Aurelia Butler

Are you optimistic about 2024? The answer from the World Economic Forum would seem to be “heck, no”. Each year, the WEF asks 1,500 of its “community” — elite business leaders, academics, politicians and so on — to cite key risks, and then crunches that with Marsh McLennan and Zurich Insurance Group. The latest reading, released before the WEF’s annual meeting in Davos this month, might make even Pollyanna weep.Apparently Davos groupies have “a predominantly negative outlook for the world over the next two years that is expected to worsen over the next decade”, with 54 per cent braced for “some instability and a moderate risk of global catastrophes” in the short term — and 30 per cent predicting severe upheaval.In the longer term, 91 per cent see “elevated risks of global catastrophes”, or worse, with environmental issues dominating the worry list, along with social conflict, war, cyber threats and “misinformation”. And even this reading might be too upbeat since the survey was done in September — ie before the latest Middle East strife.So far, so depressing. But here is something odd: this gloom, which seems even worse than during the financial crisis of 2008, has emerged amid a global economy that is not so disastrous. On the contrary, the last forecast from the IMF projects 2024 growth of 2.9 per cent — lower than previous years, but not a depression.It appears, then, that the WEF elite — like American consumers — currently has a profound psychological bias towards pessimism.Why? One possible explanation is that business leaders are ill-equipped to handle current risks: their MBAs trained them to model economic issues, not analyse problems such as war, and the former feature relatively low on the worry list. Another related factor is that while Davos attendees used to assume that history was going in a straight line towards more globalisation, free-market capitalism, innovation and democracy, all those things are now under attack. The world feels uncannily similar to that described by John Maynard Keynes a century ago, in The Economic Consequences of the Peace — it seems that “progress” and history are going into reverse.Finally, there is an attention bias: bad news sells better than good news and surveys like this WEF poll typically ask about negative, not positive, risks. Online initiatives have emerged in recent years to counter this, but they have made little impact in an era when bad news can go viral faster and spread further than ever before.So I think it behoves us all sometimes to flip that WEF question and to ask what are the top 10 positive possibilities of the moment, the things that might actually go right rather than wrong? Here’s my answer to that intellectual exercise.First, science is delivering breakthroughs in renewable energy that might yet deliver a game-changing leap in green tech, particularly since almost $1.8tn was invested in green energy in 2023 alone.Second, research is accelerating in life sciences, boosted as artificial intelligence tools are deployed. This may produce more medical breakthroughs soon, helped by the experience of Covid-19, which taught scientists to collaborate across borders and institutions on a scale never seen before. Third, with the world projected to have 18bn cell phones in 2025, millions of people now have access to information for the first time. India’s “tech stack” shows the upside of this for financial inclusion and education. Fourth, the (justifiable) hand-wringing about AI risks is belatedly inciting discussion about regulatory frameworks. One recent development that did not receive as much attention as it should is that both the US and China have backed a joint UN initiative on this.Fifth, central banks may yet implement quantitative tightening without sparking a full-blown financial crisis this year. The impact of quantitative easing has been better than many people (including myself) expected and shocks such as the Silicon Valley Bank collapse have been shortlived.Sixth, while debt levels are alarming, this has not sparked a developed world sovereign debt crisis (yet), and might not do so in the short to medium term. Seventh, inflation might continue to fall as supply chain shocks ease (or, more accurately, companies adjust to a world where they need to manage them better).Eighth, anxieties about democracy might actually prompt previously complacent voters finally to fight to preserve liberal values. Poland shows that the slide to autocracy is not inevitable.Ninth, worries about the economic risks of protectionism might prod Beijing and Washington to bolster commercial ties. Yes, global trade levels slipped last year. But they remain near record highs, even between the US and China.Tenth, and finally, the tyrants sowing havoc today will not last forever. Not even Vladimir Putin, Russia’s president, is immortal.Is this list unrealistic? I’m a journalist and am trained to be cynical, and the dangers identified by the WEF are real. But Pollyanna-ish or not, I would urge it to add a “positive risks” section to its survey next year. It might not grab headlines, but investors could find it even more interesting. [email protected] More

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This article is an on-site version of our Britain after Brexit newsletter. Sign up here to get the newsletter sent straight to your inbox every weekGood afternoon. There will be an interesting moment in Brexitland today when the London mayor Sadiq Khan makes a speech at the Mansion House warning that politicians need to stop “dodging or ducking” the Brexit issue because it’s “dragging our economy down”.Interesting because, at least tonally, Khan’s plea to confront Brexit’s negative impacts head on contrasts with Sir Keir Starmer’s rather more diffident “let’s make Brexit work” approach, a phrase which itself belies a lack of ambition.This is a sign of the inherent tension between Starmer’s growth narrative and his plans to address Brexit’s impact, which are inherently limited by red lines ruling out EU single market and customs union membership. The book I wrote last year is essentially a look at what’s left over, but electing not to talk about Brexit (because you’re either embarrassed about it, or don’t have ambitious solutions to address its downsides) doesn’t mean that Brexit is going away. On the contrary, it continues to inflict a drag on the UK economy that — according to modelling by consultancy Cambridge Econometrics commissioned by Khan — will leave the UK economic output 10 per cent smaller than it otherwise would have been by 2035.As we discussed last week, there are signs that Labour, like the Tories, are minded to concentrate on fixing things at home rather than investing political capital on an uncertain and difficult negotiation with Brussels, which brings me to today’s main topic: freeports. This week Michael Gove and the investment minister Lord Dominic Johnson gave evidence to the Business and Trade select committee on the progress of a concept that was talismanic for many Brexiters, not least Rishi Sunak.It followed the publication of a delivery road map for freeports last December that, as one business leader told me, was written in the tone that it “keeps taking a lot of time for these things to happen”.Performative aspects of freeportsWhat was interesting in the Gove and Johnson appearance was the implicit acceptance of the performative aspects of freeports that the Office for Budget Responsibility had said would have such a small economic impact it would be impossible to measure.As data analysis by Sussex university’s UK Trade Policy Observatory has shown, UK freeports don’t have the classic advantages of “duty inversion”, where manufacturers get to import inputs tariff-free and only pay a tariff on finished goods at the point of export. That’s because, as Peter Holmes of the UKTPO pointed out to the same committee a while back, the UK global tariff doesn’t create those tariff “wedge” opportunities, despite the fact that the government’s consultation on freeports described them as a “key benefit”.Not any more, it seems. This is not to be churlish, but to point out that freeports are actually — to quote Gove in his road map — vehicles for “rebalancing regional economies” or put another way, they’re a “levelling up” device.That means using freeports, which now share many of the tax breaks handed to allied Investment Zones, to attract investment and create hubs in key sectors such as renewables — rare earths at Humber Freeport, for example, or wind turbines at Teesside.‘Glorified bonded warehouses’Johnson, who gets a good rep from business groups as an energetic salesman of UK plc, urged the committee not to think of freeports any more as “glorified bonded warehouses”, adding that it was “important not to over-analyse” a concept that he described as more akin to a branding exercise.(On the point of over-analysing, Gove was typically foggy about where the government had got its 200,000 freeport jobs prediction from, or how long it would take for those jobs to materialise. We still await clarity on that.)But Johnson’s point was not to get bogged down in the detail, but to embrace the big picture offer to investors. Levelling up, he said, was a concept that was recognised around the world and freeports were “enormously powerful as a hook” to help him sell the UK internationally.This dovetails with Lord Richard Harrington’s review into improving the UK offer to international investors by using freeports to improve the “place-based, sector-specific offers across the UK” as other countries, such as France and Sweden, already do.In short, freeports are a regional industrial strategy that dare not speak its name, and could be used as the spur for new clusters and investment, although how much of this activity is “additional” will always be difficult to determine as this very good Institute for Fiscal Studies report explains.Will freeports work?The bigger question is whether this strategy — when seen in the context of the negative Brexit impacts noted above and the mega-subsidies being dished out by the US and EU — is going to deliver the kind of growth that both Labour and the Conservatives are promising.The Treasury extended the freeport tax breaks from five to 10 years at the Autumn Statement which was a recognition that the projects take a long time to establish, and also announced a new £150mn fund to help freeports get up and running.Gove described the fund as a “generous financial package”, but in truth, as David Phillips, who co-authored the IFS report mentioned above points out, it’s “pretty small beer, even for what the OBR expects to be a pretty small policy”.Or as the Scottish National party MP Douglas Chapman contended, while Gove talked about the UK government “irrigating the soil” to attract investment, the government was “using a teacup instead of a power-hose”.Ultimately, freeports are here to stay. They are only one piece of the puzzle, but the government is getting behind them not just with money, but also a commitment to put them front and centre of its inward investment offer, as well as expediting planning, grid connections, easing planning consents and the like.But for all Gove’s admirable salesmanship, they’re not a magic bullet and need to be seen in the wider context of an economy that — per Cambridge Econometric analysis above — is already £140bn smaller than it would otherwise have been. Brexit in numbersToday’s chart is based on a piece of work by Boston Consulting Group that predicts that shifts in global trade flows towards more regional supply chains will result in UK goods trade with both the US and EU actually declining over the next decade.Now models are only models, but the assumptions in the BCG work reflect the anticipated shift in global trade flows that will make the EU neighbourhood even more important to the UK just as we’ve chosen to erect barriers to trade with that area.This regionalisation trend appears to be reflected in the latest global trade tracker from the UK in a Changing Europe, which finds that trade in the third quarter of last year with the EU amounted to 53.3 per cent of total UK trade, significantly up on pre-Brexit levels.As the author Stephen Hunsaker points out, that isn’t because of booming EU-UK trade, but because the UK is struggling to deepen trade ties with the rest of the world. As he puts it: “As yet, the UK has been unable to defy gravity — the well-established fact that trade with your neighbours is easier than trade with the other side of the world.”  Tim Figures, a former business secretary adviser who is now senior expert on geopolitics and trade at BCG, says the “ongoing slow decline” of UK goods trade in the BCG forecast reflects the anticipated onward march of “nearshoring” as geopolitical forces (US-China decoupling, the EU search for strategic autonomy, for example) increasingly localises global trade flows.The further challenge for the UK (which has a resilient services sector), adds Figures, is that modern goods increasingly come bundled with services — like connected cars — which will weigh on UK trade. Rather pointedly, given Khan’s warning above, Figures also notes that the BCG forecast is based on the assumption that given the current political environment “there will be little scope over the next decade to improve the UK-EU relationship in a way which makes a material difference to the numbers.” That’s the challenge for Starmer if he wins. We’ll see. Britain after Brexit is edited by Gordon Smith. Premium subscribers can sign up here to have it delivered straight to their inbox every Thursday afternoon. Or you can take out a Premium subscription here. Read earlier editions of the newsletter here.Recommended newsletters for youInside Politics — Follow what you need to know in UK politics. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Holy God Citi’s done a deep-dive on PMIs.Everybody loves PMIs right? How could you not at least appreciate a major leading indicator that is so prone to doing weird and wonderful things as soon as the going gets tough. Plus, its idiosyncratic problems are fun![If you’ve somehow wandered this far into an article about PMIs and don’t know what PMIs are, they’re measures of business activity based on firms’ responses to question about things like orders received, price inflation, hiring conditions etc. They are a type of diffusion index, where a score above 50 indicates expansion compared with the previous month, and below 50 indicates a contraction. This causes endless problems for journalists, who often think something slowing down less means it is speeding up.]Here are two colourful charts showing how this pattern of expansion and contraction has looked over recent years (we’re assuming this is the US PMIs given the comparator):© CitigroupCiti analysts, led by Chris Montagu, write:While PMIs are frequently regarded as a leading indicator for economic trends, we see weak causality between PMIs and equity market returns, instead markets may actually lead PMIs. Nevertheless, our long-run analysis shows causality relations are evident in a small subset of industries. Furthermore, we find PMI indicators effective when used within the context of economic state models, helping to not only explain markets trends but also to support tactical style allocations.Their analysis (which focuses on manufacturing PMIs, but also takes some the parallel of services activity into accounts) draws some slightly fuzzy conclusions, as indicated above, but there are some interesting nuggets. Citi’s analysis suggests that it is turning points in the PMIs — the peaks and troughs of the index — that seem to bear the most notable relation with sustained adjustments in market prices. The problem? How markets adjust appears to vary greatly by region, and then by sector within each region:Market returns 12 months following PMI throughs have generally been positive, and the spread between Contraction and Recovery is considerably more pronounced and consistent for both Europe and US, when compared to PMI peak turning points.A distinct characteristic of PMI peaks in the US is the tendency for markets to continue rising, albeit at a slower pace following the peak.In contrast, Europe has experienced more pronounced and frequent market underperformance following PMI peaks.So is it as simple as waiting for the inflection points and buying US equities? Citi did a lot of work on expected risk/return characteristics across different markets, and concluded… kinda yes but you’re a scrub if you try it:Our historical observations suggest that selectively investing in factors based on different states of the PMI economic cycle may yield favorable outcomes. A naïve implementation of this would be to allocate/overweight styles that have historically been successful in a particular state, however much of the analysis so far relies on generalizations drawn from past observations made in hindsight, which may not translate to an effective real-world implementation.The dangers of generalisations are pretty well demonstrated by the accompanying chart, which looks a bit like a Chelsea FC player were liquidated and dripped, Jackson Pollock-style, onto some axes for maximum messiness:The fundamental conclusion, ultimately, isn’t super pretty:There is limited evidence of causality effects between changes in manufacturing PMIs and market performance across regions, rather our results suggest the opposite, that there is stronger evidence that markets often lead PMIs.But the analysts add:That said, causal analysis is one approach to how investors can infer the relationship between markets and PMIs. We find it more revealing to view PMIs within the context of a state model which provides a natural economically intuitive partition between different economic states.In this setting, we see strong evidence of diverging risk adjusted performance across PMI states. We find consistently strong risk-adjusted performance in PMI Expansionary phases. Emerging Markets and China exhibited periods on accelerated performance during PMI Recovery phases, but these growth spurts are relatively brief.Comparing the sensitivities of equity markets to PMI changes, we find Emerging Markets the most sensitive to PMI changes, and that markets in Europe appear more sensitive to shifts in manufacturing PMIs when compared to the US.Alphaville’s conclusion: it seems like PMIs are going to continue to be bothersome. What, were you expecting something simpler? More