Tag Archives: Global economy

Economic, Financial Markets, Government, Politics, Society

The global economy and the threats it faces…

FLASHPOINTS AND THE GLOBAL ECONOMY

Never has the world been subject to a constant flux of shifting alliances as it is in modern times. The world is once again in turmoil, from Iraq to the West Bank and from the Ukraine to the South China Sea. The geographical stakes and risks are extraordinarily high leading some strategic thinkers to compare the global landscape to that which preceded the First World War a century ago.

When the International Monetary Fund (IMF) produced its April 2014 forecast of 3.6 per cent global output for the current year it added an important caveat. It warned that geopolitical factors, at the time mainly thought to be the turmoil in Ukraine, posed a potential threat to its projections.

There are, however, five major geopolitical flashpoints which currently pose a threat to economic stability:

  • The ISIS advance in Iraq

That a small ragtag of some 30,000 jihadists born out of Syria’s civil war could be a threat to Iraq, with its American trained forces and weaponry, would have seemed inconceivable just a few weeks ago.

But ISIS is well funded, as a result of wealth created from kidnappings on the Turkish border, secret donations from Sunni Gulf states and the seizure of bank deposits in Mozul. It is also battle hardened from Syria.

Its seizure of refineries in Northern Iraq threatens the country’s oil production of 3.4m barrels a day or 11 per cent of the world’s current supply.

Brent Crude has exceeded, once again, $113 a barrel. So far the valuable fields of Baghdad, including those operated by BP, remain in operation. But that cannot be guaranteed even with any form of US-led intervention.

  • Middle East peace process

The recent unification deal between Hamas and the Palestinian Authority led by Mahmoud Abbas led to deadlock with Israel over future negotiations. Then came the kidnapping of three Israel youths from a bus stop on the West Bank; murdered in haste after being wrongly identified as Israeli soldiers. Tit-for-tat followed which has ultimately led to high level tensions in the Middle East with the Government of Binyamin Netanyahu amassing 40,000 troops who appear ready for a land invasion and incursion into the Gaza Strip.

The risk now is of Israel escalating the current difficulties into a much wider conflict with the threat, for example, to Middle Eastern oil lanes and production.

  • Iran nuclear talks

The July 20 deadline set for Iran to relinquish its nuclear ambitions fast approaches.

Despite some rather conciliatory language from President Rouhani of Iran, intelligence suggests little ground has been given on vital issues such as reducing the numbers of centrifuges and ending experiments with intercontinental ballistic missiles.

The US tilt at diplomacy with Iran has been met with heavy resistance in Congress. President Obama has been finding it hard to persuade Capitol Hill to ease the financial and economic sanctions that brought Tehran to the bargaining table in Geneva.

Western oil and banking interests are champing at the bit for an end to sanctions that could re-open Iran as a lucrative market.

  • Ukraine-Russia

Flashpoints continue on the borderlands of Western Europe. President Putin shows no signs of backing down from his efforts to infiltrate and recolonize Russian speaking enclaves in Eastern Ukraine.

The so-called ‘Putin doctrine’ – the idea that Moscow is planning to retake areas of vital Russian interest reaching into the Baltics – is almost certainly a myth because that would mean directly confronting NATO.

But the threat to gas supplies following cut-offs to Ukraine is a clear and present danger that will become worse as time moves on.

The crisis already has led to a Russian pivot towards Asia in the shape of the Chinese natural gas deal in which London-based Glencore is involved in financing.

Creating a secure environment in Ukraine, in which Western assistance is co-ordinated by the IMF (where monies can be released), is proving extraordinarily difficult to enact.

  • South and West China Seas

Many strategic experts see this as the theatre for the next great strategic rivalry with China and the US – that has moved much of its navy into Pacific waters – eventually clashing.

At present the dispute is manifesting itself in proxy stand-offs between Japan and China and Vietnam and China.

There are overlapping claims to islands such as Senkaku in the Okinawa Sea that are claimed by both China and Japan.

Similarly, South Korea and Japan have clashed following large scale Korean naval operations in the region.

There are fears that a collision of war ships, an attempt to run blockades or guns fired in error could provoke an all-out war.

The tensions, serious as they are, could be unexpectedly good news for BAE Systems and other defence firms as surplus Asian nations rebuild their rundown defences.

Nevertheless, a conflict in the region – the locomotive of manufacturing output – could be devastating for Western economies.

General Western Outlook

The immediate highest risks for Western economic output come from an interruption of oil supplies in the Middle East and gas supplies from Russia via the Ukraine.

However, America’s increased oil and gas fracking activities together with new gas finds – such as those off the coast of Israel – make the world a little less vulnerable than it was after the Yom Kippur war in 1973 and the first Iraq war of 1990-91.

More serious long-term threats come from the China seas where a battle for hegemony, not dissimilar to that which caused two world wars, looks to be underway.

Globalisation has produced rich rewards in terms of fast economic development, industrialisation and prosperity.

But it has also brought with it profound new strategic concerns that could damage confidence and crush output at a time when the West is still recovering from the financial and Eurozone crisis.

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Britain, Economic, European Union, Financial Markets, Government, Politics, Russia, Society, Ukraine, United States

What will happen next following the crisis in Ukraine?

ECONOMIC REALITIES

Intro: Economic havoc and a global slump could materialise from the crisis in the Crimea

So far, financial markets in the West have remained remarkably undisturbed in the face of the crisis unfolding in Ukraine. Following Crimea’s referendum at the weekend, which effectively sealed Vladimir Putin’s grip of the Ukrainian peninsula, sanctions were always likely to follow. Whilst, then, we may anticipate just how long the sanguine calm will continue, Western leaders should also be careful of supplanting diplomacy with threats to Russia that they are unwilling or unable to back up. The decision by the European Union and United States to impose sanctions on several Russian officials is a limited response to the breach of international law that has taken place in Crimea. The measures include travel bans and the freezing of assets against individuals who were deemed to have played a major role in the referendum – a vote, officials say, in which 97 per cent of voters backed a breakaway from Ukraine and, instead, opted to join the Russian Federation.

In the years since the dissolution of the Soviet Union, Russia has steadily become more integrated into the global economy. We know that many rich Russians have shifted their gains (ill-gotten or otherwise) into more stable and secure environments, such as investing on the London Stock Exchange or by diversifying their stocks in the UK property market. In actual fact, more money has flowed into Russia than out. According to data from the Bank for International Settlements, foreign owned banks have lent the country at least $260 billion. That is nearly double the value of its estimated assets in the West. As a consequence, Russia’s bilateral trade has risen to more than $100 billion annually. Almost a third of Europe’s gas, coal and oil imports come from Russia, and there has been a huge upsurge in direct investment by foreign firms.

Rhetoric used by the international community implied that there would be consequences if the referendum went ahead while the peninsula was still occupied by Russian troops. No doubt, Mr Putin will have considered the penalty a price worth paying. The question now, though, is what will happen next. Washington insists the screw will be tightened if the situation were to escalate in Ukraine – a distinct possibility that could happen fairly swiftly since the aim of the Crimean separatists is to secede from Ukraine within a month. They also aspire to adopt the rouble and by joining the Russian time-zone.

Whilst a military response to Russian aggression has already been ruled out by Western leaders, meaningful sanctions are not really much of an option, either. A full-blown trade-war would inflict serious damage on both sides. However, capital flows between Russia and the West are already in a parlous state in anticipation of lesser action, including assets freezes and travel restrictions already imposed. In order to defend the rouble, Russians are withdrawing billions from Western banks and selling off US Treasury Bonds. Mr Putin also raised interest rates to 7 per cent; a move that will discourage capital outflights from Russia to the West, a rate of interest that will be far more attractive for Russians to invest at home. The West seems certain to reciprocate by dumping Russian assets.

Yet, this all comes at a particularly delicate time for the world economy. Emerging markets, including China, have rapidly slowed down; the Eurozone is expecting a period of deflation to start anytime soon; and, America’s economy has started to inflict severe withdrawal symptoms to many countries around the world following its tapering of quantitative easing. The global economy may be just one sharp shock away from lurching into another recession.

A standoff with Russia over Crimea’s breakaway is the last thing the world needs. Economic considerations cannot surpass the higher purpose of defending international law, and as such must be secondary to it. Nonetheless, the interplay between politics and economics is what is making this situation so dangerous and destabilising. All concerned should be aware of just how very much more disruptive this crisis could yet become.

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Economic, Government, Politics, Society, United States

US budget and debt ceiling: a continuing danger to the world…

U.S. BUDGET & MARKET CORRECTION

The confrontation over the U.S. debt ceiling might have been resolved meantime, but there is nothing to prevent a repeat of the U.S. economic debacle when the government’s budget comes up for review again in January. Last week, after a wrangling spectacle that lasted several weeks, politicians in Washington slammed on the brakes at the last minute. For a long time, though, the differences between Democrats and Republicans appeared irreconcilable and seemed intent on driving the global economy off a cliff, by triggering a catastrophic default.

President Obama was quick to highlight that nothing has done more damage to America’s credibility in the world, or standing with other countries, than what we’ve seen over the past few weeks. Yet, any sense of relief is likely to be distinctly short-lived. For what will prevent this whole exercise being repeated in a few months? What was agreed on Capitol Hill was a stay of execution, rather than a reprieve. Congressmen still have utterly different views of the role and extent of government, and far less reason now than ever to trust each other.

Outside of America, the most important thing is to ensure that the risk of another global recession is eliminated because of the disaster that would follow a U.S. default. The world will expect that America’s politicians are mature enough to forge a long-term budget deal. In the likely absence of such bipartisan spirit, a partial fix would be to eliminate the need for Congress to approve each increase in the debt ceiling, and rely on the market to provide the necessary fiscal rectitude and discipline.

Market correction does not imply a recipe for unrestricted spending. The House of Representatives would still retain control of the purse strings, and could refuse to fund certain aspects of the government’s operations it was unhappy with. Otherwise, the U.S. will continue to bump up against the ceiling time and again, with the possibility and threat of a catastrophe unfolding. Given that the debt’s numerical value is bound to increase – even if it shrinks as a proportion of GDP – the market should be used as a rectifying tool, rather than politicians in Washington who have proved they are unfit to compromise on their conflicting (and perhaps even reticent) agendas.

AN IMPASSE THAT COULD BE BROKEN WITH MID-TERM 2014 ELECTIONS LOOMING

Following the deal to reopen the U.S. government, John Boehner, Speaker of the House of Representatives, said: ‘We fought the good fight. We just didn’t win.’ These words expressed by Mr Boehner, in theory the most powerful politician in Congress, disguises the fact that Republicans fought an ignoble and pointless fight that has inflicted deep damage on the United States. True, the U.S. government has averted the calamity of a debt default, but to suggest his Republican party did not win is putting it mildly. The Republicans achieved nothing of what it was seeking, most notably a postponement of President Obama’s signature health care reform. Instead, many will suggest it suffered a crushing defeat that might just bring the party to its senses.

That outcome, however, is far from guaranteed. Judging by reactions following last Wednesday’s Senate and House votes that ended the crisis, the ultra-conservative minority that has been holding America to ransom shows little sign of changing its ways.

America must now count the cost of this completely unnecessary exercise in futility. The $20 billion direct loss to the U.S. economy is just the start of it. The ‘good fight’ Mr Boehner refers to has further poisoned the atmosphere on Capitol Hill, and distracted America’s legislature from far more important issues – such as immigration policy reform and climate change. Then there is the damage to the country’s reputation and financial standing. The budget deal that has allowed the U.S. government to resume business has settled exactly nothing.

The government is being funded again, but only until mid-January; the U.S. Treasury is authorised to borrow, but only until early February. There is no guarantee whatsoever that the zealots, unchecked by Mr Boehner, will use these deadlines once again to provoke a repeat shutdown and a new round of brinkmanship on the debt ceiling.

Under the agreement, a bipartisan joint House and Senate panel is being set up, with instructions to work out by mid-December a blueprint to balance the budget, and thus resolve the arguments underlying all of the issues between Mr Obama and Congress. This may offer a glimmer of hope but few will give it much chance of succeeding where numerous attempts in the past have failed. To reconcile the vast differences between the parties on taxes and spending will require compromise on both sides not yet seen.

The best hope of averting a new crisis could lie in the approach of the 2014 midterm elections, because Republicans may fear a brutal backlash from voters. Ultimately, the impasse is not economic but political, and could be settled at the ballot box.

Pollsters clearly show that the majority of Americans blame Congressional Republicans for the folly that has ensued on Capitol Hill. If Republicans do bring about a repeat of the budget debacle early next year, then they will surely be heading for a fully deserved electoral disaster.

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