Aurelia Butler

If there’s one dominant theme in our inbox at the moment — beyond the usual cacophony of ESG and crypto nonsense — it’s how everyone seems to be freaking out about the chances of a looming recession.The US yield curve inverting was obviously one big trigger. People that want to better understand the pros and cons of the yield curve’s soothsaying abilities should check out this FT piece from 2019. The arguments have changed remarkably little since then. (If you fancy a different perspective on the yield curve, our data viz wizard colleague Alan Smith set it to music here.)But whatever the yield curve is doing, there are clearly rising fears that uncomfortably high inflation will push central banks, led by the Federal Reserve, into jacking up interest rates faster than anticipated just a few months ago. Hell, even Lael Brainard has now got her hiking face on.Deutsche Bank became the first big bank to predict a recession last week, with its top economists David Folkerts-Landau and Peter Hooper arguing:Two shocks in recent months, the war in Ukraine and the build-up of momentum in elevated US and European inflation, have caused us to revise down our forecast for global growth significantly. We are now projecting a recession in the US and a growth recession in the euro area within the next two years.The war, which has transitioned into a stalemate that is unlikely to be resolved any time soon, has disrupted activity on a number of fronts. These include upheavals in markets for energy, food grains, and key materials, that have in turn further disrupted global supply chains. We assume that the critical flow of gas from Russia to Europe will not be cut off, keeping the crisis from substantially deepening costs to the European and global economies, but that remains a downside risk. Inflation in the US and Europe is now pushing 8%, well in excess of what was expected as recently as December. More troubling, especially in the US, are signs that the underlying drivers of inflation have broadened, emanating from very tight labour market conditions and spreading from goods to services. Inflation psychology has shifted significantly, and while longer-term inflation expectations have not yet become unanchored, they are increasingly at risk of doing so. The Fed, finding itself now well behind the curve, has given clear signals that it is shifting to a more aggressive tightening mode. We now expect the Fed funds rate to peak above 3-1/2% next summer, with balance sheet rundown adding at least another 75bp-equivalent in rate hikes. With EA inflation likely to be sustained at 2% or more, we see the ECB raising rates 250 bps between this September and next December. This tightening is expected to yield negative growth in the US for two quarters during the fall-winter of 2023-24 and to reduce EA growth to modestly above zero that winter. Growth is seen recovering thereafter as inflation recedes and the Fed reverses some of its rate hikes. We acknowledge huge uncertainty around these forecasts, but also note that the risks to the downside and of a deeper downturn are considerable.At first FT Alphaville sniggered a little at the two-year forecasting horizon, but the floodgates have opened. Recession fears are clearly rising. Usual caveats etc, but take a look at how Google searches for “recession” have spiked worldwide of late.Outside of actual recessions in March 2020 and the financial crisis, this is the biggest uptick since the yield curve last inverted in 2019, and the eurozone shenanigans in 2011:

In addition to the factors listed by Deutsche Bank, Barclays’ economists highlight how the new Covid outbreak in China “can no longer be ignored”, given 30 out of China’s 31 provinces are now affected, and Shanghai — which alone represents almost 4 per cent of China’s economic output — has been in full lockdown since March 28. Here’s Barclays:Downside risks to global growth are rising, as China’s lockdowns expand, Europe moves towards sanctioning Russian energy, and the Fed signals more aggressive tightening. At the same time, high inflation will likely pressure the ECB next week to signal its willingness to act, while France elections create political risk.Ed Yardeni, a veteran Wall Street analyst who has for the most part been on the optimistic side, now pins the odds on a 2022 recession in Europe at 50 per cent, and in the US at 30 per cent.Yardeni thinks inflation will begin to moderate in the second half of the year, but highlights how every voting and non-voting member of the Fed’s interest rate setting board has become a hawk lately. That has created expectations of a series of larger-than-usual 50 basis point rate increases that could produce a recession. Here’s Big Ed:The war in Ukraine has heightened the odds of higher-for-longer inflation, tighter-for-longer monetary policy, and recession in the US and Europe, which we peg at 30% and 50%, respectively . . . The global economy is stagflating, indicators suggest . . . Will reining in inflation take just a nudge from the Fed or an all-out recession-triggering shove? AV’s gut feeling is that as long as labour markets remain strong and consumption buoyant then a recession is unlikely. With inflation still likely to moderate later this year, that might mean some Fed doves-turned-hawks revert to type. Other major central banks like the ECB, BoJ and the People’s Bank of China are not likely to be aggressive anyway, given their respective challenges. However, none are as influential for the financial system as the Fed. If the US central bank does embark on a string of 50 bps hikes we are fast going to find out just how resilient the global economy is to higher rates. More

Hello, and welcome to Trade Secrets. What of last night’s first-round French presidential election results from a trade policy perspective? A good result for Macron, obviously, but a lot of votes for far left and far right candidates with various degrees of antipathy to various definitions of globalisation. We’ll probably end up with Macron as president again and France continuing to be defensive though not mindlessly destructive on trade. That’s what normally happens. Today we look at the far more unusual occurrence of India signing a trade deal, plus briefly discuss what it means for the UK to offer more market access to Ukraine. As ever, if you’ve got anything to get off your chest, I’m at [email protected] inflection point for India?India has signed a trade deal. This is not a drill. Repeat: India has signed a trade deal. This is not a drill.OK, so the deal, with Australia, is only an interim agreement. It excludes several big categories of agricultural products about which Indian farmers are highly defensive (sugar, dairy, wheat). And as Sam Lowe in the Most Favoured Nation newsletter points out, it goes out of its way to permit data localisation, in this case in financial services. (India’s determination not to do any favours for its highly competitive IT industries by restricting free data flow is a marvel of comparative disadvantage, matched only by the UK’s insistence on handicapping its financial services sector post-Brexit.)But still, India has signed a preferential deal, indeed with a developed economy, for the first time in more than a decade. (The respective trade ministers are bigging it up here.) There’s more. After reflex obstreperousness in almost all World Trade Organization issues going back to the 2000s, it’s one of the core “Quad” of four members (the others being the EU, US and South Africa) which seem to have reached some kind of tentative proposal on waiving patent rights for Covid-19 vaccines. There’s a way to go on that issue (I’ll come back to it in future Trade Secrets) but even the fact that India is engaging constructively and has come up with a text to take back to its capital for discussion is a surprise to many, including me.Does this mark an inflection point in Indian trade policy? New Delhi also has talks ongoing with the EU and the UK. Initial bursts of enthusiasm when the negotiations started quickly dissipated, though the UK is aiming for a similar interim deal to Australia’s by year-end. Whether those talks pick up again, and particularly whether India wants a big comprehensive deal with the EU will be a big test of how serious New Delhi is about opening up more to trade.The logic of why India would want to sign deals is pretty straightforward. Its foreign policy relations with China are bad, it has ambitions to be a great manufacturing power, and so any opportunity to knit into global supply chains and get access to rich-world markets should be welcome. Geopolitically, India and Australia are of course part of the other Quad, the Asia-Pacific security alliance also including Japan and the US.Hitherto that incentive evidently hasn’t been enough to overcome the traditional political toxicity of trade deals of any kind in India, even for a government such as Narendra Modi’s which has done quite a bit of unilateral domestic trade liberalisation. The ideal chance to establish India as a counterweight to Beijing would have been joining the Regional Comprehensive Economic Partnership, which he dallied with before ultimately deciding in 2019 not to commit.I’d be hanging a lot of weight on a fairly flimsy peg if I said this interim deal, plus signs of progress in the WTO patent waiver talks, marked a substantive shift. But it’s an intriguing development.As well as this newsletter, I write a Trade Secrets column for FT.com every Wednesday? Click here to read the latest, and visit ft.com/trade-secrets to see all my columns and previous newsletters too.Britain’s eye-catching offer to UkraineBoris Johnson and Volodymyr Zelensky in central Kyiv at the weekend. The UK said it would give Ukraine a special trade deal by removing all tariffs © Ukrainian Presidential Press Service/AFPAlong with UK prime minister Boris Johnson’s celebrated trip to Ukraine over the weekend — it’s hard to turn round in Kyiv these days without bumping into a head of government — Britain said it would give Ukraine a special trade deal by removing all tariffs. To be honest, this isn’t much more access than Ukraine already has to the British market. The UK replicated the Deep and Comprehensive Free Trade Agreement (DCFTA) that the EU signed with Ukraine in 2014, a deal which incidentally seems to have been the spark for President Vladimir Putin’s invasion of Crimea and the Donbas region. There’s a more fundamental issue here. Although Putin clearly (and correctly) saw the DCFTA as an attempt to pull Ukraine into the EU’s orbit, not least because of the governance aspects to the deal, it hasn’t actually done that much to improve its trade performance. The issue isn’t so much market access as having a competitive economy producing something to sell. If and when a Ukraine economically and politically orientated towards the west emerges, it’s going to take a tonne of investment and a much better business environment and less corruption to allow it to enjoy the benefits of its trade access. It will be harder and more expensive than fiddling about with tariffs, but is much more likely to make a difference.Charted watersThe Ukraine war continues to have effects worldwide, with the price of metal forecast to rise by two-thirds owing to supply chain disruption and sanctions on Russia.This looks likely to benefit Japanese titanium suppliers, with traders betting that they will capture substantially more of the global market for the metal as western companies, particularly in aeronautics and defence, are forced away from Russian producers.Shares in Toho Titanium and Osaka Titanium Technologies, among the only manufacturers of high-grade titanium in the world, have risen about 61 and 51 per cent respectively since the Russian invasion of Ukraine in February. Trade linksFood prices have hit a new record high thanks to disruption from the Ukraine war, pushing the cost of ingredients for the classic bacon, lettuce and tomato sandwich up by more than half in two years in the UK.Research by the academics Richard Baldwin and Rebecca Freeman discusses the best way for governments to decide when to intervene in supply chains.Even before the Ukraine war, higher gas prices had substantially reduced EU demand for the fuel, according to research from the think-tank Bruegel.Putin has got traders obsessed with central bank reserves all over again, says the FT’s Katie MartinThere will be no Trade Secrets next week, owing to the bank holiday. More

BEIJING (Reuters) – China will step up the implementation of macro policies as the downward pressure on the economy is increasing, state media on Monday quoted Premier Li Keqiang as saying.Authorities should be highly vigilant of changes in the domestic and international environment that have exceeded expectations, Li was quoted as saying. More

“The Russian Federal Air Transport Agency has allowed Russian airlines to operate hundreds of foreign-owned aircraft without a valid certificate of airworthiness,” Commissioner for Transport Adina Valean said.”The Russian airlines concerned have knowingly done so in breach of relevant international safety standards. This …poses an immediate safety threat,” she said.She said the decision to ban the airlines certified in Russia, which include Aeroflot, was not another sanction against Moscow for its invasion of Ukraine, but a measure taken only on the basis of technical and safety grounds.The Commission said that after the addition of the 21 Russian airlines, the EU black list of carriers banned from EU skies now contained 117 companies. More

The title of my note today is taken from a new book by former Australian prime minister Kevin Rudd, which has become ever more timely since it was published a couple of months ago. I had the chance to hear Rudd — who speaks fluent Mandarin and is, for my money, one of the smartest westerners to opine regularly on China — talk last week about his book, as well as how Beijing may be thinking about decoupling at an Asia Society virtual event. Here are the five most interesting points he made:1. The 2020s will be the “decade of living dangerously”, as China tries to bolster not only its military strength but also its ability to fight any future western financial sanctions. Rudd pointed out that China is determined not to be vulnerable in either area, particularly in relation to Taiwan. But in lieu of any kind of managed competition, with clear red lines for the west and China in regards to Taiwan, the South China Sea, cyber security and space, the risk of accidental confrontation is high.2. Rudd himself argues for managed competition, in which both sides duke it out on everything apart from security issues — economics, foreign policy, finance, trade (he thinks that where supply chains go, currency does too), talent markets and the marketplace of ideas. All these areas are, in his view, open to battles. He believes that the victory will come down to a competition of values, between liberal democracy and authoritarianism, and “may the best system win”.3. There are potential areas of collaboration — such as climate, global finance, and vaccines and future pandemic prevention. But in order to leverage those, Washington and Beijing need executive-level co-ordination and a line directly into top leadership (meaning the president’s or premier’s office) at all times.4. China’s hope is that it can simply use the “gravitational pull” (a direct expression by President Xi Jinping) of its economic might to pull the west and Europe, in particular, into its orbit without triggering a hot conflict with the US. Beijing knows that it has alienated Europe with its stance regarding Russia’s war in Ukraine. “But there’s a deep, cynical, pragmatism in Beijing about the war” and a belief that European desire not to lose out on Chinese and other Asian high-growth markets will create a “selective amnesia” about the war by this time next year, he says. 5. Rudd, who has met Xi a number of times, says he’s “not somebody I’d like to cross”. Xi’s father was persecuted by Mao Zedong, and he knows what it’s like to be on the outside within the system. Rudd says Xi makes sure to purge any potential threats to his power before they even have a chance to become threats. “He’s a man of ideology, politics, and history” with a “resilience of steel”.What do I take from all this? Well, for starters, decoupling is clearly inevitable. Rudd, like me, believes that regionalisation is the future, though both the US and China will try to limit it to areas that won’t hurt them too much economically or geopolitically. Secondly, if I were US national security adviser Jake Sullivan, I’d definitely be trying to create some behind-the-scenes red lines around the hot-button issues. I think Rudd is quite right that in lieu of those, the risks of an accidental conflict are simply too high for comfort. But on the Chinese side, I wonder given Xi’s reputation, if there is reluctance to engage — the Chinese never take well to public pressure and even the hint of US secondary sanctions must surely be backfiring in Beijing.Finally, I’m not sure Rudd is quite right on Europe. While I wouldn’t want to underestimate the lobbying abilities of European multinationals in Brussels (particularly German exporters who are desperate to keep access to Chinese markets), I think it will be very difficult for the EU, which has taken such a tough stance on digital rights and technology regulation, to make peace with state surveillance, and the assumption that there is no data privacy to be had in China. Ed, would you agree, and what do you make of Rudd’s take?Recommended readingIt’s always tough to slog through an economics paper, but this one, co-written by one of my very favourite academics, the Massachusetts Institute of Technology’s Daron Acemoglu, is a must read particularly for any business school deans out there. It basically quantifies what I’ve long suspected (and wrote about in my first book), which is that people who have MBAs actually reduce the wages of the workers they oversee, whereas managers that come from outside the business sector do just the opposite. What’s more, MBAs do nothing more than non-MBAs to improve the sales and profitability of their companies. Save the $200k, I’d say, and just go straight to doing what you love.On that note, perhaps we could even save a couple of years of college and just make high school better — see this New York Times opinion piece by John McWhorter, which argues for the sort of “6 in 4” programmes that I’ve written about in the past as an alternative to just defaulting to four-year college for everyone.Also, in the FT, don’t miss the terrific “tick-tock” piece about the new era of financial warfare.Edward Luce responds Rana, I agree that Kevin Rudd is a first class observer of China and I look forward to reading his book. I also agree with his forecast that the 2020s will be “the decade of living dangerously”. As for what all this means for the future of western democracy, I find it very hard to forecast. Will Europe decouple from China? I doubt any region of the world will fully decouple from China given its centrality to global growth. But there will be ever-tighter restrictions on China’s strategic investments in western high tech and national security-related sectors, as we have seen happening on both sides of the Atlantic in the last few years. My concern is that the strategic need to curb China’s growing artificial intelligence-fuelled military and surveillance capacities will bleed into an unrelated anti-globalisation agenda. The rest of Asia is not China and it wants to see more western economic engagement to counter-balance China’s growing dominance in the region, not less. We would be foolish to cede the field to China. I am also concerned about our lack of engagement with the rest of the world. Dozens of low and middle-income countries in Africa, south Asia, the Middle East and Latin America are at risk of debt default in the next year. As Adam Tooze writes in this sharp essay in Foreign Policy, the developing world will feel the most pain from the coming credit tightening in the west. In all these debates about whether and how to decouple from China, we are forgetting that the other side of the coin must be to re-engage with the rest of the world, which has been economically devastated by the pandemic and now faces a monetary blow that could cripple their ability to recover. If the west is to think strategically about the rocky decade ahead, the rest of the world should feature much more prominently in its calculations. Your feedback And now a word from our Swampians . . . In response to ‘The politicisation of the Supreme Court’:“The politicisation of the Supreme Court is an existential problem for the US, and any modern society. However, the Clarence-Ginni Thomas problem is overblown . . . The existential problem for America is the toxic partisanship defining how justices are confirmed. Constitutional democracy is not sustainable without a credible, trusted judiciary. The court has no army or means of enforcement other than moral authority. That authority has been earned, not granted and nurtured for more than 200 years. Partisanship today is the real threat. Antonin Scalia — hard right — and Ruth Bader Ginsburg — hard left — were voted in with at least 98 affirmative votes because they were recognised by all as undeniably worthy of the appointment. The system works. Fewer than 20 per cent of Scotus decisions are 5-4. The majority of the rest are decided 9-0. Justices have proven worthy of the ‘highly qualified’ label they all have received. But the craven partisanship in the Senate has reduced the consent process to adolescent bickering. It broadcasts belief in the partisanship of judges and the court. Over time it will sap trust in the system and cheapen the court itself. The rule of law is western civilisation’s greatest legacy. Once lost, it is near impossible to rebuild.” — Robert A Rogowsky, Leesburg, Virginia More