Finance

Every day brings more misery for China’s foreign investors. Some are most worried by China’s souring relations with Western governments. Others fret about the unprecedented slump in the country’s property market. Many are simply tired of losing money. On January 22nd the CSI 300 index of Chinese shares dropped by 1.6%; it is now nearly a quarter below its level of a year ago. Meanwhile, Hong Kong’s Hang Seng index fell by 2.3% on the day, and is more than a third below its level at the start of 2023.Heady optimism about China Inc. is an increasingly distant memory. Just five years ago investors clamoured for exposure to the country’s growth miracle and sought diversification from rich-world markets, which often move in lockstep. Providers of the world’s most important stock indices—FTSE and MSCI—were making adjustments accordingly. Between 2018 and 2020 Chinese stocks listed onshore, known as A-shares, were added to the benchmark emerging-markets index.image: The EconomistAt their peak in 2020 Chinese firms made up over 40% of the index by value. In 2022 foreigners owned $1.2trn-worth of stocks, or 5-10% of the total, in mainland China and Hong Kong. One investment manager describes the challenge of investing in emerging markets while avoiding China as like investing in developed markets while avoiding America. So how will investors do it? And where will their money flow instead?Some investment firms are eager to help. Jupiter Asset Management, Putnam Investments and Vontobel all launched actively managed “ex-China” funds in 2023. An emerging-market, ex-China, exchange-traded fund (etf) issued by BlackRock is now the fifth-largest emerging-market equity etf, with $8.7bn in assets under management, up from $5.7bn in July.A handful of large emerging stockmarkets are benefiting. Money has poured into India, South Korea and Taiwan, whose shares together make up more than 60% of ex-China emerging-market stocks. These markets received around $16bn in the final three months of 2023. Squint and the countries together look something like China: a fast-growing middle-income country with potential for huge consumption growth (India) and two that are home to advanced Asian industry (Taiwan and South Korea).image: The EconomistWestern investors looking for exposure to China’s industrial stocks are also turning to Japan, encouraged by its corporate-governance reforms. Last year foreign investors ploughed ¥3trn ($20bn) into Japanese equity funds, the most in a decade. For those with broad mandates, different asset classes are an option. Asia-focused funds investing in real assets, including infrastructure, have grown in popularity.Yet these various alternatives have flaws of their own. Unlike China’s cheap offerings, Indian stocks are expensive. They have higher price-to-earnings ratios than those in other big emerging markets. Although Japan’s stocks look relatively cheap, they make an odd choice for investors seeking rapid income growth. Likewise, Taiwanese and South Korean stocks are included among emerging markets because of the liquidity and accessibility of their exchanges, but both economies are mature high-income ones.Size is a problem, too. Many of the places benefiting as supply chains move away from China are home to puny public markets. Even after fast growth, India’s total market capitalisation runs to just $4trn—not even a third of Hong Kong, Shanghai and Shenzhen combined. When MSCI released its emerging-market index in 1988, Malaysia accounted for a third of its stocks by value. The country now represents less than 2%. Brazil, Chile and Mexico together made up another third; today they make up less than 10%.And whereas returns on Chinese investments tend to follow their own logic, smaller economies are more exposed to the vagaries of the dollar and American interest rates. According to research by UBS Asset Management, Chinese stocks had a correlation of 0.56 with those in the rich world between December 2008 and July 2023 (a score of one suggests the stocks rise and fall in tandem; zero suggests no correlation). By contrast, stocks from emerging markets excluding China had a correlation of 0.84 with rich-world equities.The emergence and growth of funds that pledge to cut out China will make life easier for investors who wish to avoid the world’s second-largest stockmarket. Without a turnaround in the country’s economic fortunes, or a sustained cooling of tensions between Beijing and Washington, interest in such strategies will grow. They will not, however, evoke the sort of enthusiasm investors once felt about China. ■ More

The consumer price index, a key inflation measure, has declined from a pandemic-era peak of 9.1% to 3.4% in December.
Reaching the Federal Reserve’s 2% annual target may be harder than what came before, some economists believe.
Largely, that’s because it may take a while for housing inflation to cool and for wage growth to moderate, they said.

A man walks past a barbershop in Los Angeles.
Robyn Beck | Afp | Getty Images

Inflation in the U.S. economy is on the retreat. But the road to ultimate victory may be harder than what’s come already, some economists argue.
“The so-called last mile is going to get a lot trickier,” Mohamed El-Erian, chief economic advisor at Allianz and president of Queens’ College at the University of Cambridge, recently told CNBC.

“We’re not going to have the tailwinds that we had, and we’re going to have some headwinds,” he said.
Inflation measures how fast prices are rising for goods and services — anything from concert tickets and haircuts to groceries and furniture. Policymakers aim for a roughly 2% annual inflation target.

Arrows pointing outwards

The consumer price index — a key inflation barometer — has fallen gradually from a 9.1% pandemic-era peak in June 2022 to 3.4% in December 2023, within striking distance of the target.
This final disinflationary hurdle will be a challenge without curtailing economic growth and risking recession, a dynamic that would likely crimp consumer demand and rein in prices, economists said.
“One theme is clear — the transition from 8-4% inflation is easier than the transition from 4-2% inflation,” Gargi Chaudhuri, head of iShares investment strategy for the Americas at BlackRock, wrote about the recent CPI report.

Why goods won’t be much help

This difficulty with reducing inflation is largely centered on the “services” side of the economy, according to economists. Think of services as things we can experience, such as rent, auto repairs, haircuts, veterinary visits, theater tickets and medical care.
Goods, on the other hand, are tangible things such as cars and clothes. They account for 21% of the consumer price index (after stripping out items in the food and energy categories).
More from Personal Finance:Why egg prices are on the rise againA 12% retirement return assumption is ‘absolutely nuts’Here’s where prices fell in December 2023, in one chart
Inflation among these so-called “core” goods peaked more than 12% in 2022 but is now near zero as supply chains have normalized.
That means further broad disinflation likely won’t come from consumer goods, economists said. In fact, attacks by Houthi rebels on ships in the Red Sea threaten to disrupt a key transit corridor and may trigger higher goods inflation if it persists, El-Erian explained.

Where inflation has been ‘sticky’

Inflation among services has been more stubborn, though. And consumers spend more on services, which account for 59% of the CPI (after stripping out energy services).
While down from more than 7% last year, services inflation still sits at 5.3%. A big reason for that persistence is housing, which accounts for more than a third of the overall CPI.
“The shelter inflation component is the part that has remained quite sticky,” Chaudhuri said in an interview.
Economists expect shelter inflation to moderate. It’s just a matter of when and how quickly it happens.

For example, prices for newly signed leases appear to have deflated: The New Tenant Rent Index declined to about -5% in Q4 2023, a significant drop from +3% in Q3, according to Bureau of Labor Statistics data issued last week.
It takes a while for such data to feed through into the Labor Department’s CPI calculations, economists said.
“I think it’ll take most of the year to get back to target” on inflation, largely because of shelter, said Mark Zandi, chief economist at Moody’s Analytics.
Labor-market dynamics are also an important component of “services,” economists said.
A hot job market has meant strong wage growth for workers. That dynamic can underpin inflation if businesses raise prices quickly to compensate for higher labor costs and if larger paychecks lead to more spending by consumers.

The so-called last mile is going to get a lot trickier.

Mohamed El-Erian
chief economic advisor at Allianz and president of Queens’ College at the University of Cambridge

Wage growth needs to be about 3.5% a year, on average, to achieve target inflation, Chaudhuri said. But hourly earnings growth is currently about 4.1% for private-sector workers, for example.
Further, businesses have learned they can raise prices and consumers will keep spending (so far, at least). That doesn’t give businesses much incentive to pump the brakes, said Sarah House, senior economist at Wells Fargo Economics.
“I think the taboo of not raising prices on consumers for fear of losing their business was broken in the pandemic,” House said.
Absent weaker consumer demand — and weaker economic growth — it may be hard to unwind business owners’ mindset, she said.

Why this may all be ‘nonsense’

Not all economists think the last mile of disinflation will be harder than what came before, however.
Paul Ashworth, chief U.S. economist at Capital Economics, called the theory “nonsense” in a recent research note, for example.

Largely, that’s because, by one measure, the inflation battle is already nearly won, he said. The Federal Reserve’s preferred inflation gauge is the Personal Consumption Expenditures price index; in November, the PCE index was running at a 1.9% six-month annualized rate, “which means it was already below target,” Ashworth said.
“All the Fed needs to see is that slower pace of price increases being sustained for a little longer,” he wrote. More

The former president, and overwhelming favorite to secure the Republican nomination for the 2024 race, plans to impose a 10% tariff on all imported goods.
The center-right American Action Forum think tank said the plan would “distort global trade, discourage economic activity, and have broad negative consequences for the U.S. economy.”
Rabobank’s Michael Every said the plan was aimed at “structurally breaking the global system by hook or by crook, to basically reindustrialize the U.S. in a neo-Hamiltonian manner.”

Former U.S. President and Republican presidential candidate Donald Trump holds a rally in advance of the New Hampshire presidential primary election in Rochester, New Hampshire, U.S., January 21, 2024. 
Mike Segar | Reuters

Markets need to begin thinking about the structural impact of Donald Trump’s proposed 10% tariff increase, which “shakes up every asset class,” according to Michael Every, global strategist at Rabobank.
The former president, and overwhelming favorite to secure the Republican nomination for the 2024 race, plans to impose a 10% tariff on all imported goods, trebling the government’s intake and aiming to incentivize American domestic production.

Treasury Secretary Janet Yellen said earlier this month that the plan would “raise the cost of a wide variety of goods that American businesses and consumers rely on,” though she noted that tariffs are appropriate “in some cases.”
Criticism of the policy has been relatively bipartisan. The Tax Foundation think tank highlights that such a tariff would effectively raise taxes on U.S. consumers by more than $300 billion a year, along with triggering retaliatory tax increases by international trade partners on U.S. exports.
The center-right American Action Forum estimated, based on the assumption that trading partners would retaliate, that the policy would result in a 0.31% ($62 billion) decrease to U.S. GDP, making consumers worse off and decreasing U.S. welfare by $123.3 billion.

After Republican rival Ron DeSantis ended his bid for the GOP nomination, Every told CNBC’s “Street Signs Asia” on Monday that markets were “not going to be caught napping” by a potential Trump presidency, as they were in 2016. He suggested one of investors’ top concerns would be the 10% tariff on all U.S. imports.
“First of all, they can’t model that because they don’t really understand what the second and third order effects are, and more importantly, they don’t grasp that Trump isn’t talking about a 10% tariff just because it’s a 10% tariff,” Every said.

“He’s talking about structurally breaking the global system by hook or by crook to basically reindustrialize the U.S. in a neo-Hamiltonian manner which is how the U.S. originally industrialized, putting up a barrier between it and the rest of the world so it’s cheap to produce in America and more expensive to produce everywhere else if you’re importing into America.”
A second Trump term
Every added that a return to this type of trade policy “shakes up every asset class — equities, FX, bonds, you name it — everything gets put in a box and shaken around, so that’s what markets should start thinking about.”
In the American Action Forum’s November report, data and policy analyst Tom Lee concluded that in the most likely scenario that trading partners impose retaliatory tariffs, a new 10% duty on all goods imported to the U.S. would “distort global trade, discourage economic activity, and have broad negative consequences for the U.S. economy.”

Read more CNBC politics coverage

Trump floated the 10% tariff during an interview last year with Fox Business’ Larry Kudlow, his former White House economic advisor, saying “it’s a massive amount of money.”
“It’s not going to stop business because it’s not that much,” he claimed, “but it’s enough that we really make a lot of money.”
During his first term in office, Trump triggered a trade war with China by unilaterally slapping $250 billion worth of tariffs on goods imported from China, which the AAF estimated have cost Americans an extra $195 billion since 2018.
China responded with its own tariffs on U.S. goods, and Trump also imposed tariffs on steel and aluminum imports from most countries, including many of Washington’s biggest allies.

Keen to maintain a firm stance on Beijing, President Joe Biden’s administration has largely kept these tariffs in place, though converted some of the metal tariffs into tariff-rate quotas, which allow a lower tariff rate on particular product imports within a specified quantity.
Dan Boardman-Weston, CEO of BRI Wealth Management, said the macroeconomic and geopolitical landscape is now very different and more challenging than when Trump’s first term began in 2017, and added that his erratic approach to policy decisions would add to the kind of uncertainty that markets most dislike.
“In 2017, markets really appreciated the Trump presidency because of all the tax cuts and deregulation, and there was a more conducive market environment I think back then, with where rates were, for markets to move higher,” he told CNBC’s “Squawk Box Europe” on Monday.
“I think this time is going to be very different, and I do think the geopolitical risks across the world are rising, and this doesn’t seem to be on investors’ radars as of yet.”
He noted Trump’s tendency to “change his mind” so frequently on geopolitical issues that “people won’t know where his thinking is at.”

Trump has claimed that he would stop Ukraine’s war with Russia within 24 hours, but has been economical with details of his supposed peace plan, and throughout his political career has lavished praise on Russian President Vladimir Putin.
He was also impeached by the U.S. House of Representatives for allegedly threatening to withhold U.S. military aid to Ukraine unless President Volodymyr Zelenskyy sanctioned a politically motivated investigation into his then-leading electoral challenger Biden. Trump was acquitted by the Senate.
“That unpredictable approach to how he will approach the war in Ukraine or how he will approach relations with China and Taiwan I think lead to heightened risks from a geopolitical perspective, which I think will impact into market valuations,” Boardman-Weston said.
“It’s that added element of uncertainty in an already very uncertain world.” More

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The Utah Jazz is casting its net wide for international players. 
“We have scouts all over the world — almost every basketball country throughout the world,” Danny Ainge, the team’s CEO and governor, told CNBC’s “Halftime Report” on Friday.

The two-time champion of the National Basketball Association and former NBA All-Star highlighted having scouts in countries throughout South America, Europe and Asia, as well as every region in the U.S.
“It’s a worldwide sport, and we got to find them all,” he said.
His remarks come after the NBA announced in October that a record 125 international players — five of which were on the Utah Jazz — were on opening-night rosters for the 2023-24 season. Those players hailed from 40 countries and territories across six continents, with a record from Canada at 26 and France at 14.
All 30 NBA teams feature at least one international player this season.
International ticket sales also saw a 120% increase from last season, according to StubHub. Fans are traveling from a total of 92 countries to North American games, which is up from 68 countries last season.

Ainge joined the Utah Jazz as CEO in December 2021 after leading basketball operations for the Boston Celtics for 18 years.
Utah Jazz’s valuation currently sits at $3.09 billion, according to data from research firm Statista. This marks a 52.59% increase from last year and a 76.57% increase since the year Ainge joined the franchise.

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Exchange-traded fund experts anticipate spot bitcoin ETFs, which debuted this month, to spark a new wave of crypto products.
Cboe Global Markets’ Catherine Clay believes options are a natural progression for bitcoin ETFs.

“We believe that the utility of the options, what they provide to the end investor in terms of downside hedging, risk-defined exposures into bitcoin, really would help the end investor and the ecosystem,” the firm’s global head of derivatives told CNBC’s “ETF Edge” this week.
The Cboe, the largest U.S. options exchange, filed with the SEC on Jan. 5 to offer options linked to bitcoin exchange-traded products. It expects those options to begin trading later this year, per its news release.
According to Dave Nadig, financial futurist at VettaFi, options on the crypto funds could appeal to institutional investors, who have been more reluctant to invest in the digital asset class.
“You’re going to start seeing all sorts of hedge fund players in the space,” he said in the same interview. “Folks who might not have been traditionally speculating on crypto directly in the crypto ecosystem are now going to have something to play with.”
Nadig also suggested that zero-day options — contracts that expire the same day they’re traded, commonly known as “0DTEs” — would be the ultimate goal for bitcoin derivatives products.

“If what happens in bitcoin is what’s happened in single stocks, we’re going to see retail in particular and a lot of institutions move towards zero days to expiration options trading on bitcoin itself,” he said.
Still, Cboe’s Clay cautioned that those products could be very far away.
“We still have not even received approval to list options, so let’s not get ahead of ourselves and think about 0DTEs,” she said. “We want to get options on these ETFs in a very intelligent and thoughtful way that actually … really builds the ecosystem of new entrants into the market.”
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Morgan Stanley’s new CEO, Ted Pick, on Thursday expressed confidence his bank will hit financial targets of $10 trillion in client assets and a 20% return.
Pick, a three-decade Morgan Stanley veteran who took over this month, said he has three priorities: sticking to the strategy laid out by predecessor James Gorman, maintaining the bank’s culture and achieving their targets.

Morgan Stanley’s new CEO, Ted Pick, on Thursday expressed confidence his bank will hit financial targets of $10 trillion in client assets and a 20% return.
Pick, a three-decade Morgan Stanley veteran who took over this month, said he has three priorities: sticking to the strategy laid out by predecessor James Gorman, maintaining the bank’s culture and achieving their targets.

“Ten trillion in wealth and asset management dollars, that’s going to be coming,” Pick said in a CNBC interview at the World Economic Forum in Davos, Switzerland. “We’re going to get there and hit 20% returns. That’s it: 10 and 20. It will take some time, but I’m super bullish.”
Pick’s predecessor guided Morgan Stanley in the aftermath of the 2008 financial crisis that nearly capsized the investment bank. Gorman transformed the firm into a wealth management giant through a series of savvy acquisitions, while helping rehabilitate trading businesses for a new era on Wall Street.
The pivot to wealth management boosted Morgan Stanley’s valuation well beyond rivals including Goldman Sachs, but more recently concerns about growth in that business have stymied the stock. Shares of the bank are down 12% in the last year.
“Part of the reason the boss had so much success is he kind of guided the place to a durable narrative instead of the herky-jerky, unpredictable Morgan Stanley,” Pick said.
The firm’s “secret sauce” is in the combination of a leading investment bank with its wealth management operations, he added.

“The name of the game is to sort of balance realistic expectations and build credibility, but have people understanding that we are highly confident of both of these pieces to grow,” Pick said. “The ecosystem of being a leading wealth manager, banking individuals not institutions, and then also covering them as an investment bank or hedging the risk as a trading house, that is unique.”
What may help matters this year is an expected rebound in corporate mergers and related activities after more than a year of depressed volumes, Pick said. A backlog of deals has been building since before the Covid pandemic began in 2020, he said.
“There’s a ton of activity buzz,” Pick said. “I think once people start getting going, we’re going to see a bunch of it.”
The U.S. economy is “probably past peak inflation,” and it’s “not inconceivable” that the Federal Reserve will be forced to cut rates faster than anticipated because of weakening data, Pick added.
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The two German lenders abandoned a merger plan in 2019, but concerns about bank profitability, and reports that the German government’s is considering selling some of its company stakes, have rekindled whispers about a possible tie-up in recent weeks.
“Obviously with regard to the sharply increased interest rates, you have to think about fair value gaps given the mortgage books of a lot of banks, so I don’t think it is a priority for this year,” Sewing said.

Christian Sewing, Chief Executive Officer of Deutsche Bank, has acknowledged that a recession in Germany is inevitable, and urged leaders to accelerate its decoupling from China.
Denis Balibouse | Reuters

Deutsche Bank CEO Christian Sewing on Thursday said that merger and acquisition activity is not a priority for his group, as speculation resurfaces over the future of domestic rival Commerzbank.
The two German lenders abandoned a merger plan in 2019, but concerns about bank profitability, and reports that the German government’s is considering selling some of its company stakes, have rekindled whispers about a possible tie-up in recent weeks.

The state still has a 15% stake in Commerzbank, but Reuters reported earlier this week that Finance Minister Christian Lindner is open to disposing of it.
The merger of Germany’s two biggest banks would create a combined entity with around $2 trillion in assets, although Deutsche Bank’s low valuation could complicate any such move. The bank trades at around 12 euros per share, a fraction of its book value, and a significant portion of assets would need to be marked down.

Speaking to CNBC on the sidelines of the World Economic Forum in Davos, Switzerland on Thursday, Sewing appeared to pour cold water on the rumors, at least for now.
“I wouldn’t say it’s on top of my priority, to be honest. I have always said for years that M&A in the banking industry, particularly in Europe, must come at some time, but most important for that is that certain preconditions are met — preconditions from a regulatory point of view, finalization of the banking union,” Sewing said.
“Obviously, with regard to the sharply increased interest rates, you have to think about fair value gaps given the mortgage books of a lot of banks, so I don’t think it is a priority for this year.”

The European Banking Union was created in 2014 and seeks to ensure the bloc’s banking and financial systems are stable.
In December, Italy’s lower house of parliament voted down reforms to the European Stability Mechanism, the euro zone’s bailout fund, which had been approved by all other euro zone countries.
This left the bloc unable to implement a portion of its banking union legislation described by Eurogroup President Paschal Donohoe as “a key element of our common safety net.”
“Therefore, we are focusing on our own business,” Sewing concluded. “If, in this own business, there are possibilities and options for doing the one or the other smaller add-ons, like we have done with Numis, then obviously we are looking at it.” More

Just over 100 days after Hamas’s brutal attack on Israel started a war in Gaza, the conflict is still escalating. On January 11th America and Britain started attacking Houthi strongholds in Yemen, after months of Houthi missile strikes on ships in the Red Sea. Five days later Israel fired its biggest targeted barrage yet into Lebanon. Its target is Hizbullah, a militant group backed by Iran.A full-blown regional war has so far been avoided, largely because neither Iran nor America wants one. Yet the conflict’s economic consequences are already vast. Trade routes are blocked, disrupting global shipping and devastating local economies. The Middle East’s most productive industries are being battered. And in Lebanon and the West Bank, growing hardship threatens to spark even more violence.Start with trade. Before Hamas’s attack, a fifth of the average Middle Eastern country’s total exports—from Israeli tech to oil from the Gulf—were sent somewhere else in the region. Geopolitical enemies were increasingly trading with each other. Now, the routes that transported more than half of all goods are blocked. Intra-regional trade has collapsed. At the same time, the cost of shipping goods out of the Middle East has risen. That will send many exporters, operating on razor-thin margins, out of business in the months to come.image: The EconomistThe Red Sea used to handle 10% of all goods moving around the world. But since the Houthis began launching missiles, its shipping volumes have dropped to just 30% of normal levels (see chart). On January 16th Shell, an oil and gas giant, became the latest multinational to say it would avoid the Sea.For some of the countries bordering the Red Sea, Houthi missile strikes have far worse consequences. Eritrea’s economy is propped up by fishing, farming and mining exports, all of which travel by sea owing to tense relations with its neighbours. For crisis-stricken Sudan, the Red Sea is the sole point of entry for aid, almost none of which has reached the 24.8m people in need of it since the attacks began.Further disruption could visit financial ruin on Egypt, one of the region’s biggest countries. For its population of 110m, the Red Sea is a vital source of dollars. Its government earned $9bn in the year to June from tolls on the Suez Canal, which links the Mediterranean to the Red Sea. Without the toll revenue, Egypt’s central bank would have run out of foreign exchange reserves, which stood at $16bn (or two months-worth of imports) at the start of 2023. The government would also have faced a yawning hole in its budget, which already relies on cash injections from Gulf states and the IMF.Both crises may materialise in 2024. Egypt’s year-to-date income from the Suez is 40% less that it was this time last year. That puts it at real risk of running out of dollars, which would push its government into default and its budget into disarray.Conflict has also hit the Middle East’s most promising industries. Before October 7th Israel’s tech sector was its brightest bright spot, contributing a fifth of the country’s GDP. Now it is struggling. Investors are pulling funding, customers are cancelling orders and much of its workforce has been called up to fight.Jordan, meanwhile, is suffering from forgone tourism, which would normally constitute 15% of its GDP. Its struggles are emblematic of those across the region: even Gulf states have seen tourist numbers dip. In the weeks after Hamas’s attacks, international arrivals to Jordan fell by 54%. Just like Egypt, the lost revenues leave it perilously close to default.Yet the most dangerous economic consequence of the war may be the hardship inflicted on populations in Lebanon and the West Bank, two powder kegs that could easily explode into more violence. As Israel and Hizbullah trade air strikes, they are destroying southern Lebanon. More than 50,000 people have already been displaced (as well as 96,000 in northern Israel). Repairs will be expensive, but there is no cash left for them: Lebanon has had a shell government since it defaulted in 2019. In recent months its economic freefall has accelerated as foreign tourists and banks, which together make up 70% of its GDP, have deserted the country on the advice of their governments.Things are no better in the West Bank. Of its 3.1m residents, 200,000 are factory workers who used to commute to Israel every day. They are out of work after Israel revoked their permits. Meanwhile, 160,000 civil servants have not been paid since the war began. The West Bank’s government now refuses to accept its tax revenues from Israel (which collects them) after Israel withheld funds that would usually be sent to Gaza. Public services are shutting down, and missed mortgage payments from civil servants risk triggering a banking crisis.The Middle East has long been full of economies on the brink. Israel’s war with Hamas may now tip them over. To make ends meet, their governments have built houses of cards, balancing bail-outs from Gulf states, handouts from America and expensive short-term loans. The risk of it all tumbling down is worryingly high.The rest of the world economy has so far faced few costs from the conflict. Oil prices have remained relatively calm, except for a spike in early January, and the effects on global growth and inflation are likely to be minimal. But if much of the Middle East slides into a debt crisis, all that could change, and fast. It would hit populations that are young, urban and increasingly unemployed. That is a recipe for even more extreme politics in a large group of strategically important, chronically volatile countries. The consequences would reverberate across the world. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More