Economy

The writer is Senior Fellow at Brown University. Josh Felman contributed to this articleShocks such as Covid and the Russian invasion of Ukraine command our attention. But it is shifts — that is, major transformations — that will determine the long-run trajectory of the global economy. Consider five major shifts and their potential consequences. First, the era of extraordinarily cheap finance is over. As inflation grips the world economy, a cycle of monetary tightening is under way. Long-term real interest rates are unlikely to rise to levels seen during the previous era of inflation, since growth now is much weaker and ageing populations will depress investment opportunities. But the era of zero interest rates has ended.Higher interest rates will destroy wealth as asset prices descend from frothy valuations. They will also expose companies and countries that have accumulated large amounts of debt. The result will be defaults and financial crises, especially in emerging markets. Second, the era of trade hyperglobalisation is over. Over the past decade, anti-globalisation forces have gathered strength. Over the next decade we will see this shift play out. Geopolitics will trigger protectionism; hedging will drive greater self-sufficiency in food, energy, essential drugs, resources and technologies; the weaponisation of interdependence, reflected in sanctions against Iran and Russia, will deflate the lure of globalisation; and capital will exit from odious regimes.The world will not actually deglobalise, since trade of some types (services) and in some regions (the west) will continue to expand. But the scale and speed of integration that the world witnessed for about 25 years are surely behind us.Third, economic convergence will stall. For three decades, poorer countries have been catching up with the living standards of richer countries, reversing two centuries of divergence. But this dynamism was propelled in large part by cheap finance and hyperglobalisation. Meanwhile, as the historic addition of the Chinese and Indian workforce to the global labour supply nears its end, the world economy will move from plentiful supply to shortfall, reinforcing inflationary pressures. Fourth, already weak global co-operation will dwindle further. The pandemic revealed the shambles that now characterises the multilateral system put in place after 1945. The financial costs of producing and distributing vaccines to the world were trivially small compared with the potential benefits in lives saved and economic losses averted. Yet the major powers and institutions proved unable to accomplish this task.This is not the only example. The World Trade Organization has been on life support for decades, a victim of geopolitical rivalry and the west’s inability to figure out ways to provide good jobs for workers who lost out when the global industrial base shifted east. More fundamentally, the sheen has come off the idea — going back to Norman Angell’s The Great Illusion — that global integration was good for peace and would broadly restrain superpower rivalry. The new era could see full-blown US-Chinese rivalry in the economic and security realms. It used to be a G1, G2, G7 or G20 world. Now we are destined to a G-minus world because of domestic developments in the world’s two largest economies, the US and China. This is the fifth shift. The US is now two different nations. An internally polarised America is a less attractive and unreliable partner for other countries. Access to its markets and provision of generous finance are no longer part of its foreign policy arsenal or its soft power. Meanwhile, China has become a threat to its neighbours. Xi Jinping is dashing both the possibility of China becoming truly rich and the hope once entertained by the world that it would become politically open. Grim as these five shifts seem, silver linings can be sighted. Deglobalisation away from China provides opportunities for other countries to fill the vacated space. Vietnam, Bangladesh and Indonesia have taken advantage, and so too can other developing countries. Global food shortages and the drive for self-sufficiency should encourage policymakers in south Asia and sub-Saharan Africa to focus on boosting agricultural productivity and farm incomes. This could bring faster overall growth, as South Korea, Taiwan and China showed decades ago.Finally, conditions are ripe for the world to grasp that, intermittent as their gifts are, the sun and wind are more reliable, less destructive sources of energy than Russia and the Middle East. Producing more renewable resources helps the planet and drains war chests. That should motivate the world to act. More

Some economists argue that recessions have become an inevitable part of the economic cycle that fluctuates between periods of expansion and contraction.
The Federal Reserve has attempted to avoid a recession by engineering what’s known as a “soft landing,” but successfully pulling it off is extremely rare.
Policies often have a clear limitation on what they can achieve against an impending downturn.

The U.S. has experienced at least 30 recessions throughout history, dating back as early as 1857.
Some economists argue that they may have become an inevitable part of the financial cycle that fluctuates between periods of expansion and contraction.

“History teaches us that recessions are inevitable,” said David Wessel, a senior fellow in economic studies at The Brookings Institution. “I think there are things we can do with a policy that makes recessions less likely or when they occur, less severe. We’ve learned a lot, but we haven’t learned enough to say that we’re never going to have another recession.”
As the nation’s authority on monetary policies, the Federal Reserve plays a critical role in managing recessions.
The Fed is currently attempting to avoid a recession by engineering what’s known as a “soft landing,” in which incremental interest rate hikes are used to curb inflation without pushing the economy into recession.
“What they’re trying to do is raise rates enough so demand slows,” said Jason Snipe, chief investment officer at Odyssey Capital Advisors.
But a successful soft landing is extremely rare as the monetary policy needed to slow down the economy is often enforced too late to make any meaningful impact.

It was arguably achieved just once, in 1994, thanks to the Fed’s more proactive response to inflation and good timing.
“[It’s] really, really difficult to get into that really, really narrow zone,” said Stephen Miran, former senior advisor at the U.S. Department of Treasury. “It’s the difference between trying to land an airplane in a really wide and spacious open field versus trying to land an airplane on a very, very narrow piece of land with rocks and water on either side.”
Some experts also argue that policies have a limitation on what they can achieve against an impending downturn.
“Policy tends to operate with long lags, which means the ability to effect immediate change in the economy is quite slow. I also think that increasingly we live in a global economy where the cross-currents that are impacting the economic dynamics are very complex,” said Lisa Shalett, chief investment officer, wealth management at Morgan Stanley.
“These are dynamics that the Fed doesn’t have the tools to address and so to a certain extent, we do think that policymakers have certainly developed more tools to fight recessions,” she said. “But we don’t think that you can rely on policymakers to prevent recessions”
Watch the video to find out more about why recessions could be inevitable.

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Retail and food service spending posted a surprise 0.3% decline in May, below the estimate for a 0.1% increase.
Spending at gas stations led but was offset by declines elsewhere, according to numbers that are not adjusted for inflation.

Retail sales turned negative in May as consumers pulled back spending while inflation surged, the Commerce Department reported Wednesday.
Advance retail and food service spending fell 0.3% for the month, below the Dow Jones estimate for a 0.1% gain. Excluding autos, sales were up 0.5%, which fell short of expectations for a 0.8% increase.

The numbers are not adjusted for inflation, which increased 1% for the month on the headline number and 0.6% excluding food and energy.
Sales were well below the pace in April, which posted a downwardly revised 0.7% increase from the initial 0.9% estimate.
Spending for the month declined even though sales at gas stations increased 4% due to fuel prices that scaled new heights, with regular unleaded hitting $4.43 a gallon in May and now running around $5. That growth was offset by a 3.5% decline at motor vehicle and parts dealers.
Miscellaneous store retailers saw a 1.1% drop in sales, while online stores posted a 1% decline. Bars and restaurants registered a 0.7% increase, part of a broader trend that has seen spending gradually shift from goods back to services.
On a yearly basis, sales were still up 8.1% as spending, combined with higher prices, has put a floor under the numbers. Consumers have been resilient through the inflation wave, using savings to compensate for the higher costs.
The retail release comes the same day the Federal Reserve is widely expected to raise interest rates three-quarters of a percentage point in an effort to tame inflation. The consumer price index for May reflected an 8.6% year-over-year increase, the highest since December 1981 and far above the Fed’s 2% target.

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The 55-page document, released in Portuguese and Chinese on the legislature’s website, comes as the government is due to formally sign a six-month licence extension for casino operators on June 23, local broadcaster TDM reported.The moves are expected ahead of casino license expirations due this month. The extension, to Dec. 31, allows more time for a highly anticipated rebidding process in the Chinese special administrative region, the only place in China where gambling in casinos is legal.Macau’s casino bill, which marks the biggest reform in two decades for the former Portuguese colony, will likely be approved by lawmakers this month. The final version is similar to an initial draft first circulated in January but clarifies that casino tax on gross revenues will increase to 40% from 39%, although the chief executive has discretion to reduce it by up to 5% if operators succeed in attracting non-mainland Chinese gamblers. [L4N2TY23L]Casino operators must have 5 billion patacas ($618.43 million) in cash at all times during the 10 year license period. Macau’s casino operators – Wynn Macau (OTC:WYNMF), Sands China (OTC:SCHYY), MGM China (OTC:MCHVY), Galaxy Entertainment and Melco Resorts – all have sufficient liquidity with only SJM Holdings (OTC:SJMHF) needing to beef up liquidity, according to DS Kim, analyst at JP Morgan in Hong Kong.All operators will also need to pay 47 million patacas ($5.81 million) for the extension.Macau’s government did not immediately respond to requests for comment.In 2019 Macau raked in $36.5 billion from its casinos, more than six times as much as the Las Vegas strip. Since 2020 however Macau’s casinos have been hurt by coronavirus travel restrictions, which have curbed visitors, and crackdowns on the opaque junket industry.Beijing, increasingly wary of Macau’s acute reliance on gambling, has not yet indicated how the licence rebidding process will be conducted. ($1 = 8.0850 patacas) More

US president Joe Biden on Wednesday took aim at refiners for not producing more petrol, saying their rising profit margins “at a time of war” were “not acceptable”. In letters sent to seven oil companies including ExxonMobil, BP, Shell and Valero, Biden called for “immediate actions” to supply more fuel, and said the administration was prepared to use “all reasonable and appropriate” tools to help increase supply in the near term. Biden called on the refiners to explain why they had shut down some plants that make fuel, which had contributed to “an unprecedented disconnect between the price of oil and the price of gas”. “There is no question that Vladimir Putin is principally responsible for the intense financial pain the American people and their refineries are bearing,” the president wrote. “But amid a war that has raised gasoline prices more than $1.70 a gallon, historically high refinery profit margins are worsening that pain.”Mike Sommers, president of the American Petroleum Institute lobby group, welcomed the opportunity to “open increased dialogue with the White House”, but said the administration’s “misguided policy agenda shifting away from domestic oil and natural gas has compounded inflationary pressures and added headwinds”. The API said refineries were currently operating close to capacity and fuel production was near the top of the five-year range.“Any suggestion that US refiners are not doing our part to bring stability to the market is false,” said Chet Thompson, president of American Fuel and Petrochemical Manufacturers. “We would encourage the Administration to look inward to better understand the role their policies and hostile rhetoric have played in the current environment,” he added. Analysts said the letters were another effort to shift blame for an oil market rally that has prompted US petrol prices to more than double since Biden entered office last year, hitting a record high above $5 a gallon last week.American petrol prices, equivalent to about £1.07 per litre, remain well below levels in Europe, but have fuelled decades-high economy-wide inflation in the US, sapping Biden’s approval ratings ahead of crucial midterm elections this year. Some US oil companies and refineries are reporting record cash flows as soaring global demand for their products, coupled with tepid supply growth, helps push crude and petrol prices to multiyear highs.In a bid to drive down crude prices, the White House has since August repeatedly called on Opec+ producers to increase supply, released record amounts of oil from a federal strategic petroleum stockpile, and recently loosened pollution controls on petrol blends. Biden will also travel to Saudi Arabia, the world’s top oil exporter, next month during a trip to the Middle East — part of a thawing of relations between the White House and the Saudi court.Oil prices have doubled since the start of 2021, including the sharp rise this year following Moscow’s invasion of Ukraine and a widening embargo on Russian crude. The Biden administration has also called on US shale producers to increase production, reversing earlier efforts to limit drilling. US oil output remains well below the highs struck before the pandemic. US refining capacity averaged 18.8mn barrels a day in 2019 but has fallen below 18mn b/d this year — due in part to the collapse of refining margins during the pandemic and the high cost of maintaining operations, analysts say.

Global refiners’ output has also decreased because of a drop in refined products from China. Sanctions on Russia threaten to tighten supplies further. Analysts said there was little refiners in the US could do in the short term to fix the shortages — and that adding new capacity may compromise their climate pledges.“There’s no refining capacity sitting on the sidelines idle that would not require a lot of time and money to restart, meaning it can’t help during the summer at the very least,” said Robert Campbell, head of energy transition research at Energy Aspects.For some that recently shut refineries, such as Shell, resuming operations would significantly increase their greenhouse gas emissions, Campbell said, adding that doubts about long-term oil demand made costly investments difficult.“I understand that many factors contributed to the business decisions to reduce refinery capacity, which occurred before I took office,” Biden wrote in his letters, which were also sent to Marathon Petroleum, Phillips 66 and Chevron. “But at a time of war, refinery profit margins well above normal being passed directly on to American families are not acceptable.” More

FRANKFURT/MILAN (Reuters) -The European Central Bank unveiled fresh measures on Wednesday to temper a market rout that has fanned fears of a new debt crisis on the bloc’s southern periphery but appears to have disappointed some investors looking for a more decisive step. Government bond yields have soared on the 19-country currency bloc’s periphery since the ECB unveiled plans last Thursday to raise interest rates in July and September to tame painfully high inflation that is at risk of becoming entrenched.The sell-off was exacerbated by the absence of any concrete plan from the ECB to limit this rise in borrowing costs, raising fears that policymakers were too complacent about the situation of more indebted nations, such as Italy, Spain and Greece.Facing the threat of a repeat of the debt crisis that almost brought down the single currency a decade ago, the ECB said it will be flexible in reinvesting cash maturing from its recently-ended 1.7 trillion euro ($1.8 trillion) pandemic support scheme and would consider a fresh instrument to be devised by staff.”The Governing Council decided to mandate the relevant Eurosystem Committees together with the ECB services to accelerate the completion of the design of a new anti-fragmentation instrument for consideration by the Governing Council,” the ECB said after an extraordinary meeting. Investors appeared less than pleased as they had hoped for more decisive steps and more detail.The euro fell around a half a percent against the dollar after the ECB statement while Italian yields jumped around 7 basis points.The spread between 10-year Italian and German bonds, a key indicator, meanwhile widened to 239 basis points from around 224 before the announcement.”This is what they should have said last week. Better one week late than never,” Pictet Wealth Management economist Frederik Ducrozet said “Details will matter a lot, but now I can’t see how they could not deliver by the next meeting.”Italian spreads peaked at around 250 basis points on Tuesday, their highest since early 2014 raising worries that Italy’s high debt level could become unsustainable. While there is no universally accepted level for this spread Carlo Messina, the CEO of Intesa, Italy’s largest bank, earlier on Wednesday said the country’s economic fundamentals would justify 100 to 150 basis points.The spread on 10-year Spanish bonds meanwhile widened to 128 basis points after the ECB’s announcement from around 125 while for Greece, it rose to 269 basis points from around 260.ECB President Christine Lagarde is due to speak at 1620 GMT in London in an engagement scheduled earlier. ECB board member Fabio Panetta will also speak at 1315 GMT, though his speech will be about a digital euro. Both are expected to be answering questions.($1 = 0.9542 euros) More

The proceedings could result in the European Court of Justice (ECJ) imposing fines, although these would likely be more than a year away.London has proposed scrapping some checks on goods from the rest of the United Kingdom arriving in the British province and challenged the role of the ECJ to decide on parts of the post-Brexit arrangement agreed by the EU and Britain.European Commission Vice President Maros Sefcovic, who oversees EU relations with former EU member Britain, said there was no justification for unilaterally changing an international agreement”Let’s call a spade a spade. This is illegal,” he told a news conference, adding it cast a shadow on relations at a time when international cooperation was even more important, a reference to the alliance against Russia’s invasion of Ukraine.A spokesperson for British Prime Minister Boris Johnson said London was disappointed by the EU’s legal moves.”The EU’s proposed approach, which doesn’t differ from what they’ve said previously, would increase burdens on businesses and citizens and take us backwards from where we are currently,” he said, referring to EU proposals to ease post-Brexit trade problems with Northern Ireland.The three legal proceedings do not relate to Britain’s new plans, but to the EU belief that Britain has failed to implement the protocol that governs Northern Irish trading.The two new suits charge Britain with failing to ensure adequate staff and infrastructure to carry out checks in Northern Ireland and not providing the EU with sufficient trade data.The other, paused a year ago to improve the atmosphere around talks, relates to the movement of agri-food products. Sefcovic said the EU might take the case to the ECJ if Britain failed to address the EU’s charges within two months. Sefcovic said Brussels still wanted to resume talks with Britain to resolve difficulties in shipping British products to Northern Ireland.”We decided that our response should be measured, should be proportionate. And we are offering not only legal action here today but we’ve been fleshing out what concretely we could do,” he said.The British province is in the EU single market for goods, meaning imports from the rest of the United Kingdom are subject to customs declarations and sometimes require checks on their arrival. The arrangement was set to avoid reinstating border controls between Northern Ireland and EU member Ireland, which were dropped after the 1998 Good Friday peace agreement.The arrangement has inflamed pro-British unionist parties by effectively creating a border in the Irish Sea.The Commission made a series of proposals last October to ease customs formalities and cut checks. More

China’s economy showed signs of recovery in May after slumping in the prior month as industrial production rose unexpectedly, but consumption was still weak and underlined the challenge for policymakers.Authorities will seize the window of opportunity and “decisively enhance the strength (of policy), roll out all policy measures that are needed to stabilise the economy”, the cabinet was quoted as saying after a regular meeting. But such efforts should not lead to excessive money issuance and “overdraft of the future”, it said.The cabinet recently announced a broad package of economic support measures, although analysts say the official GDP target of around 5.5% for this year will be hard to achieve without doing away with the zero-COVID strategy.China will step up support for private investment, which accounts for more than half of the overall investment, selecting a batch of major infrastructure projects to attract private investors, the cabinet said. Financial institutions should support private investment by rolling over loans, while the government will provide financing guarantees for qualified projects involving private investors, it added.China’s private fixed-asset investment rose 4.1% in January-May from a year earlier, trailing a 6.2% rise in the overall fixed-asset investment, official data showed.The cabinet also reaffirmed its support for the “healthy development” of the platform economy, state media said. More