Catching up (WTF Economy #107)
Wrapping up the British saga (for now)
Last week was the climax of the Truss government as the prime minister, under tremendous pressure from her own party and the markets, announced her resignation. Market reacted strongly to her decision, with the pound up and the cost of borrowing money for the British government going down.
Then, yesterday, the conservative party selected Rishi Sunak to be the next PM.
Questions still remain if he and his government can:
right the ship so to speak or
last until the next general election in 2024.
For now, the UK appears to be on the right path. The lesson, though, is clear: even if you’re one of the most developed countries on the planet, there’s no escaping the ire of the market if you want to take your economy off of the rails. As we navigate what’s going to be an economically uncertain winter, the UK offers us a cautionary tale.
Europe’s inflation numbers are up for September
The European Central Bank released its September inflation numbers for the EU. Overall, inflation remains up across the bloc, rising from 9.1% in August to 9.9% in September (remember that these numbers compare this year with last year. In other words, prices are in aggregate 9.9% higher compared to September 2021).
It shouldn't be a shocker, but the high cost of electricity and gas is the primary culprit. Food is also up due to the combined impacts of the war in Ukraine and global warming.
Interestingly, here in Spain, inflation is cooling off, going from 10.5% in August down to 9.0% in September. Meanwhile, Baltic countries are having it the worst with an average of 22.8% across the three countries.
Again, energy is the main driver, with housing, electricity and gas prices up a staggering 62% year over year.
We see the same trend across Europe (for example, the Netherlands has a 61% increase in the same category). Although countries with more zero-carbon nuclear power like France and Finland have overall lower inflation rates.
We’ve shared it before, but please check out the ECB’s inflation dashboard. It’s going to tell you more than what the news will, and will give you much-needed context to our current economic situation.
US stock markets bounce back up on strong earnings
Despite a lot of the doom and gloom US stocks have been on a tear recently. Over the past three weeks, the major indices including the Dow Jones Industrial Average and the S&P 500 have closed in positive territory more times than not. Smaller American companies are also getting in on the action thanks to a weaker dollar and strong domestic economy. (Seriously. The economy is way better off than many people are reporting it. It just turns out that negativity sells clicks and eyeballs).
The main reasons for the better US market performance goes down to stronger-than-expected 3rd quarter earnings by companies and the belief that inflation has peaked, which means interest rates might be stable for the short-term. (Although there will likely be at least one more increase by the Federal Reserve before year-end). These results are certainly welcome by investors. But, if you’re building your wealth over the long-run, what’s happening today shouldn’t bother you when you’re thinking years if not decades ahead.
Gas prices in Europe continue to fall
European natural gas prices continue to fall which is excellent news for the continent’s economy. There are three reasons for the drop:
European gas reserves are at 93% capacity
The weather is mild (it was 27C yesterday here in Barcelona 😎)
There’s an abundance of liquified natural gas in the market which creates additional supplies
We’re far from out of the woods when it comes to energy security. However, with winter approaching, we’ll happily take what we can get, especially since gas prices will make or break the European economy over the next five months.
China’s new government & what it means for the global economy
Over the weekend, the Chinese Communist Party affirmed leader Xi Jinping to a 3rd term as China’s president.
If you’re not up-to-date on China’s politics, President Xi is the first person since modern founder Mao Zedong to hold the presidency for more than two terms.
Xi’s ascent caps off an impressive ten years of transformation. During this time, he was able to ostensibly clean up corruption while continuing to grow the Chinese economy. However, it hasn’t all been roses.
During this time, relations with the West have reached new lows, as human rights concerns (including in Hong Kong and Xinjiang) and geopolitical tensions, created a formidable schism.
The global pandemic not only sowed more doubt between China and the world, but also created supply chain issues that reverberate across the global economy.
If that wasn’t enough, China is also in the midst of a deep real estate bust, which, when combined with hundreds of billions USD of debt, could threaten investors around the world.
Slower growth in China could mean bad news for the rest of us
Just yesterday, the Chinese government released its economic growth results for the 3rd quarter. The report -- which was delayed by a week due to the people’s congress -- showed the GDP growing at 3.9%.
Despite this number beating estimates of 3.5%, investors began selling their Chinese holdings. From them, they’re concerned that:
After decades of high growth, the Chinese economy might have peaked, especially as the population ages and shrinks;
Poor relations with the West could mean a permanent decoupling, where Western companies look elsewhere for low-cost manufacturing;
Xi’s next term will be more authoritarian, which will be bad news for growth and relations
The economy is worse off than reported and things are way worse than they seem
Considering that China has spent the past 30 years manufacturing many of the goods we use, the country slowing down will impact global growth, at least in the near term.
But that could be good for us in Europe
Having the world’s second-largest economy slow down or even enter a recession would, on the surface, be an unwelcome development. Like everything right now, the word “normal” doesn’t apply.
If China’s economy continues to slow over the next coming months, that would mean less manufacturing and consumption in the country.
If production falls, that means China will need less natural gas. In turn, the market will have more capacity, which is excellent news for us in Europe as we try to adapt to a post-Russia world.