2.6% as well, down from 2.8% in May. While the decrease is encouraging, inflation remains above the Fed’s 2% target, suggesting that a July interest rate cut may still be out of reach. Indeed, at least one Federal Reserve official suggested the Fed may need to raise interest rates again this year. Meanwhile, budget projections released by the Congressional Budget Office last week show U.S. debt levels growing more quickly than anticipated. The report projects that the budget deficit will top $1.9 trillion in 2024, up from a projected $1.6 trillion earlier this year, while U.S. national debt will exceed $56 trillion by 2034. On Thursday, the IMF concluded that U.S. government budget deficits and an escalating debt load pose “a growing risk” to the global economy in its annual report on the U.S. economy.
Across the Pacific, Chinese Premier Li Qiang defended his country’s export driven industrial strategy while affirming that China is on track to meet its goal of 5% growth this year. But while the Chinese government is pouring money into its manufacturing sector, foreign investors are not. Foreign direct investment (FDI) in China fell for the 12th straight month in May, with FDI between January and May dropping 28.2% compared to the same period last year.
United States reveals plan to restrict outbound investment in China’s critical technology sectors: Speaking of FDI in China, last August President Biden made waves when he issued an executive order (EO) announcing plans to restrict outbound investment into China’s semiconductor, artificial intelligence, and quantum computing sectors. Ten months later, those plans are beginning to take shape. Last Friday, the Treasury department proposed a new rule to implement the EO, which would explicitly prohibit certain types of investments while requiring notification of others. The Treasury Department would also have the power to force divestments and could refer violations to the Justice Department for criminal prosecution. The proposal comes as U.S. investment in China continues to plummet, falling from an average of $14 billion per year between 2005 and 2018 to less than $10 billion since 2019. The Treasury Department expects to finalize the rule later this year.
EU and China agree to talks as concerns of an impending trade war loom: Earlier this month, the European Union announced plans to introduce additional tariffs of up to 38% on Chinese electric vehicles (EVs), on top of the standard 10% tariffs already in place. The European Commission stated that the purpose of the tariffs is to “remove the substantial unfair competitive advantage” of Chinese EV supply chains “due to the existence of unfair subsidy schemes in China.” While that may be so, the tariffs risk provoking an escalatory cycle of tit-for-tat import taxes. Last week, China threatened to impose tariffs on European pork, which accounted for over $3 billion in Chinese imports in 2023. 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. Recognizing the potential for tensions to spiral out of control, both China and the EU agreed to engage in talks in an attempt to deescalate.
Europe implements new sanctions on Russian energy exports, targets liquified natural gas for first time: Following Russia’s full-scale invasion of Ukraine in 2022, the EU and its allies levied sweeping sanctions on Russia. These encompassed a number of policies, such as asset freezes, travel bans, export restrictions, import bans, and a price cap on Russian oil. However, Europe refrained from sanctioning Russian gas imports, on which the European continent is highly reliant. Before the invasion, 40% of Europe’s gas came from Russia and, while pipeline imports have decreased since 2022, many European countries still buy Russia’s liquified natural gas (LNG) transported via ships. So, it was a notable change in policy when the European Union agreed to sanction Russia’s LNG last week, most specifically gas transshipments directed to third countries that travel through EU ports. The measures, according to EU officials, should squeeze Russia’s gas revenues, which play a key role in sustaining Moscow’s war efforts.
Chinese Premier Li Qiang visits Malaysia as the Southeast Asian nation pursues closer ties with its regional neighbor: While rising geopolitical tensions can certainly create problems, they also create opportunities. As a fast-growing economy in a strategic location, Malaysia is a country well positioned to seize these opportunities. About 30% of global trade traverses the Straits of Malacca between Malaysia and Indonesia, while Malaysia boasts decades of experience in industrial manufacturing, particularly in semiconductors. It's for these reasons, among others, that U.S. tariffs on China are a potential problem for China, yet an enticing opportunity for Malaysia: Chinese firms view Malaysia as a prime destination to relocate their manufacturing operations to and avoid these tariffs. Accordingly, Li Qiang, China’s number two official, was in Malaysia last week to celebrate 50 years of diplomatic relations between the two countries. Though Malaysian officials were disappointed Chinese President Xi Jinping didn’t make the trip, Prime Minister Anwar Ibrahim hailed China as a “true friend.” Malaysia recently announced its intentions to join the BRICS coalition, and expects to receive President Xi when it hosts the 2025 summit of the Association of Southeast Asian Nations.
China’s space sector continues to develop as it becomes the first nation to retrieve mineral samples from far side of the moon: While space exploration has always been tied to national prestige and defense, today it’s also tied to economics. The space economy was estimated to be worth over $550 billion in 2023, with significant room for growth. Accordingly, more nations are competing in space than ever before: there were 223 orbital launch attempts from more than 10 different countries in 2023, the most ever in a single year. This continued competition was highlighted this week as China became the first nation to retrieve mineral samples from the far side of the moon. China aims to send a manned mission to the moon by 2030 and establish a moon base by 2035. Though NASA administrator Bill Nelson asserts that the United States remains on track to return astronauts to the moon in 2026, China’s lunar missions have enjoyed much more success in recent years. Some U.S. officials are concerned that China could claim territorial control of strategic locations on the lunar surface should it beat the United States there.
July 30 – The U.S. Federal Reserve meets to decide on interest rates.
