No summer calm...

The (northern) summer has been dominated by political and economic turbulence; expect more to come

My plans for a relaxing Greek holiday from mid-July were partly thwarted by a particularly volatile few weeks of economic and political news.

Equity markets sold off sharply on concerns about US recession, an AI bubble, as well as the unwinding of the Japanese carry trade on an appreciating JPY (and various other reasons).  A recovery has since clawed back about some of these losses, notably in the US, but markets remain jittery.  Elsewhere, one US Presidential candidate was shot at and the other stepped down from the race; the race dynamics have been completely reset by the candidacy of Kamala Harris.  And there were riots across the UK; China continues to equivocate on economic policy; and risks of military escalation in the Middle East are rising.

Beyond the near-term drivers, this volatility reflects regime change in the global system: macro policy ‘normalisation’ in key economies alongside new macro behaviours (structurally higher inflation and rates); ongoing political realignment across advanced economies; as well as intensifying geopolitical rivalry – together with regional conflicts (Ukraine/Russia, the Middle East) that have global spillovers. These structural changes suggest further turbulence ahead.  

Inflation is moderating across advanced economies, and from Europe to New Zealand central banks are easing.  But this will likely be a bumpy path: expansionary fiscal policy, growing frictions to global flows, and the potential for geopolitically-motivated inflation shocks, all mean that inflation surprises are quite possible over the next period.

The centre has broadly held in a series of recent elections across across advanced economies.  But as the UK riots illustrate, as well as advances in vote shares for far-right/populist parties in France, the Netherlands, and elsewhere, political systems are under strain.  This will have major implications for economic policy and national performance.

In the US, the ‘October surprise’ came early. But I continue with my long-standing assessment that Mr Trump will not win: his vote share has a high floor but a low ceiling, which complicates his route to victory (even given the vagaries of the Electoral College).  I wavered a little after Mr Biden’s very poor debate showing in June, and then the potential for a messy replacement process.  But Kamala Harris has not put a foot wrong since, and has energy and dynamism on her side – and Mr Trump is flailing.  Much can change in the next ~80 days of course, and the polls remain close, but I give Ms Harris the edge.

From Fed independence to US market access and industrial policy, this election will have deeply consequential effects on the US as well as on economies that are exposed to the US (which is to say, everyone).

Geopolitical rivalry continues to build, with countries under growing pressure to make choices about geopolitical positioning.  And the data flow over the past few months continues to highlight the emergence of a fragmented global economy.  Trade and investment flows are increasingly shaped by geopolitical affinity, partly due to tightening restrictions on trade, investment, and technology flows.  Geopolitics is rewiring global flows, and in an increasingly rapid, material way.  These realities will need to be factored into capital allocation choices by firms and investors, as well as by policy-makers.   

The potential for economic and political earthquakes is high as tectonic plates move; economic and political turbulence is unlikely to ease soon. And this ongoing firehose of economic and political events means that decision-makers need to become proficient at distinguishing signal from noise.

It is the structural shifts not just the shocks that firms, investors, and governments should be positioning for. 

From next month, I’ll be shifting these free notes to a monthly frequency, with shorter updates.

Alongside this, I will be starting a regular series of notes and presentations on economic, policy, and geopolitical dynamics and developments - for direct distribution to clients. These client notes will provide analysis, data, and insights on the regime change in global economics, economic policy, and geopolitics - extending the discussions in my notes over the past few years.

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