Aurelia Butler

The writer is chief executive of Federated Hermes Limited There was a time when investors understood that geopolitics had a real impact on financial volatility and economies. During the cold war, international tensions played out via a blend of proxy wars and high-stakes diplomacy. As a young boy in East Jerusalem in the late sixties, I lived through one such proxy war in June 1967. That experience taught me that risk is not the same as volatility — the former carries the possibility of losing everything. The peak of that era came in 1973. The same year that heralded the US withdrawal from Vietnam also saw the Yom Kippur war, and the ensuing oil price crisis. Then in 1989 the Berlin Wall came down, and the political scientist Francis Fukuyama declared the “end of history”. Thus began, almost 30 years ago, the widespread belief that globalisation represented the intertwining of regional economics and an end to geopolitics affecting investments, except in fringe developing economies.By the time Russian tanks rolled into Ukraine last year, we had lived through a period of global calm, relative to much of the previous century. As a result, many investors had, in my view, forgotten how central geopolitics can be to making investment decisions. There were, perhaps, three reasons why geopolitics took a back seat in investor frameworks. First, the euphoria that followed the collapse of the Soviet Union incorrectly convinced many that we had entered an era of democratic politics the world over. Many also thought that western powers held the most military might, as signified by the Iraq war at the beginning of this century. Second, there was a false belief that a connected global economy was a new phenomenon, when, in fact, international trade dates back to ancient times. Third, the idea grew that this interconnectedness would lead to the end of conflict between nations, and geopolitical difficulties would no longer impact on the economic landscape. Arguably, the seeds of the new era were laid with the “ping-pong diplomacy” of the 1970s, and the start of the transformation of China into the economic superpower it is today. This generated extensive opportunities for investors (who overlooked the inevitable rising rivalry between Beijing and Washington). Today, China’s recent move to restrict exports of two key metals used for chipmaking, due to its trade dispute with the US, reminds us that economics is an extension of politics by other means. That is not to say there are no opportunities to invest and indeed benefit from the emergence of a new economic landscape. But investors need a specific set of skills in order to do so. Managers who can navigate today’s geopolitical risks are the ones who are best placed to generate long-term, stable returns. Those who fail to take account of such risks may not simply experience temporary volatility, but could actually lose all of their clients’ money — as those invested in Russian assets learnt the hard way, following President Vladimir Putin’s decision to invade Ukraine. The challenge for fund managers today is having an instinct for geopolitical risk when, in most cases, they haven’t actually experienced it. Asset management houses need to make sure they have the relevant skills for today’s world. The industry should consider where they recruit from, for example, to equip themselves with right perspectives and expertise. Graduates with politics and history degrees are as important and relevant today as those who have studied finance and economics. Diversity of thought is as important as diversity of background. Often, the two go together. Two decades ago, we invested in the creation of an engagement arm. This unit talks to companies and challenges them on the types and range of risks that they consider, to help assess how sustainably they are positioned to deliver returns to shareholders. Geopolitical risk is part of that assessment. This is no less relevant in developed markets than in developing ones, as Britain’s Trussonomics episode and the recent anti-police protests in France have demonstrated.Of course, we should continue to consider the impact of monetary policy, as well as economic and natural risks, in combination with the effects of geopolitics. Many of these factors are interconnected, such as the possibility of mass migrations caused by the ideological whims of individual states or climate change. As an investor, taking heed of these geopolitical risks could be the crucial difference between securing your returns or ending up with nothing. More

The Southeast Asian nation announced in 2019 that it would build a new capital, Nusantara, on Borneo island, replacing an overcrowded and sinking Jakarta. The new city is expected to cost a total of $32 billion by the time it is completed in 2045.The government has already invested 32 trillion rupiah to build basic infrastructure, including a dam and a toll road. Finance Minister Sri Mulyani Indrawati said 35 trillion rupiah from the 2024 budget would be given to the public works and housing ministry, who will build infrastructure and housing for civil servants. “Supporting infrastructure will be finished in 2024,” Sri Mulyani said at a news conference.The government will in September start building housing for about 16,000 civil servants, military and police officers, who are due to move in next year, said public works and housing minister Basuki Hadimuljono. The government plans to complete 12 of 47 apartment blocks by July next year, a month before the government will hold its first independence day flag ceremony in the new capital, Basuki said.”Four coordinating ministry’s offices, the presidential palace will be complete next year, while the field for flag-raising ceremony next year will be complete in July,” he said. ($1 = 15,285.0000 rupiah) More

Kyla Scanlon is the founder of Bread, a financial education company, who is on TikTok, YouTube, and Twitter X, among other places. This is a version of a post first published in her newsletter.Last year, the economic vibes were so bad it felt like we were talking the US into a recession. Now, people are wondering whether the “vibecession” is truly over. And maybe it is? The mood is certainly improving. US consumer sentiment is on the up again, with many people seemingly celebrating (slightly) lower gas prices. The Federal Reserve seems convinced as well, with Jay Powell stating at the FOMC presser on July 26th that:The [Fed] staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession.Powell even highlighted the better vibes.I would say that having headline inflation move down that much . . . will strengthen the broad sense that the public has that inflation is coming down, which will in turn, we hope, help inflation continue to move down.Of course, Powell’s announcement triggered a series of jeers on Twitter from people proclaiming that we’ve been in a recession since before time began. But things really are looking okay! Growth is resilient. Inflation is cooling. The labour market is humming along.While real wages are down in most of Europe since 2019, in the US they’re up 6 per cent. In fact, as UMass Amherst’s Arin Dube has pointed out, real wages for most American workers are not only higher than they were prior to the pandemic, but almost to where they would be if the global pandemic that shuttered swaths of the economy and put millions out of work had never even happened. Which is a pretty big win. I mean, people spent enough on Taylor Swift’s tour that it even warranted a mention in the Philadelphia Fed’s Beige Book.Despite the slowing recovery in tourism in the region overall, one contact highlighted that May was the strongest month for hotel revenue in Philadelphia since the onset of the pandemic, in large part due to an influx of guests for the Taylor Swift concerts in the city. Basically, people are feeling a bit better. The vibes continue to improve. The proportion of US companies that mentioned the word “recession” on earnings calls has nosedived from a high of 27 per cent earlier this year to just 11 per cent in the latest quarter.

As Goldman Sachs said in its own Beige Book rountup of business sentiment (with Alphaville’s emphasis below):. . . Company commentary this quarter reflects the belief that a soft landing is possible. While many management teams were pessimistic on the economy in late 2022 and following banking stress in March, sentiment has improved. Several companies acknowledged the resilience in the U.S. economy had led them to now expect a soft-landing. But other companies still anticipate a near-term recession, albeit later than previously expected, and some companies continue to incorporate a slowdown in economic growth into their planning and guidance.Even investors are becoming increasingly confident that the economic landing will be a soft one. Just take a look at Bank of America’s latest fund manager survey for August.As BofA highlighted, the consensus is still that the economy will hit a mild downturn, but fears of a “hard landing” keep receding, and a rising proportion think there might not be any landing at all.

But the vibes are not perfect. Student loan payments are starting back up, which could feel like a 5 per cent pay cut in the US. Inequality is rising through drops in Medicaid enrolment, and homelessness is on the rise again. The resilient economy might mean the Fed tightens further, which isn’t great for vibes or the real economy. Workers are going on strike, which is important! Go workers! But it definitely puts pressure on growth (and as Noam Scheiber points out, it underscores “the fracturing of work into lower-paying, degraded pieces”.)Diane Swonk of KPMG highlighted some more pressure points:Brace for a sharper slowdown in spending over the summer and fall, as tighter credit condition collide with the crimp from the end of student loan forbearance and tighter credit conditions. Rejection rates for vehicle loans hit a record high in recent months and have begun…— Diane Swonk (@DianeSwonk) July 18, 2023
So there are still a lot of things to fix. Even vibe-wise, we have a lot of work to do. It’s hard to ignore now much sentiment and actual data can diverge these days. Sentiment is only picking up from semi-depressed state. Wharton’s Ethan Mollick recently shared an old paper on the ‘blurry vision bias’, and how leaders talk in big grand sweeping ways that don’t really help align people to their mission. That’s the problem with a lot of currently-hyped things these days — it has no end state. What’s the vision? What’s the goal? Mollick highlighted another relevant paper on this, which took its title from an apocryphal story where president John F. Kennedy met a Nasa janitor late at night. When JFK asked him why he was working so late, the janitor replied: “Because I’m not mopping the floors, I’m putting a man on the moon!”We seem to be missing that big national goal these days. Or at least more common, compelling narratives. I circle this point a lot (and recognise that it’s abstract!) but I think that in order to encourage a true vibe change (a shift of the vibe supply if you will) we need to find ways to tell better stories, especially on a fiscal level — for example, how is reshoring helping people, why is Bidenomics a banger, etc etc. But overall, the vibecession seems to be cleared, and hopefully, a recession too. Let’s hope it stays that way! Further reading:– The ‘Dukes of Hazzard’ landing More

The writer is managing partner of Flint Global and former permanent secretary at the UK Department for Business and the Foreign and Commonwealth OfficeIn the great power confrontation between the US and China, military tension is rising but the weapons of choice are economic. Digital technologies, trade interdependence and cyber warfare blur the boundaries of economic and security policy in ways that affect us all. The race for leadership in green technology and developing AI is also about geopolitical dominance. Government intervention in markets is escalating through sanctions, trade protection, export controls, supply chain management and investment screening — such as the US’s Chips and Science Act, its new controls on investment into China and the EU’s draft economic security strategy. These interventions put businesses, investors and scientists on the frontline of adversarial international politics, seeking reassurance. Given the fast-moving threats, there will never be total certainty. But they can reasonably expect governments to set coherent policies that balance open economic relationships with national security constraints. And they are entitled to opportunities for consultation.Since the G7 summit in Hiroshima in May, the idea of reducing economic dependence on high-risk countries is supplanting wilder notions of full decoupling, which would have catastrophic economic and political consequences. Continuing economic interdependence preserves prosperity and deters conflict. But businesses need to know what this approach means in practice. When US national security adviser Jake Sullivan talks of keeping sensitive technologies within a “small yard and high fence”, they ask what is to be kept in the yard, and how the fence is constructed.The UK should focus on improving the way decisions are made and executed. For example, advice to the cross-departmental National Security Council, which brokers sensitive decisions at the heart of Whitehall, has been dominated by “securocrats,” many of whom have limited knowledge of economics and business. There should be a stronger economic counterweight. The Treasury is rightly boosting its own economic security expertise.Transparent and effective dialogue with the private sector is vital. Occasional feel-good meetings between handpicked CEOs and top ministers are not enough. Consultation should be early, systematic and operational — it is often the nitty-gritty of implementation that matters most to business, such as the precise specification of products captured by a control list. Whitehall’s poor record of timely decision-making in applying export controls on sensitive technologies is justly criticised. Businesses are caught between different departments with little sense of where the final decision lies or when it will emerge. Processes for constructive challenge are unclear. There is a strong case for a single “shop front” for business liaison.Similarly, while the National Security and Investment Act sets out objective criteria relating to sensitive sectors and stake size, the recent shift of responsibility from the Department for Business and Trade to the Cabinet Office is tacit recognition that the most difficult cases are highly politically sensitive. They can end up being handled in what seems like a black box.Sharing sensitive information is a perennial problem. Despite the welcome publication of the high-level national risk register, the government is understandably reluctant to disclose detailed threat assessments on issues like foreign intelligence activity. Constraints on sharing can also inhibit private consultation, though many people in business have government security clearances. Despite the challenges, better access to information should be a goal.The UK National Cyber Security Centre, the public arm of GCHQ, has pioneered proactive engagement with business to explain and avert digital threats. Expanding such an approach to wider issues concerning critical national infrastructure and newly emerging technologies like AI would be welcome. International co-operation is also vital. When the EU, US or Japan introduce rules that are not aligned they create competing and sometimes contradictory obligations for business. The US is pursuing overtly “America First” policies and will penalise countries and companies that do not comply. Promoting co-operation with the US, the EU and others in the G7, OECD, World Trade Organization and international standard-setting bodies is a priority. Geopolitical confrontation and government intervention are here to stay. Both will hamper economic efficiency and growth. The greater the economic damage, the more difficult the political choices. The government has a strong interest in bringing businesses deeper inside the tent. More

By Manoj KumarNEW DELHI (Reuters) – S&P Global (NYSE:SPGI) on Thursday projected the Indian economy to grow by an average annual rate of 6.7% to March 2031, driven by manufacturing and services exports and consumer demand, despite short-term challenges from rate hikes and a global slowdown.S&P retained its earlier forecast of 6% growth for the current fiscal year ending March 2024, noting even at this rate, India will be the fastest growing economy in the G20.Last month, the International Monetary Fund raised its growth forecast for India by 0.2 percentage points to 6.1% for the current fiscal year, while the central bank has forecast 6.5% rise. “While the world is in the midst of an unprecedented period of transition and uncertainty, India faces a defining opportunity to capitalize on this moment,” said the S&P Global in its report “Look Forward: India’s Moment” released in Delhi. S&P Global expects the size of the economy to reach $6.7 trillion from $3.4 trillion in fiscal 2023, which could see per capita GDP rise to about $4,500.If realised, India would overtake Japan and Germany to become the third largest economy in the world. In manufacturing, new opportunities are expected to emerge from an accelerating global trend towards supply chain diversification, said the report, as the government offered incentives to manufacturers and improving infrastructure.The economy is set to benefit from efficiency gains from tax reforms, state support to digital and physical infrastructure and reducing leakages from government subsidy transfers. The Indian consumer market will more than double by 2031, surging to $5.2 trillion from $2.3 trillion in 2022, driven by rise in household incomes and higher spending on food and other items. “Higher per capita incomes will also likely boost discretionary spending in areas such as entertainment, communications, restaurants and hotels,” said the report. S&P Global said developing a strong logistics framework will be key in transforming India from a services-dominated economy to a manufacturing-dominant one, besides increasing female participation in the workforce to realize a demographic dividend. “India’s ability to become a major global manufacturing hub will be a paramount test for its economic future.” More

The writer is senior fellow at the Center for International Governance Innovation and a former IMF executive director Argentines went to the polls last Sunday in a primary election that was a dress rehearsal for the general elections to be held on October 22. The winner, Javier Milei, with a little over 30 per cent of the vote, is a rightwing libertarian who campaigns like a rock star, lives alone with five mastiffs named after famous liberal economists and claims not to have brushed his hair since he was 13 (he is 52).Milei has vowed to “dollarise” the economy and “blow up” the central bank in order to prevent Argentina’s corrupt “political caste” from printing any more pesos. Consider the dire economic context in which this message has resonated with many desperate Argentines. The central bank is almost out of reserves, the government of President Alberto Fernández has imposed restrictions on access to the foreign exchange market and exchange rates have mushroomed as people rush for dollars.Since Argentina signed its 22nd lifeline programme with the IMF in 2022, it has missed all its fiscal, monetary and reserve accumulation targets. The government blames a $20bn drop in exports on a severe drought. While acknowledging the impact of the drought, the IMF argues that the government compounded the problem by pumping up the economy with generous energy subsidies and an overvalued official exchange rate that has artificially reduced the cost of imports.No wonder Argentina is again on the brink of default. The government is hoping that the IMF will soon finally disburse $7.5bn. But if it does, the money will not stay in Argentina. It must be used to pay back short-term “in extremis” borrowing from China, Qatar and the Development Bank of Latin America (CAF).With nearly 40 per cent of the population living below the poverty line, Argentines’ patience is running thin. Many, particularly among the young, have responded favourably to Milei’s promise to replace pesos with dollars. Markets, though, responded with alarm. The day after the election, peso-holders (there are still some left) ran to exchange their unworthy pieces of paper for greenbacks. Meanwhile, the government devalued the peso by nearly 22 per cent, as the IMF had requested.If Milei were to win in October — and it is still a big “if” — his radical libertarian ambitions will collide with this dismal economic and social reality. Yet, whatever the outcome, he has at least succeeded in shaking up the debate in Argentina, particularly on the economy and security issues.Current finance minister Sergio Massa — a pro-market Peronist who cunningly managed to run for the governing Kirchneristas (a leftwing Peronist offshoot that has ruled the country for much of the past 22 years) — shows little sign of accepting defeat. And he will surely move to toughen his position on security between now and October. Drug-related crime and violent robberies are a particular problem in poor urban areas that were previously centres of Peronist support.Massa will no doubt read from the Peronist playbook and blame the dire economic situation on the IMF. He will also try to alarm his friends in the Biden administration by portraying Milei as a terrifying hybrid of former US president Donald Trump and his Brazilian counterpart Jair Bolsonaro.As for the mainstream opposition grouping, Together for Change, it finds itself in a delicate position: its candidate, Patricia Bullrich, is appealing to the same rightwing electorate as Milei. The results of Sunday’s primary, while shocking, are not definitive. The situation is highly volatile, though two things, at least, are certain: Argentina is veering rightward and if the Peronists are ousted, they will — as usual — blame the IMF. The fund should keep its hand in its pocket until the dust settles. More

WASHINGTON (Reuters) – Blame it on economic theory not matching reality, groupthink among forecasters or political partisanship by opponents of the Biden administration, but a year ago much of the U.S. was convinced the country was in a recession or would be soon.The first two quarters of 2022 had seen U.S. economic output contract at a 1.6% annual rate from January through March and at a 0.6% annual rate from April through June, and by one common, though not technically accurate, definition the country had already entered a downturn.Why wouldn’t it? The Federal Reserve was quickly cranking interest rates higher, housing investment seemed to be buckling, and the conventional wisdom was that other industries, consumer spending, and the job market would all tumble as well.”A number of forces have coincided to slow economic momentum more rapidly than we previously expected,” Michael Gapen, chief U.S. economist at Bank of America (NYSE:BAC), said in a July 2022 analysis. “We now forecast a mild recession in the U.S. economy this year … In addition to fading of prior fiscal support … inflation shocks have eaten into real spending power of households more forcefully than we forecasted previously and financial conditions have tightened noticeably as the Fed shifted its tone toward more rapid increases in its policy rate.”Fast forward a year, and the unemployment rate at 3.5% in July is actually lower than the point where many analysts expected it to begin rising, consumers continue to spend, and many professional economic forecasts have followed Gapen in a course correction.Reuters polls of economists over the past year showed the risk of a recession one year out rising from 25% in April 2022, the month after the first rate hike of the Fed’s current tightening cycle, to 65% in October. The most recent read: 55%.”Incoming data has made us reassess our prior view” of a coming recession that had already been pushed into 2024, Gapen wrote earlier this month. “We revise our outlook in favor of a ‘soft landing’ where growth falls below trend in 2024, but remains positive throughout.”The recession revisionists include the Fed’s own staff, who followed their models to steadily downgrade the outlook for the U.S., moving from increased concerns about “downside risk” as of last fall, to citing recession as a “plausible” outcome as of last December, and then projecting as of the Fed’s March 2023 meeting that recession would begin this year.With the failure of California-based Silicon Valley Bank expected to put an extra constraint on bank credit, “the staff’s projection … included a mild recession starting later this year, with a recovery over the subsequent two years,” the minutes of the Fed’s March 21-22 meeting showed.In May and June, the Fed staff projections “continued to assume” the U.S. economy would be in recession by the end of the year.The more dour outlook disappeared at the July 25-26 meeting, Fed Chair Jerome Powell confirmed recently, with perhaps more details about the staff outlook to come in the minutes from that meeting, which will be released at 2 p.m. EDT (1800 GMT) on Wednesday.”The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession,” Powell said at a press conference after the end of last month’s policy meeting.Fed policymakers’ projections, which are issued on a quarterly basis, never showed GDP contracting on an annual basis.’CHUGGING ALONG’What made the difference between an in-the-moment recession that many thought was underway last year to growth that has surprised to the upside?The forecast miss wasn’t even really close: By the third quarter of last year, growth had rebounded to a rapid 3.2% annual rate, and has remained at 2% or above since then, higher than the 1.8% the Fed considers as the economy’s underlying potential. An Atlanta Fed GDP “nowcast” puts output growth for the current July-September period at 5.0%, showing continued strong momentum.A big part of the story is the staying power of U.S. consumers, who have continued “chugging along” and spending more than expected, as Omair Sharif, president of Inflation Insights, puts it.Spending has shifted from the goods-gorging purchases seen at the start of the coronavirus pandemic to the hot services economy that exploded this summer in billion-dollar movie runs and music concerts.But the dollar amounts keep growing regardless of what’s in the basket, leaving economists to steadily push back the date when the “excess savings” of the pandemic era will run dry, or puzzle over whether low unemployment, ongoing strong hiring and labor “hoarding” by companies, along with rising earnings, have trumped any anxiety over the outlook.But it isn’t just that.It may be that high interest rates don’t work the same way in an economy that spends more on less rate-sensitive services, and where businesses have continued to borrow and invest more than many economists anticipated – perhaps to capitalize on regulatory shifts aimed at encouraging technology and green energy projects.A surge in local government spending also gave an unexpected boost to growth as localities put pandemic-era funds to work on a delayed basis.Can it last?One risk is if inflation resurges alongside a tighter-than-expected economy, and Fed policy needs to become even stricter and induce the inflation-killing downturn which officials still hope to avoid.But the odds of that may be falling.”We’ve been wavering for a while on whether to shift to the ‘soft-landing’ camp, but no longer,” noted Sal Guatieri, a senior economist at BMO Capital Markets, in reference to the Fed’s hopes of lowering inflation without provoking a recession.”Broad strength” in the U.S. economy, he said, “convinced us that the U.S. economy is more durable than expected … Not only is it not slowing further, it might be picking up.” More