Newsletter by Chris Borges, Kirti Gupta, andAndrea Leonard Palazzi

Published August 23, 2024

State of the Global Economy

After a period of turbulence, markets around the world bounced backlast week as confidence in the U.S. economy increased. Retail sales leapt1%, the most in 18 months and far above economists' forecasts for a 0.4% rise, while new jobless claims came inbelow expectations and consumer sentiment increased. Most importantly, however, the Consumer Price Index (CPI) recordedan annual price increase of 2.9% in July, the first time the inflation gauge fell under 3% since March of 2021. The drop sets the stage for a rate cut at the Fed's next meeting in September, which Fed Chair Jerome Powell clearly signaledis on the way during a speech in Jackson Hole this morning.

In the Pacific, markets are closely watchingthe region's central banks after the Philippinesand New Zealandsurprised many last week by loweringinterest rates before the Fed. While Thailand, Indonesia,and South Koreaall held interest rates steady this week, some analysts expectthem and other Asian central banks to cut rates later this year as the global fight against inflation shifts to a new phase. China loweredinterest rates earlier this summer to boost economic activity, and new data this week showedsome signs of growing consumer spending. Some analysts were skepticalof the data, however, while noting that housing prices and sales continue to plummet.

Meanwhile in Europe, Eurozone GDP exceeded expectations by growing0.3% in the second quarter of the year compared with Q1, while inflation edged up slightly. July CPI registeredan annual price increase of 2.6%, a slight increase from the 2.5% recorded in June. EU wage growth also slowedsharply in Q2, potentially setting the stage for another rate cut from the European Central Bank (ECB) in September. The United Kingdom, for its part, received some good news as GDP grew0.6% in Q2, marking the second straight quarter of growth after ending last year in a recession. July CPI in the UK also came in lower than expected at 2.2%, while the unemployment rate unexpectedly droppedfrom 4.4% in May to 4.2% in June.

Around the World

Trade tensions between EU and China continue to escalate: The tit-for-tat tariff cycle between the European Union and China continued this week, as China announcedan anti-dumping investigation into imported European dairy products after the EU affirmedits plan to imposelevies on Chinese electric vehicle imports. Both sides claim the other provides their industries with an unfair competitive advantage through subsidies. Given the interconnectedness of the EU and Chinese economies, the outbreak of a trade war would challenge many stakeholders, such as the German automobile sector which is highly dependent on the Chinese market. Last year, China was the EU's third-largestexport market, while the EU was China's largestexport market.

Oil tanker set ablaze in Red Sea as attacks on shipping persist: A Greek-flagged oil tanker traversing the Red Sea was attackedon Wednesday by projectiles and men on small boats, leaving the ship ablaze and adrift. While no group has yet claimed responsibility for the attacks, many suspect is it a continuation of the Yemen-based Houthi's attackson shipping in the region. The attacks have forced shipping companies to avoid the Red Sea, a key waterway connecting the Indian Ocean and Suez Canal, raising shipping times and costs: the price of shipping a 40-foot container has more than doubledsince April. Policymakers and economists have been especially focusedon this issue lately, as the heightened shipping costs may sustain inflation and complicate central banks' ability to cut interest rates.

Labor disputes in Canada shut down rail lines, potentially disrupting North American supply chains: Canada's two largest railroads shut downThursday morning, locking out 9,000 members of the Teamsters union who operate the trains after the two sides failed to negotiate a new contract. The shutdown could deal a major blow to the North American economy: credit ratings agency Moody's estimatedthat it could cost the Canadian economy for than $250 million per day, while nearly a third of the freight handled by the two railroads crossesthe U.S.-Canadian border. The labor dispute may be the first of several to disrupt supply chains in the next few months-dockworkers at 36 U.S. east and gulf coast ports are threatening to strike in October after their contract expires.

The United States announces $1.6 billion CHIPS Act grant to Texas Instruments; plans to disburse final CHIPS Act funds by end of year: The Biden Administration announced$1.6 billion in grants for Dallas-based Texas Instruments last Friday, which the chipmaker will use to construct three new plants in Texas and Utah. The announcement highlights the continued impact of the CHIPS Act as the dispersal of funds draws to a close. To date, the United States has allocatedabout $33 billion in CHIPS Act awards, leaving approximately $6 billion left which it plansto allocate this year. A study earlier this year by the Semiconductor Industry Association and Boston Consulting Group estimatedthat U.S. semiconductor manufacturing capacity will grow from 10% today to 14% by 2033 due to the chips act, the first rise in the U.S.' global share of chip manufacturing in decades. Absent the CHIPS Act, the report estimates the U.S.' share of global chip manufacturing would have fallen to 8 percent by 2032.

Debt distress continues to burden developing economies and pressure governments: In the last few weeks, protests have rocked Kenya, Nigeria, Bolivia, and several other nations. While each situation is unique, a common thread unites these protests: deteriorating economic conditions and heavy debt burdens. Much of the developing world faces a growing debt crisis, which limits their ability to invest in their economies-more than 3.3 billion people live in countries that spendmore on debt interest payments than education. Without a concerted effortto address this growing issue in the developing world, Western-led institutions risk ceding ground to China, which is looking to capitalize on the crisis by offeringrescue loans. Boston University estimatesthat from 2000-2022, Chinese lenders loaned over $170 billion to nearly 50 African governments. Some analysts, however, arguethat China's loans are predatory and strain these developing economies more than the West.

What We're Watching

• September 17 - The U.S. Federal Reserve meets to decide on interest rates.
• September 19 - The Bank of Japan meets to decide on interest rates.

• October 6 - Laos hosts the 2024 Summit of the Association of Southeast Asian Nations.

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