Aurelia Butler

European stocks and US futures were steady on Wednesday, with investors betting that cooling inflation would allow central banks to pause their rate increases earlier than previously thought.The regional Stoxx Europe 600 added 0.1 per cent, while Germany’s Dax dipped 0.1 per cent and London’s FTSE 100 traded in a tight range. The FTSE is slightly below a record high after UK inflation slowed for the second month in a row, declining to 10.5 per cent in December from an 11.1 per cent peak in October. Contracts tracking Wall Street’s blue-chip S&P 500 and those tracking the tech-heavy Nasdaq 100 both traded between gains and losses ahead of the New York open.The moves come as investors grow increasingly confident that inflation has peaked on either side of the Atlantic, and as China’s economic reopening has eased fears of a protracted global recession later this year. Gita Gopinath, deputy managing director of the IMF, signalled this week that the fund would upgrade its economic forecasts, while Germany’s chancellor, Olaf Scholz, told Bloomberg that the eurozone’s largest economy would avoid a recession.Even so, the effects of last year’s sharp jump in US interest rates are only just beginning to show up in corporate results. Analysts at S&P Global said they expected the impact from the “fastest pace of rate hikes in recent history to increasingly show in issuers’ operating performance and trading outlooks” as fourth-quarter earnings were released over the next few weeks.Of the 13 S&P 500 stocks to have reported so far, 10 have beaten earnings per share estimates and three have missed, with nine stocks rising and four selling off, according to Mike Zigmont, head of trading and research and Harvest Volatility Management. The data so far “isn’t compelling for a bullish or bearish spin”, he said.Elsewhere, the Bank of Japan opted against a further tweak to its yield curve control measures, pushing stocks higher and sending the yen lower against the dollar. The yield on 10-year Japanese bonds fell to 0.43 per cent from 0.5 per cent.Hong Kong’s Hang Seng index rose 0.5 per cent and China’s CSI 300 shed 0.2 per cent. More

Global oil demand is set to rise to an all-time high in 2023 as China relaxes its Covid-19 restrictions in a move that may push crude prices higher in the second half of the year, according to the International Energy Agency.Demand for crude oil could rise 1.9mn barrels a day to reach a record 101.7mn b/d, while the evolving impact of western sanctions on Russia threatens to constrain supply, the IEA said in its first monthly oil report of 2023.“Two wild cards dominate the 2023 oil market outlook: Russia and China,” the report said, adding that robust demand growth would tighten “the balances as Russian supply slows under the full impact of sanctions”.Crude prices soared last year to near record highs amid fears of disruption to oil markets following Russia’s full invasion of Ukraine, but then fell back as Russian supply held up and an economic slowdown crimped demand, particularly in Europe.The Paris-based IEA, which advises governments on energy policy, said Russian oil supply had “held steady” in December, at 11.2mn b/d, despite the introduction of EU sanctions on the import of Russian crude. However, it forecast that the “well-supplied” global oil market at the start of the year could “quickly tighten” as western sanctions — particularly an EU ban on the import of refined Russian products from February 5 — take full effect.Prices for Brent crude, the international benchmark, climbed 1.4 per cent on Wednesday morning to more than $87 a barrel.Growing optimism that Chinese demand will recover this year has helped oil prices rally by around 10 per cent in the past week.The IEA said nearly half of the forecast rise in oil consumption this year would come from China even though “the shape and speed” of the country’s reopening remained uncertain.Coronavirus restrictions in China, which depressed economic activity last year, meant that Chinese oil demand in 2022 fell for the first time since 1990, declining by an average of 390,000 b/d, its biggest annual fall.But the loosening of quarantine and testing measures in November, followed by Beijing’s abrupt decision to abandon its so-called zero-Covid regime in early December, had already boosted Chinese consumption, the IEA said. Chinese oil demand in November rose by 470,000 b/d compared with October, according to the agency’s data.Opec, the oil producer group led by Saudi Arabia, expects Chinese demand to grow by 510,000 b/d in 2023, it said in its own monthly report published on Tuesday. Opec predicts global oil demand will rise by 2.2mn b/d in 2023 to 101.8mn b/d.Opec and its allies, including Russia, boosted their oil output by a combined 4.7mn b/d in 2022 but slashed their group production target in October, despite US pressure to continue pumping more.As a result, global oil supply growth in 2023 was set for a “dramatic slowdown”, the IEA said.Oil production is predicted to increase by 1mn b/d this year, it said, as increased output from the US, Brazil, Norway, Canada and Guyana is offset by an 870,000 b/d fall in production from the Opec+ group. More

UK inflation slowed for the second consecutive month in December after it hit a 41-year peak in October, although economists do not expect the change to ease pressure on the Bank of England to raise interest rates. The annual rate of consumer price inflation declined to 10.5 per cent in December, from 10.7 per cent in November and further below the 41-year high of 11.1 per cent in October, according to data published on Wednesday by the Office for National Statistics.The decline was in line with analysts’ expectations. Core inflation, which strips out volatile food, energy, alcohol, and tobacco prices, remained unchanged at 6.3 per cent. Economists polled by Reuters expected the rate to decline to 6.2 per cent.

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Food inflation rose to 16.9 per cent in December, the fastest pace since records began in 1977. Services inflation — considered a better measure of domestic price pressure — also accelerated.Ruth Gregory, senior UK economist at Capital Economics, said that the small fall in headline inflation and the strong underlying price pressures suggest “it is too early for the Bank of England to declare victory in its fight against inflation.” She expects the BoE to raise interest rates to a peak of 4.5 per cent in the coming months.Markets are pricing in a 50 basis point rate increase at the next meeting on February 2. The Bank of England has raised interest rates from 0.1 per cent in November 2021 to the current 3.5 per cent in order to bring inflation down to its 2 per cent target. The slowdown in inflation is unlikely to bring much relief to struggling households as prices remain high, with the pace of the cost of living significantly outpacing wage growth.Jack Leslie, senior economist at the Resolution Foundation, a think-tank, said that inflation remains particularly high for low-income families “who are on the wrong side of a large cost of living gap due to the high cost of energy bills and food.”Chancellor Jeremy Hunt, said: “High inflation is a nightmare for family budgets, destroys business investment and leads to strike action, so however tough, we need to stick to our plan to bring it down.”The ONS noted that the slowdown in inflation was in part driven by the easing of motor fuel prices, which fell 4.9 per cent month on month.Grant Fitzner, chief economist at the ONS, said: “Prices at the pump fell notably in December, with the cost of clothing also dropping back slightly. “However, this was offset by increases for coach and air fares, as well as overnight hotel accommodation. Food costs continue to spike with prices also rising in shops, cafés and restaurants.” US inflation fell to a 15-month low of 6.5 per cent in December while eurozone price rises dropped back to 9.2 per cent, as lower oil and gas costs and improving global supply chains ease price pressures around the world.The BoE expects inflation to remain above 10 per cent in the first quarter of 2023 before falling sharply from the middle of the year. More

Ruurd Brouwer is the chief executive of TCX, a currency hedging fund set up by several development banks to help developing countries ameliorate FX risks. In last week’s FT, Martin Wolf made a just case that high income countries should support emerging and developing economies to prevent the next debt crisis.Covid was not these countries’ fault. The lack of global co-operation in tackling it was not their fault. The lack of adequate external official funding was not their fault. The global inflation was not their fault. The war is not their fault. But if the high-income countries do not offer the help they now evidently need, it will unambiguously be their fault.Zambia, Lebanon, Sri Lanka and recently Ghana are leading the way, but the number of countries at (high risk) of debt distress has been on the rise for quite some time — as this IMF chart shows.

© IMF

This matters in so many ways. Preventing debt crises even saves lives. Last year, the World Bank studied the effect of 131 sovereign defaults since 1900. They learned that in the short term the number of people living in poverty shoots up 30 per cent, but even a decade later defaulters have 13 per cent more infant deaths every year, whilst surviving infants have a lower remaining life expectancy.

© World Bank

The most recent big initiative to help the poorest countries manage their debts was the G20 Debt Service Suspension Initiative (DSSI). Paying later would prevent countries from defaulting whilst freeing up liquidity to fight the Covid pandemic. And it would buy time to address structural debt problems.Out of the 73 countries that were allowed to use the DSSI, 45 actually did. A total of $12.9bn of debt servicing was suspended by official creditors in 2020 and 2021.The initiative fulfilled its short-term purpose of providing at least some relief. But that’s only one side of the debt coin. It is the tail side that defines success. As poor countries have shallow capital markets, their long-term funding usually comes from foreign lenders, in foreign, hard currency, mainly US dollars. But borrowing in a currency that you don’t control is rightly called the “original sin” of sovereign debt markets, and has through history proven dangerous. While many big developing countries have developed domestic bond markets — mitigating the risk of original sin — the foreign-currency share of the debts of low-income countries is around 70-85 per cent according to Unctad. When the currencies of developing countries fall — as they generally have against the dollar in recent years — the burden of these debts increases commensurately. As the currencies of countries that participated in the DSSI depreciated 22.5 per cent on average against the US greenback, every dollar of debt suspended has now in practice turned into $1.225 of debt in local-currency terms. And it’s the local currency that is relevant for borrowers, given that the vast majority of their revenues will be domestic taxes. As a result, the non-participants had a better deal in debt terms.

© World Bank data, OGResearch calculations.

Now, what does all this mean in practice? Let’s take Ethiopia, a good example as they were hit the hardest. The country got a $800mn payment holiday, but the fall of the Ethiopian birr increased the effective burden of their debts by 35 per cent over 2020-22. In US dollar terms that is an increase of $9.7bn (conservatively recalculating using 2021 exchange rates). Zambia got $700mn of relief, yet the depreciating kwacha led to a debt burden increase of $1.7bn. The effective weight of Kyrgyzstan’s debts grew by more than five times the amount suspended; $120mn versus $660mn.

© World Bank/IMF data, OGResearch/TCX calculations

In relative terms, Ethiopia extended 2.9 per cent of its 2019 external debt against a de facto debt increase due to depreciation of 35 per cent. For the DRC Congo the tally was 7 per cent of debt extended, for a 16 per cent increase. In Zambia; 6.4 per cent extended, and a 15 per cent increase.

© World Bank/IMF data, OGResearch/TCX calculations

Yes, the DSSI created $12.9bn in liquidity. But the currency effect increased their debt burden in domestic currency terms by a whopping $34bn by 2022. This is real local money that cannot be spent on healthcare or education.Now, it is not the DSSI’s fault that many of these currencies have fallen in value. Developing country currencies as a group declined by a similar amount over the same time. One could argue that the DSSI beneficiaries would have been worse off without the debt suspension. But that’s not the point. The point is that significant currency risk in a country’s sovereign debt creates a debt doom loop. Any adverse event — such as a war, pandemic or financial crisis — can lead to a flight to (dollar) quality and out of developing country assets. Their currencies then take a hit, their debt servicing costs shoot up, credit ratings are slashed, interest rates rocket and refinancing risks jump, leading to further capital flight, depreciations, and ultimately a potential sovereign default.This dollar debt doom loop is active today. And it turns debt suspension into a senseless instrument that exchanges a big problem today for a much bigger problem tomorrow. Almost a quarter of a century after identifying “original sin” as a major source of suffering, professors Barry Eichengreen Ricardo Haussmann and Ugo Panizza their earlier research in November 2022 in a paper fittingly titled Yet It Endures: The Persistence of Original Sin, which argued:Notwithstanding announcements of progress, “international original sin” (the denomination of external debt in foreign currency) remains a persistent phenomenon in emerging markets. Although some middle-income countries have succeeded in developing markets in local-currency sovereign debt and attracting foreign investors, they continue to hedge their currency exposures through transactions with local pension funds and other resident investors. The result is to shift the locus of currency mismatches within emerging economies but not to eliminate them.Preventing the debt doom loop can only be realised by de-risking dollar loans, removing the currency risk from borrowers (which will need to pay higher local interest rates in return). The World Bank already concluded in a document to raise funding for International Development Association member countries that:Exchange rate risk in many IDA countries’ external public borrowing represents one of the biggest financial risks, and the potential impact is intensified by weakening debt sustainability.The institution is committed for the first time in its history to do a pilot local currency loan from IDA resources in the coming year. As official lenders have dumped currency risk on to their borrowers for the past 75 years, this is a hopeful development. But it too late to prevent the next debt crisis. More

When Tim Cook visited Capitol Hill to meet privately with senior lawmakers in early December, his company’s relationship with China was high on the agenda. In the prior month, Beijing’s strict Covid policies had led thousands of workers to flee the Zhengzhou megafactory known as “iPhone City” run by Foxconn, Apple’s manufacturing ally for a quarter of a century. When those trapped at the factory protested, police responded with violence in riot gear. But when a Fox News reporter put him on the spot in Washington, he declined to answer. “Do you support the Chinese people’s right to protest? Do you have any reaction to the factory workers that were beaten and detained for protesting Covid lockdowns?” asked Hillary Vaughn, as Cook walked through the building. “Do you think it’s problematic to do business with the Communist Chinese party when they suppress human rights?”Cook ignored Vaughn, eyes cast downward as he changed direction to avoid her. The clip was played repeatedly on US cable news, and the Wall Street Journal highlighted it in an oped entitled, “Tim Cook’s Bad Day on China.” One supply chain executive, who declined to speak on record, characterised the confrontation as “the worst 45 seconds of Cook’s career.”Tim Cook at Capitol Hill last month, when he met privately with senior lawmakers © Bill Clark/CQ-Roll Call, Inc/Getty ImagesTo be fair, few CEOs would respond to reporters doorstepping them on live TV — least of all Cook, whose media appearances are typically choreographed carefully with senior broadcasters.But it was a striking example of the political spotlight that Cook is now facing. He and Apple said little throughout the widespread demonstrations against Beijing’s “zero Covid” policies, beyond a short statement on November 23 to say it was “working closely with Foxconn to ensure their employees’ concerns are addressed.” The company declined to comment on this article. Apple also conceded the unrest had created “significant” supply chain disruptions. Analysts now predict the lucrative holiday period saw around 78mn iPhone units shipped, a shortage of 6mn or more units.But far more significant than the short-term risk is how the protests reminded the world that America’s most valuable brand increasingly finds itself beholden to America’s biggest geopolitical rival.Apple did not just fail to support protesters; as it emerged Chinese citizens were using AirDrop to share information, the company limited use of the file-sharing tool, in a move seen as acquiescing to Beijing’s demands. It was tantamount to “doing . . . the bidding” of the Chinese Communist party, said Democrat Mark Warner, chair of the Senate Intelligence Committee. The company has high-profile critics in both parties. Republican Senator Josh Hawley accused Apple of being so dependent on China that it can no longer express basic American values. “When the communists in Beijing tell Apple to jump, it asks, ‘How high?’” Hawley says. “Apple’s relationship with China is untenable, both economically and morally.”Apple is facing political, strategic and investor pressure to dramatically cut its manufacturing reliance on China. The threat of tariffs loomed large during the Trump administration, and President Biden has only hardened Washington’s stance against Beijing by choking off more Chinese companies’ access to cutting edge US technology including semiconductors.

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But if the relationship is untenable, it is also near-unbreakable. The operations that Apple orchestrates are so complex and massive — including factory hubs the size of western cities in China — that it is not at all clear the world’s biggest company has any viable options to overhaul the way it rolls out $316bn worth of iGadgets each year. “Nobody comprehends the scale of Foxconn’s manufacturing efforts, until you see it with your own eyes,” says Brian Blair, a former tech analyst who has repeatedly toured the key Apple supplier’s facilities in China. “It’s like trying to describe New York City to a villager.”Apple’s dilemma on China is over two decades in the making, going to the foundation of its global success. For Cook, it’s personal. The operations guru was the architect of Apple’s China-oriented supply chain strategy, earning a reputation for obsessing over details that transformed its end-to-end management into the envy of the tech world.But Apple’s reliance on the country for its annual cadence of product refreshes is now arguably its biggest vulnerability. “Apple can’t diversify,” says one former Apple engineer who had been tasked with finding ways to automate production to overcome rising labour costs. This person says the iPhone maker has been striving to move its operations outside China since at least 2014, but with little progress to show for it. “China is going to dominate labour and tech production for another 20 years.” The diversification challengeNo other Big Tech company shares Apple’s level of exposure to China. Meta and Alphabet depend on digital advertising for the bulk of their business. Amazon has no real presence in the region and Microsoft’s share of revenues from hardware is roughly 6 per cent. Even Korean giant Samsung, the only company that sells more phones than Apple, is much less exposed. Samsung closed its Chinese plants in 2019, after its local market share collapsed to less than 1 per cent from nearly 20 per cent in 2013, as homegrown rivals Huawei, Xiaomi and Oppo thrived.Samsung now builds more than three-quarters of its handsets in six countries from Argentina to Vietnam, and less than one-quarter are outsourced to contract manufacturers in China, according to Counterpoint Research.By contrast, virtually all of Apple’s hardware is made in China. The company directly employs only 14,000 people in the country, but it monitors the weekly hours of 1.5mn workers in its global supply chain, the vast majority in China.These enormous operations underpin Apple’s ascent to being the world’s largest company — one that ships up to a quarter of a billion iPhones a year. The candidate in the best position to become a rival to China as a new hub of manufacturing is India, which is expected to surpass it as the world’s most populous country this year.

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India, a democracy with English as a second official language, offers fewer geopolitical risks than China and, with its rising middle class, could become a huge market in the coming decades. At present, the iPhone’s market share in the country is just 5 per cent, according to Counterpoint.Thanks largely to efforts from Samsung, Chinese smartphone groups and multiple suppliers including Apple partners Foxconn and Pegatron, India already accounted for 16 per cent of global smartphone production in 2022 — about 200mn units — up from 2 per cent in 2014, says Counterpoint.Samsung is said to be showing the way: in recent years its operations in Noida, near New Delhi, have doubled capacity to build 120mn phones a year. Apple has been producing lower-end iPhones in India since 2017 and began building flagship devices there last autumn. JPMorgan estimates that India could account for a quarter of iPhone assembly by 2025, up from less than 5 per cent today. Long-term, India wants to have the entire value chain in its borders, according to Prabhu Ram, head of industry intelligence group at CyberMedia Research. He points out that in recent months Indian conglomerate Tata has made plans to hire tens of thousands of workers in Tamil Nadu, in an attempt to serve as a local “anchor” to bring in more suppliers for iPhone production. He predicts more Indian companies will establish operations, with incentives from New Delhi.“This isn’t just about Tim Cook’s legacy — this is about Prime Minister Narendra Modi’s legacy,” Ram says.No rivals to ChinaBut some supply chain experts argue that the growth numbers in iPhone “manufacturing” in India are more hype than reality. Most operations that suppliers have set up for Apple in India are known as FATP — Final Assembly, Test and Pack — a labour-intensive process performed with components largely flown in from China and then assembled mostly by Taiwanese companies.Pegatron and Foxconn may be moving there, says Steven Tseng, tech analyst at Bloomberg Intelligence, but their suppliers are not. “There is no supply chain in India,” he says. “They have to import pretty much everything from China.”And although 200mn phones were made in India last year, they are not in the same league as Apple’s products. The most popular models typically sell for $250 or less, while average iPhones cost nearly $1,000 and require more sophisticated automation and labour intensity. “It’s like comparing a Kia Sorento with a Ferrari,” says a former Microsoft executive. “It’s a way more technically advanced device, a more finessed product.”

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Experts worry the country lacks the same skill sets, migrant labour pools, infrastructure or supportive government that makes China so attractive to Apple.“The infrastructure in India is obviously not as well established,” Tseng says. “The transportation, utilities, communication can all be issues. And the labour quality in India — whether it can be the same as in China — is a big question mark.”Vietnam seems like an attractive alternative, especially as average wages today are less than half that of China’s. JPMorgan estimates that Vietnam will by 2025 account for a majority of AirPods production, 20 per cent of iPads and Apple Watches and 5 per cent of MacBooks.But other companies have stumbled there. After the Finnish telecoms company Nokia was acquired by Microsoft in 2013, its China factories were closed and production was consolidated to Vietnam, in the hopes of cutting costs and boosting efficiency.But Nokia quickly ran into problems with organised crime, inadequate transportation and unpredictable weather that would shut down trading ports.“It was incredibly challenging in terms of ramp up, set up, and getting that working the way it was working in China,” the former Microsoft executive says. “The infrastructure was either very new and hadn’t been proven — or it didn’t exist.”The executive says Vietnam is still “years and years” away from building competitive operations for technical manufacturing, while the broader logistics challenge is probably even greater.“We had challenges with sourcing components, because all of our tier-two, tier-three sourcing was still all in China,” this person adds. “So we ended up shipping a lot of semi-finished goods from China to Vietnam for final assembly.”Even if Vietnam does improve the quality of its operations, experts point out that the south-east Asian nation is just too small to actually rival Apple’s current set-up.

China, according to some estimates, has more factory workers than Vietnam has people. The number of rural migrant workers in the country was 293mn in 2021, according to China’s National Bureau of Statistics, versus an entire population of 100mn in Vietnam.Jenny Chan, co-author of Dying for an iPhone, which details the lives of Foxconn workers who assemble Apple products, points out that China’s labour infrastructure is uniquely supported by the state. At times it is all but mandatory, she says, with villagers and students bussed in to lend hands.“This is really important, because you will not get [much] interest to assemble an iPad or iPhone,” she says. “It’s repetitive work and you are just rendered as a robot — a tiny cog in a huge machine.”The ‘red supply chain’Even as Apple is attempting to diversify its supply chain internationally, its ties to China are simultaneously becoming stronger. For years, the tech giant has been establishing closer ties with mainland Chinese companies in exchange for concessions to operate more freely. Cook even personally forged a five-year agreement in 2016 to spend more than $275bn to help advance China’s economy and workforce, according to specialist tech publication The Information.Apple has since given lucrative orders to Chinese contract manufacturers Luxshare, Goertek and Wingtech, helping to establish a so-called “red supply chain” at the expense of Taiwanese suppliers Foxconn, Wistron and Pegatron.JPMorgan now forecasts Chinese companies’ share of iPhone manufacturing will rise from 7 per cent last year to 24 per cent by 2025. Luxshare, run by billionaire chairwoman Grace Wang, has been the biggest beneficiary. Since winning an order to produce AirPods in 2017, its revenues have soared from less than $2bn in 2016 to more than $31bn, and it now assembles Apple Watches and iPhones. In 2017, Cook agreed to be photographed at a production line at Luxshare — helping its shares soar. There, he lauded the labourers’ skills and provided comfort when asked if Apple would shift its supply chain to India and south-east Asia.“We’re not doing that,” Cook replied. “Manufacturing our products requires deep engineering skills, flexible supply chain management, and exceptional quality standards. We won’t be shifting production for the sake of lowering costs.”However, Apple risks losing some control over its production process innovations with the “red supply chain.” One reason is it no longer owns as much production machinery at its suppliers’ plants — a strategy that gave the company unprecedented control over how its products were made.The value of Apple’s “long-lived assets” in China peaked in 2018, at $13.3bn, and in the years since has nearly halved to $7.3bn. Former Apple engineers that spent time in China say that after iPhone sales peaked in 2015 the company was happy to be more reliant on suppliers’ machinery to save costs.A second loss of control was the result of Covid-19. Blair says “a huge, huge part of [Apple’s] secret sauce” is how frequently its top talent from California would travel to China and spend months at its suppliers’ plants. Pre-pandemic, such trips had become so common that the company was booking “50 business class seats daily” from San Francisco to Shanghai, according to an accidental leak from United Airlines.But since 2020, Apple has been unable to send troops of engineers to China. The mobile phone plant of Rising Stars Mobile India Private, a unit of Foxconn, in Sriperumbudur, Tamil Nadu, India © Karen Dias/BloombergTwo former Apple manufacturing engineers say the company’s Chinese engineers really stepped up and proved themselves. “Apple provided a training ground for Chinese manufacturing engineering that was second to none,” one person says. Apple, in turn, raised their pay and has been able to retain most of the team despite frequent recruiting efforts from rivals.However, two people familiar with Apple’s operations say that giving up control risks slowing innovation and leaking intellectual property. “The Cupertino guys stood back and let the Chinese take the lead,” says one. “The Chinese guys completely control the product now.”Apple alluded to this risk in its recent annual filing to the Securities and Exchange Commission, saying that “stringent employee travel restrictions” had “adversely affected” its supply chain and caused “delays in production ramps of new products.”Back to the status quoSome experts now believe that the expertise China has developed is so difficult to replace that Apple has no real choice but to keep the bulk of its manufacturing in place and suffer the economic and political costs.But those are not set in stone. In the medium term, the abrupt reopening of China’s economy is likely to ease pressures on global supply chains. Even if US-China relations remain strained for now, there are differing views on the prospect of the two economies “decoupling” completely and setting off on rival, parallel paths. Workers in China protest last November at Apple’s factory known as ‘iPhone City’ during Covid controls © EyePress/Reuters Such a thing might not even be possible, says Bindiya Vakil, chief executive of Resilinc, a California-based supply chain mapping group. It would take “many years, indeed decades — if we ever really manage to decouple at all.”Although many companies are, like Apple, attempting to diversify from China, she says, they are typically “China+1” strategies rather than full exits, as no other place has the same combination of quality and scale.

“Today, every component has a supply chain dependency in China,” she says. “Either it is directly manufactured in China, or has at least several parts that go into it that are made in China.“Look back a few tiers and we get down to smelters, which are mostly based in China. These cleaned and processed metals, minerals and derivatives make their way into products worldwide — and there are no back-up sources.”Woo-Jin Ho, hardware analyst at Bloomberg Intelligence, projects that Apple will shift just 10 per cent of iPhone production outside of China by 2030, or at most 20 per cent if it moves aggressively.“Look at the smartphone manufacturing hubs that China has created,” he says. “I don’t know where that can be replicated.”Chan, the Foxconn labour researcher, predicts that as media attention dies down Apple will quietly increase its investments in the country. “China has so many advantages,” she says. “From the moderately educated and skilled workers to the really high level engineers and PhDs — those providing expertise in cutting-edge knowledge.”Chan adds: “Apple would have too many difficulties to find the human resources and infrastructure that is parallel — or even close — to the scale provided in China.”Data visualisation by Chris Campbell and Keith Fray More

A dozen or so years ago at a Davos World Economic Forum, I first heard of “Vuca”. The ugly acronym of US military origin stands for “Volatility, Uncertainty, Complexity and Ambiguity”. Before the 2008 financial crisis, these were not especially familiar words at Davos. Attendees saw globalisation, free-market capitalism, and democracy as self-evidently good things that drove the future, at least in the west. Vuca was primarily a poor-country problem.No longer. The 2008 crisis undermined the cult of free-market orthodoxies, showing the dangers of excessive deregulation and unleashing a once­unimaginable level of government intervention into finance. Subsequent years of quantitative easing further damaged conventional beliefs by distorting the price of money.Events such as the Covid-19 pandemic and the 2022 energy crisis caused yet more government intervention. Democracy has been shaken by rising populism in the US and Europe, and intensified autocracy in countries such as China and Russia. In a 2022 survey by the non-profit think-tank the Bertelsmann Foundation, the number of non-democratic countries eclipsed democratic ones for the first time since 2004.Globalisation is in retreat, too, amid rising protectionism, nationalism and military conflicts such as the Ukraine-Russia war. Members of the Davos elite face a world that seems more uncertain and unstable than seen in their lifetime. Call it, if you like, Vuca squared.How should they respond? One place to start is pondering a second ugly acronym: Spof, or Single Point Of Failure.The term was developed by civilian and military engineers to describe risks that arise when a complex machine or system relies on a single cog, node, or conduit. It used to be invoked in relation to small-scale structures (say, if a car can only operate if a circuit works).But, these days, Spofs are a macro problem, too. That is because, in the early days of the 21st century, there was so much faith in free markets and globalisation that the global economy became tightly interconnected — increasingly dependent on concentrated financial and trade flows, and nodes.

Consider AIG. Before 2008, the multinational insurance and finance company attracted scant attention. However, when crisis erupted, it emerged that numerous financial institutions had used it to hedge credit exposures, creating an extreme concentration of risks. A potential failure of AIG threatened the entire system; it was a Spof.Or look at pre-Covid trade supply chains. In the early 21st century, many western businesses sourced key components from Asia, often via the same transport hubs. When transpacific shipping gummed up, that created severe challenges. So, too, when Russian invaded Ukraine.Even cyber space is Spof-prone, never mind that the internet is supposed to be a decentralised platform. Countries, such as Greece, that rely on underwater cables to keep the internet functioning are vulnerable to these links being cut. So, too, a company with outsize dependency on a single server or vendor.Can this be fixed? Yes, in theory, by building more information redundancy and back-up systems. As 2023 gets under way, many executives are scrambling to do this — by reorganising supply chains, creating back-up cyber platforms, and embracing a “just in case”, not “just in time”, approach that prizes resilience in addition to efficiency.

Cost is one problem with this shift. A highly streamlined system tends to be far cheaper than one with redundancies. Another is cultural: anyone who grew up in the late 20th century, when free-market ideas ruled, tends to assume that business should operate to optimise individual profit making.The task of tackling Spofs can rarely be dealt by any single company alone; it requires collaboration and oversight of governments. One small example: if global companies want to reduce the danger of cyber attacks, they need to share details of cyber attacks and accept outside controls on how they organise their digital affairs (say, by only using certain approved vendors). This does not mesh easily with the shareholder-first ethos.Similarly, if Western businesses want to reduce the risks arising when they rely on a country such as China for battery metals — or Taiwan for computer chips — it will require a wider industrial policy. Countries such as the US have been wary of this, until recently.Hence, Vuca and Spof need to be pondered together. The last decade has not just delivered nasty financial, economic, medical and geopolitical shocks, but also has undermined Davos’ basic assumptions. Whether it can adapt is alarmingly unclear. More

Fears of a 2023 US recession have been rising as the Federal Reserve attempts to tackle the country’s worst inflation problem in decades.Far more persistent price pressures than expected have led the US central bank into its most aggressive campaign to tighten monetary policy since the early 1980s.Top Fed officials concede that bringing inflation back under control will require a “sustained period” of below-trend growth and job losses. No policymaker, however, has yet said a recession is inevitable.Jay Powell, the bank’s chair, has said there remains a path to a “soft landing” — but it is a path that gets more narrow the more stubborn inflation proves to be, and the higher the Fed has to push up borrowing costs to quell it.“I don’t think anyone knows whether we’re going to have a recession or not and, if we do, whether it’s going to be a deep one or not,” Powell said at his final press conference of 2022.Economists across Wall Street and academia share his view of an uncertain outlook but are notably more pessimistic about the path forward.“It’s very, very difficult to fine-tune this huge $20tn-plus economy and cool it off just enough,” says Kathy Bostjancic, chief economist at financial services company Nationwide Mutual. “We have pretty high conviction that a recession is likely in 2023.”A consensus forecast by Bloomberg — reflecting the view of more than 80 institutions — indicates a contraction in the US economy of 0.1 per cent in both the third and fourth quarters of 2022, with unemployment nearing 5 per cent. But it is forecast to be offset by stronger growth in the first half of 2023, resulting in a 0.4 per cent expansion this year.However, in a survey last month by the Initiative on Global Markets at the University of Chicago Booth School of Business, in partnership with the FT, 85 per cent of the academic economists polled expected the private non-profit National Bureau of Economic Research to declare a recession this year.Federal Reserve economists have conceded that such an outcome is as plausible as a soft landing.

On the town: service sector prices are elevated as Americans continue to spend © Bloomberg

The NBER characterises a recession as a “significant decline in economic activity that is spread across the economy and lasts more than a few months”. More often than not, this follows Federal Reserve attempts to cool an overheated economy.Since the 1950s, the US economy has tipped into a recession within two years every time inflation has exceeded 4 per cent and unemployment has fallen below 5 per cent, research shows.Inflationary pressures have cooled recently but consumer prices are still rising at an annual rate of 6.5 per cent. Unemployment hovers at 3.5 per cent.Whether a recession happens, and its severity, depend largely on global factors, says Gregory Daco, chief economist at consultants EY-Parthenon.Further inflationary pressure — be it from additional supply chain pressures linked to Covid complications in China, or a resurgent spike in energy prices stemming from the war in Ukraine — could force the Federal Reserve to damp demand further.Most officials back a rise in the federal funds rate — at which commercial banks borrow and lend their excess reserves to each other overnight — from its present 4.3 per cent to above 5 per cent, with no rate cuts until 2024.Michael Gapen, the head of US economics at Bank of America, says the federal funds rate may need to surpass 5.5 per cent should price pressures continue to linger.Much depends on the trajectory of the labour market, which remains tight as employers compete to fill vacancies amid a worker shortage.Wage growth, while slowing, is well above a level consistent with the Fed’s 2 per cent inflation target. Service sector prices, including dining out, personal care and transport, are also elevated as Americans continue to spend.Mark Zandi, chief economist at Moody’s Analytics, refers to the upcoming period as a “slowcession”.Nevertheless, a full recession could be “self-fulfilling”, he adds. “Recessions are ultimately a loss of faith — a loss of faith by consumers that they will hold on to their jobs . . . a loss of faith by businesses that they will be able to sell what they produce.”  More

The World Economic Forum in Davos has been the meeting place and cheerleader for global capitalism. But, some would argue, this cause is dead. Russian oligarchs are absent. Although some Chinese business leaders are there, their wings are clipped at home and abroad. The global financial crisis, Covid, resurgent nationalism, deteriorating relations between the US and China, and war in Ukraine have transformed the global business environment for the worse.Ultimately, capitalism is global, because opportunities are global. Beyond national borders lie markets to serve and resources to exploit. Today’s multinational companies and cross-border flows of goods, services, knowledge, finance, people, data and ideas are products of these opportunities. Yet, whether they are exploited, and by whom, is also determined by the risks and the constraints.What has changed are perceptions of risk. Not so long ago, both businesses and politicians saw only the upside. Now they also see the downside. Business sees risk in extended supply chains and vulnerability to disruption. Politicians see the risks of extended supply chains, too. Yet they also see threats from hostile powers, loss of their countries’ technological superiority and threats to the livelihoods of important domestic constituencies.Perceptions have, in sum, shifted towards “dog eats dog” from “dog trusts dog”. How far has this shift gone in practice? “Not so far” is the answer.A report on Global flows published last November by the McKinsey Global Institute provides needed illumination. A signal conclusion is that global flows are now being led by intangibles, services, and human skills.Thus, trade in goods has stabilised relative to world output since the global financial crisis, after an enormous rise over the decades before it. Flows of services, international students, and intellectual property grew about twice as fast as trade in goods in 2010-19. Data flows grew at nearly 50 per cent annually. Crucially, most flows have proved robust during recent disruptions: flows of goods recovered quite strongly after the pandemic (see charts).

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Reliance on products produced in just a few places is widespread. Such concentration is, notes McKinsey, a “two-sided” coin. It allows substantial efficiency gains but creates dependency and risks of significant disruption.Europe’s reliance on Russian gas has proved a paradigmatic case of a dangerous dependency. Lithium, rare earths, and graphite are extracted from three or fewer countries and mostly refined in China. The most sophisticated computer chips come from Taiwan.Overall, argues a more recent McKinsey report, every region relies on trade with others for more than 25 per cent of at least one important type of good. For 40 per cent of global trade, the importing economy relies on just three, or fewer, nations for the supply of a given resource or manufactured good.

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Moreover, no evidence exists of systematic diversification by the largest economies in the past five years. Finally, multinationals continue to account for about two-thirds of global exports.So, globalisation is changing, rather than dying — and rumours of global capitalism’s demise are exaggerated. Russia is partly out of the picture but remains a huge energy exporter. The US has maintained the Trump tariffs and imposed an embargo on exports of certain chips to China; it is set on rendering World Trade Organization rules ineffective. China insists on being treated as a “developing country”. Attitudes and practices are shifting against some aspects of openness. Will this change?Past experience demonstrates the destruction that can be done by wars and economic disasters. Globalised capitalism almost disappeared between 1914 and 1945. If one assumes away similar follies, economic opportunity will surely continue to guide what happens.Yes, there will be a degree of decoupling of trade and investment between China and the west, notably in strategically sensitive technologies. However, decoupling seems unlikely and stupid — not just economically, but politically.Again, some diversification of supply is sensible for countries and companies. But, beyond a certain point, it becomes extremely costly. Reliance on a few suppliers at home or in nearby countries might itself prove risky. It is also impossible to stockpile enough to meet every conceivable emergency. In most circumstance, a flexible global economy is going to be a far better safeguard.Trade cannot sensibly be limited to one’s own region or to one’s “friends”. For the US and Europe, the former would mean not only foregoing trading opportunities with the strategically and economically crucial Asian region, but abandoning it to China. Forcing Asian countries to choose between China and the west would be similarly counterproductive. Again, who are our “friends”? Friendships change. Not so long ago, Vietnam was an enemy.The biggest questions are whether a mutually satisfactory modus vivendi can be reached with China and how far the protectionist thrust of politics can be contained in the US.Unquestionably, substantial reform of how global capitalism works is needed. Among the biggest issues is tackling the defects of global finance. Recognition is required, too, of the upheaval that will be brought about by the dynamic new forms of virtual globalisation, notably our wild internet.Capitalism may be becoming somewhat less global. But an internationally open capitalism remains the foundation of future prosperity. It needs to be reformed. It must not be abandoned, as it was in the early 20th century. More