America Self-Defeating Policies Are Endangering Its Leadership
In 2015, only 8 years ago, the world was a completely different place.
The world had not experienced COVID yet, interest rates and bond yields were near zero, real estate was booming across the world and disinflation, free trade and globalisation were the macro-economic themes of the times.
American Universities were full of Chinese students, Chinese tourists were invading the world, gobbling up European luxury and fashion products, wine, whisky or Cognac. Western companies were building factories all across China and “Made in China” was great with Apple packaging its products with its famous signature : “Proudly designed in California and manufactured in China”
In China, Chinese consumers were fighting for US and European-made products. From Starbucks to Harley Davidson to Budweiser, what was made in the West and in America was seen as upmarket and a guarantee of quality. Owning a Mercedes Benz, an iPhone or a Chanel bag was a sign of social success and studying in the US a guarantee of success.
Russia was a major trading partner of Europe, Russian oligarchs were splashing their wealth with mega yachts, luxury properties and football clubs and the Russian and Chinese domestic markets were the strategic sources of future growth for Western corporations.
Back then, Barack OBAMA was in the middle of his second term as President of the US, the UK was still part of Europe, Xi Jing Ping was already at the helm of China for his second term and Vladimir Putin was seen as a reliable trading partner, leading Germany to be confident enough in its energy dependency to abandon its nuclear program.
Back then, Syria’s Bashar El Assad and Radical Islam were enemy public of the world #1, ISIS had proclaimed the Islamic Caliphate, Islamic terrorism plagued Europe and the US, Israel was still officially at war with the Arab World, Iran’s nuclear program was seem as a major threat and Saudi Arabia and Iran were at war in Yemen.
It all changed in 2016 with the run-up to the US Presidential elections, where the US Republican Party chose a real estate mogul and TV reality host as its nominee to fight Hilary CLINTON, one of the most qualified candidate to run the world’s leading superpower, considering her vast experience in both US domestic affairs and International policies.
Donald Trump was very much a demagogic politician, little experienced in Government and world affairs, but his angle was to capitalise on a growing resentment of a faction of the US population against the traditional political establishment of Washington. And Hilary CLINTON was clearly a pure product of that establishment.
During the campaign, Donald Trump flamed the frustrations of the deeply rooted middle America white populations and the sentiment that America had lost its greatness with globalisation, immigration, industrial decline and, ultimately, a black President.
“Make America Great Again” was his core political line, a line that pitted America against the rest of the world by definition.
With the help of Peter Navarro, a scholar who had never set foot in China but nevertheless wrote a book titled “Death by China”, but also a failed politician who ran unsuccessfully for public office five times previously, Donald Trump rode a long time favourite political theme of his : The fear of the rise of China.
From a political angle, themes directed are foreigners are easy horses to ride… It is all about words, fear, sentiment with no deliverables to be quantified. They were used by Hitler, Mussolini, Franco and so many others to get to power democratically in the past
This was nothing new for Donald Trump who in his youth, had been campaigning against the rise of Japan and the invasion of Japanese products in the 1980s. Antagonising China and promising he would prevent them to rise to economic superiority was at the heart of his promise to make America Great Again.
Unfortunately, this was the start of an unstoppable anti-Chinese sentiment in the US, by making it one of the hottest and unescapable domestic issue about the leadership of the US on the international political scene.
In November 2016, Donald Trump won the elections over Hilary Clinton with 2 million less popular votes, thanks to the US Federal system that privileges the rural states over the urban states, and from there on, Donald Trump implemented his anti-Chinese policies as soon as coming to power on January 20th 2017.
Besides making major economic policy blunders such as his countercyclical tax cut of 2018 that deepened the fiscal trouble of the US at a time where the Government should have replenished its coffers and reduced its debt load, Donald Trump used Executive Orders and Sanctions like no other President before him.
Without making judgements or pre-judgements, Donald Trump will probably stay in history as one of the worst Presidents of the United States of America. He not only failed to secure a second term, a rare feature for a sitting Republican President, but he also publicly contested his own democratic system and electoral process, leading to the storming of the seat of the US democracy on January 6th 2022, with his followers calling for the hanging of his own Vice President.
He is also the only President in the US history to have been indicted four times on four criminal charges relating to four completely different felonies or crimes, together with the most senior members of his Presidential staff and advisors, the latest being the infamous Peter Navarro who has just been indicted of contempt of Congress, a first in the US history.
if there was any sign that America’s democracy is deeply sick, suffice to see that a person with such a track record could still be the favourite candidate of the Grand Old Party for the upcoming elections.
Self- Defeating Policies
In a structurally more integrated world where technology enables corporations and individuals to communicate freely and immediately with billions of others around the world, where free trade agreements allow an optimal allocation of resources and the development of world-wide markets for services and products, where world peace is based on trust and patiently crafted international agreements, seeing the leader of this global village turning his back on globalisation and international relations could only lead to global destabilisation.
From pulling out of NAFTA, of climate fighting processes to imposing tariffs on European imports or Chinese products, from imposing sanctions on the “perceived” enemies of the US, be they Nations, corporations or individuals, to imprisoning foreign corporate executives to banning foreign corporations access to the US market or access to world-wide available technologies, the action of the US Government under Trump and then Biden after him has changed the international world order in a drastic and irreversible way.
Unfortunately, what is clearly appearing now is that this strategy of promoting the supremacy of the US and trying to contain the natural rise of China is self-defeating and will ultimately cost the US far more than they are impacting his self-proclaimed adversaries.
When it comes to China, the targeting of Huawei and the multiple bans and tariffs put on Chinese products, let alone the restrictions on allowing Chinese student to study in the US have done little to prevent the economic, social or technological advance of China while having significant negative consequences for the US itself.
1 . The stark development of American aggressiveness vis a vis China has ultimately led, as we predicted already then in 2017 and 2018, to the rise of an anti-American sentiment in China itself. The Chinese were great admirers of the US and significant buyers of US products prior to Donald Trump.
Today, the Chinese are shunning US and western products, privileging locally made products from cars to food to wearables. They prefer Anta sport to Nike, Chinese made SUVs to Jeeps, Brilliance Sedans to GM’s and they buy Xiaomi, Oppo or HuaWei smart phones rather than Apple’s.
The recent decision of the Chinese Government to ban Apple’s products from public administrations on security concerns runs far deeper than the simple security issue. It is a major step towards the growing sinisation of the Chinese consumer market.
Unfortunately, for most global US corporations, China is either their second or third largest consumer markets and the long term consequences of the loss of this extremely large and still strongly growing consumer market has considerable consequences on their long term development.
2. The bans issued on technology transfers such as chips, memories or telecommunication, has led to nothing apart from an acceleration of China’s self-reliance and drive to master the technologies themselves, The recent release of Huawei P60 smart phone equipped with the latest Kirin chip developed with a 7 nanometer technology show how quickly China is catching up in one of the very few areas where it is still lagging behind.
Bans and sanctions have only pushed the internal security and sustainability of China’s path of development to the forefront of Government priorities and billions are being poured in the development these technologies internally.
The US public obsession with Intellectual property tends to forget that the Chinese are amongst the world’s largest inventors, filing more patents annually than any country in the word, and where universities and research centers have reached capabilities and have access to funding that are not available everywhere. As they have demonstrated in fields as diverse as telecommunication, solar panels, memory chips, haptics, high speed trains, ballistic missiles and aeronautics, the Chinese have already surpassed the West in a considerable number of strategic technologies and are catching up fast in the others.
The choice and use of confrontational measures by the US will ultimately fire back, as seen with Apple today or with the ban put on NVIDIA’s selling its latest technology chips to China. China is not only very advanced in Ai, with players that dwarf in size any of their US competitors when it comes to the size of their available data, but they are also extremely advanced in cloud computing, servers, data centers and data transmissions, benefitting from a far superior network of fibre optics and far more reliable power generation capabilities.
China has just obtained the international certification of its Chinese made commercial aircrafts, and the next decade will see a considerable loss of market share of the two world leaders in commercial aircraft manufacturing, Airbus and Boeing, with Chinese made aircrafts replacing their products in the world’s largest market for commercial flying, China, but also internationally, withmajor markets that are not married to the US or Europe.
As is the case with the automobile sector where Chinese made cars are now making significant inroads in international markets with top quality vehicles with far better equipments and much lower price tags than their Western counterparts, it is only a matter of time before these industries suffer considerably and lose their world dominance.
The loss of the Chinese market is probably the most damaging consequences of the ill-conceived American policy of confronting China since 2016.
Joe Biden’s attempts to pursue a double edged “de-risking” policy of maintaining relationships without lifting sanctions is doomed… The Chinese rightly see it as “Un-sincere” and they have decided a long time ago to go their own way.
The confrontation about Taiwan has constantly been fuelled by the US and its interference in the matter and there again, America is flaming the tensions while knowing perfectly well that it cannot engage in a full war with China to defend Taiwan.
The issue will certainly come to the fore in the Taiwanese elections of January 2024 and it remains to be seen whether the majority of the Taiwanese really want to pursue the confrontational path vis a vis China of the current administration.
At the beginning of 2022, US and Western intelligence knew full-well that Putin had decided to invade Ukraine.
As the world leader, America had the choice of stopping Putin in its track immediately by stating clearly that any military invasion would be countered by a global military confrontation, something that would probably have made Putin hesitate, or to allow it to happen and then wage a proxy war in Ukraine and using sanctions to weaken Putin’s stand and potentially lead to the demise of his regime.
Besides the 500’000 casualties of the war and the 6 million Ukrainians that have been displaced, neither massive military support to the Ukrainian military nor sanctions on Russia have achieved much.
For the US taxpayer, Ukraine has become far and away the top recipient of U.S. foreign aid. It is the first time that a European country has held the top spot since the Harry S. Truman administration directed vast sums into rebuilding the continent through the Marshall Plan after World War II.
Since the war began, the Biden administration and the U.S. Congress have directed more than $75 billion in assistance to Ukraine, which includes humanitarian, financial, and military support, according to the Kiel Institute for the World Economy.
Much of the aid has gone toward providing weapons systems, training, and intelligence that Ukrainian commanders need to defend against Russia, which has one of the world’s most powerful militaries and almost unlimited resources in terms of military personnel.
Eighteen months into the war, the Biden administration had provided or agreed to provide Ukraine with a long list of defense capabilities, including Abrams battle tanks, anti-aircraft missiles, coastal defense ships, and advanced surveillance and radar systems. In July, the Biden administration sparked some controversy in agreeing to supply Ukraine with cluster munitions, which are banned by most countries because of the risk their undetonated components can pose to civilians many years after their use.
US and Western Economic sanctions on Russia and oligarchs have had a very limited impact on the Russian economy. After a year of recession and adjustment, At USD 2.2 trillion the Russian economy has grown by 31 % since 2019 and is back to its 2014 record level. In Q2 2023 the Russian economy grew by +4.9 %
So much so for the economic weakening of Russia …
Finally, and maybe more importantly, large parts of the world such as China, India, or the Middle East are not abiding by the US sanctions.
Russian oil and commodities are flowing to the third world and paid in currencies other than the US dollar.
Granted a few mega yachts have been seized from oligarchs and they had to sell some of their assets in the West including football clubs, stakes in Western corporations, but the. real impact of the economic sanctions have been the forced divestment of Western corporations from the Russian domestic market. From car manufacturers to banks to insurance companies or luxury goods, it is ultimately Western corporations that are paying a heavy price for the sanction policies.
Domestically, the Russia economy is doing well and consumers have switched from western products to Chinese, Indian or Russian made products .
Even more interesting the main impact of the sanction policies was to allow Russia oligarchs to buy Western assets at deeply discounted prices.
The war in Ukraine is leading nowhere, apart from further human fatalities and a potential escalation into a Nuclear conflict.
The lack of willingness of the US to engage directly militarily against Russia in the Ukrainian conflict has all but devastated the trust that other nations had put in the commitment of the US to defend them militarily against foreign aggressions.
Countries as diverse as Japan, Germany or the Nations of the Arab World, have now shifted path and are re-building their own military capabilities.
With the war in Ukraine, America has clearly lost a major element, if not the core foundation, of its world leadership, its willingness or ability to defend its allies militarily….
A fragmented World
Over the past two months, significant symbols have painted the new world we are in today.
The BRICS summit in South Africa was attended by Xi Jing Ping and extended the BRICS from 5 to 11 Nations representing 3.7 Billion people, adding Argentina, Saudi Arabia, the United Arab Emirates and Iran in an informal club that is, by essence, rejecting the hegemony and leadership of the United States of America.
A month later, XI JingPIng decided not to attend the G20 summit in India, sending a signal that what has been the core vehicle of international relations for decades was no longer the ultimate medium of diplomacy.
These symbols should not be underestimated and they say a lot about a world that is slowly but surely navigating away from the US influence and leadership of the world.
America is in danger of losing its world leadership
Unfortunately, these strategic shifts have most to do with the unilateral policies pursued by the Trump and now Biden administrations, for domestic political reasons.
America’s leadership problem finds its roots in two fundamental issues : fear and paralysis
The American generations at the helm today have lost the memory of what America was and what has led it to world dominance.
In 1900, when the sun never set on the British Empire, when Gustave Eiffel was building his tower in a sprawling France that was oscillating between Empires and Republics, where Vienna was at the forefront of intellectual development with psychoanalysis and arts in the Habsbourg empire and where Germany was becoming a major industrial power in the German reich or empire, America was an emerging nation of cowboys that had invented a new political system in 1775 putting democracy and the citizen at the center, in opposition to the then dominant system of Governance of Kingdoms and empires.
That new governance system gave it better productivity, better efficiency, better infrastructures and better social cohesion than what was the case in the old European world leaders.
Unfortunately, today, America is failing to recognise that China is exactly where America was in 1900. An emerging nation that has adopted a new, but far more efficient governance system, the stakeholder system inspired by the western democracies private governance, with massive growth rates, rising affluence of the masses, massive infrastructure with the latest technologies and innovation capabilities that have already demonstrated their worth.
Instead of trying to contain the inexorable rise of China’s economic might, America would have been much better off keeping its leadership by accompanying China’s growth and development, by benefiting from it and participating in it instead of cutting itself and its corporations from it.
Confrontational attitudes ultimately lead to confrontations, and neither America nor the world has anything to gain from a military confrontation with what is ultimately going to become the world’s largest economy.
The American fantasy that China will fail and that America’s sanctions and confrontational policies will contribute to this failure are as unrealistic as their hopes that their military support to Ukraine and economic sanctions against Russia will bring Putin down…
America’s policy choices of the past 8 years have led to a world where fragmentation is increasing and where the leadership of America politically and economically is being challenged seriously.
Its policies are ultimately harming its own corporations more than they are harming their perceived adversaries.
America should realise that they have to find a new path of collaboration in good faith with China, a path that respects the difference of political systems and a path where peaceful and productive cooperation takes over from sanctions and criticism.
You cant’ make friends when you publicly call the opponent leader a dictator …
Unfortunately America is itself paralysed by its own political and financial demons …
MAXIN ADVISORS Weekly Market Review
9 Sep 2023
World Food Prices Lowest in 2 Years
The FAO Food Price Index declined 2.1% to 121.4 points in August 2023, the lowest since April 2021, reversing the 1% gain seen in July, and pushing the index 24% below its peak reached in March 2022. Declines were seen in dairy products (-4%), the eighth consecutive fall, led by whole milk powder amid abundant supplies especially from Oceania amid seasonally rising production, and a slowdown in imports by China. Cost for vegetable oils dropped 3.1% due to lower world prices across palm, sunflower, soy and rapeseed oils. Prices of meat decreased 3%, with the steepest drop registered for ovine meat, due to a surge in export availabilities, mainly from Australia, and weaker demand from China. Also, the cost of cereals edged 0.7% lower, with wheat prices falling 3.8% amid higher seasonal availability from ongoing harvests in the northern hemisphere. On the other hand, sugar prices were up 1.3% due to concerns over the impact of the El Niño weather phenomenon on global production prospects.
US Consumer Credit Growth Misses Estimates
Total consumer credit in the US jumped by $10.4 billion in July of 2023, following a downwardly revised $14 billion growth in the previous month while missing market expectation of a $16 billion rise. Revolving credit, like credit cards, increased by $9.6 billion (or 9.2 percent on annual basis), compared to a $872 million fall in the prior month. Non Revolving credit, typically auto and student loans, increased by $773 million (or 0.2 percent), following a downwardly revised $14.89 billion gain in the prior month.
Gasoline Prices Hit 3-Week High
Gasoline futures rose past $2.6 per gallon, the highest since mid-August and in line with a broader trend seen in energy-related commodities after the recent announcement made by Saudi Arabia and Russia, indicating an extension of their voluntary supply cuts. Saudi Arabia extended its 1-million-barrels-per-day voluntary oil production cut until the end of the year and Russia extended its voluntary reduction in oil exports by 300,000 bpd until December. At the same time, demand remains strong with EIA data showing an increase to 9.32 million b/d last week from 9.07 million b/d while gasoline inventories fell by 2.666 million barrels, the biggest decline in four months. Unplanned refinery outages have also pushed gasoline prices higher. The national average gasoline prices in the United States hit $3.811 a gallon in the beginning of September, the second-highest level in records going back to 1994 from the American Automobile Association.
Used Car Prices in the US Edge Higher in August
The Manheim Used Vehicle Value Index for the US edged 0.2% higher month-over-month in August 2023, the first increase in five months, but the gain is in line with the 0.3% average observed since 1997. Prices rose the most for vans (1.2%), followed by pickups (0.6%) while cost declined for compact (-0.6%) and midsize cars (-0.5%). Luxury and SUVs gained little, both up 0.1% from last month. Year-on-year, prices for used cars were down 7.7%, a 12th consecutive decrease. “Used market conditions have been quite consistent for a few months and are not likely to change much, even with the larger push toward balance; sales are slightly stronger than expected, inventory remains tight, and prices are holding at levels around 6% below last year at the same time. These factors are expected to prevent any substantial decline in wholesale prices through year-end”, aid Chris Frey, senior manager of Economic and Industry Insights for Cox Automotive.
US Wholesale Inventories Fall More Than Initial Estimates
Wholesale inventories in the United States fell by 0.2% from a month earlier in July 2023, compared to the preliminary estimate of a 0.1% decrease and following a 0.7% drop in the prior month. It marks the fifth consecutive month of decreases in wholesale inventories, driven by durable goods (-0.3%, the same pace as in June), mostly furniture (-2.9%), hardware (-0.8%) and electrical equipment (-0.8%). Conversely, stocks rebounded marginally for non-durable goods (0.1% vs -1.3%), as solid increases in petroleum (+4.3%) and farm products (+3.4%) were partly offset by reduced inventories of apparel (-3.3%) and paper (-1.8%). On a yearly basis, wholesale inventories rose by 0.5% in July, matching the initial estimate.
Canada Adds More Jobs than Expected
The Canadian economy added 39.9 thousand jobs in August 2023, far exceeding market expectations of a 15.0 thousand increase. Employment in professional, scientific, and technical services increased by 52.1 thousand, marking the first significant increase in the industry since December 2022. Additionally, employment in construction was up by 33.8 thousand, partially offsetting July’s sharp decline. Furthermore, employment increased in “other services,” which include personal and repair services, by 20.9 thousand, and also in transportation and warehousing by 12.7 thousand. On the other hand, employment decreased in educational services (-44.2 thousand), manufacturing (-29.5 thousand), finance, insurance, real estate, rental, and leasing (-16.3 thousand), and agriculture (-10.5 thousand). Among Canada’s provinces, employment rose in Alberta (17.7 thousand), British Columbia (12.0 thousand), and Prince Edward Island (1.8 thousand), while it declined in Nova Scotia (-3.6 thousand).
Canada Unemployment Rate Unchanged at 18-Month High
The unemployment rate in Canada was at 5.5% in August of 2023, remaining unchanged from the 18-month high from the previous month and slightly below market estimates of 5.6%. The data consolidated evidence of some softening in the Canadian labor market since the prior year, but the jobless rate remains well below pre-pandemic averages and the labor market is tight when compared to historical levels. Unemployment rose by 14.2 thousand individuals to 1.181 million, with 57.8% of unemployed individuals being unemployed for over one month. Joblessness fell 0.4% for core-aged women, offsetting the 2.5% increase in the male youth, while unemployment for the female youth and core-aged men remained relatively unchanged. In the meantime, a net of 39.9 thousand individuals to 20.166 million, well above estimates of a 15 thousand increase.
Spain Industrial Output Shrinks for 4th Month
Industrial production in Spain fell by 1.8% year-on-year in July 2023, after an upwardly revised 3.2% slump in the previous month and compared with market forecasts of a 2% drop. It marks the fourth consecutive month of declines in industrial activity, as output continued to fall for energy (-10.8% vs -9.8% in June), durable consumer goods (-7.3% vs -5.7%) and intermediate goods (-2.6% vs -4.5%). On the other hand, production rose faster for capital goods (5.9% vs 2.3%) and it rebounded for non-durable consumer goods (1.1% vs -0.6%). On a seasonally adjusted monthly basis, industrial output went up by 0.2% in July, reversing a 1% decrease in the previous month.
Ireland Industrial Production Contracts in August
Industrial production in Ireland sank by 4% year-on-year in July of 2023, reversing from the downwardly revised 1% growth from the previous month, reflecting the pressure from higher interest rates from the ECB. Output fell by 4.3% for manufacturing industries, with sharp declines noted in non-metallic mineral products (-8.1%), food products (-2.2%), and modern manufacturing sectors (-5.8%), which include the production of chemicals, chemical products, pharmaceutical products, and electronics and computer equipment. On a monthly basis, industrial production sank by 6.6%
Greece Inflation Picks Up Further in August
The annual inflation rate in Greece edged higher to 2.7% in August of 2023 from 2.5% in the previous month, marking the second increase since touching the near-two-year-low of 1.8% in July to reflect the return of inflationary pressure to economies in the Eurozone. Consumer prices reaccelerated for transportation (1.6% vs -3.7% in July) amid higher energy prices in the period. On the other hand, deflation picked up for housing (-12.6% vs -11.8%), and inflation continued to ease for food and non-alcoholic beverages (10.7% vs 12.3%) and restaurants and hotels (6.1% vs 6.2%). Consumer prices were unchanged on a monthly basis, holding the 0.3% decline from July.
China Consumer Prices Inch Higher
China’s consumer prices rose by 0.1% yoy in August 2023, compared with market forecasts of a 0.2% gain and after the first drop in over 2 years of 0.3% a month earlier. Non-food prices increased by 0.5%, picking up from a flat reading previously, as cost went up for clothing (1.1% vs 1.0% in July), housing (0.1% vs 0.1), health (1.2% vs 1.2%), and education (2.5% vs 2.4%); while prices of transport fell at a softer rate (-2.1% vs -4.7%). In the meantime, cost of food fell 1.7%, the same pace as in July, with prices of pork decreasing more. China’s statistics agency recently said that inflation is projected to pick up gradually as the impact of a high base last year fades. Core consumer prices, excluding food and energy prices, went up 0.8% yoy, the same pace as in July, and remained at the fastest pace since January. On a monthly basis, consumer prices gained 0.3% in August, matching consensus and coming after a 0.2% growth in July.
China Food Prices Fall for 2nd Straight Month
Food prices in China declined by 1.7 percent year-on-year in August 2023, the same pace as in the prior month while pointing to the second straight month of drop. Prices of pork fell further (-17.9% vs -26.0% in July), amid continued efforts from authorities to closely monitor supply and demand in the hog market. Also, cost continued to drop for fresh vegetables (-3.3% vs -1.5%) and cooking oils (-1.9% vs -1.3%). At the same time, prices moderated for both fresh fruit (1.3% vs 5.0%) and milk (0.1% vs 0.4%). Meanwhile, cost of eggs rose by 3.2%, swinging from a 0.5% fall in July.
China Producer Prices Fall the Least in 5 Months
China’s producer prices dropped 3.0% yoy in August 2023, matching market forecasts, after a 4.4% decline in the prior month. It was the eleventh consecutive month of producer deflation but the smallest producer deflation since March amid various policy measures from the government to boost consumption and strengthen post-pandemic recovery. A decrease in production materials softened (-3.7% vs -5.5% in July), amid a slower decline in processing prices (-3.1% vs -3.8%), raw materials (-4.0% vs -7.6%), and extractions (-9.9% vs -14.7%). Also, prices dropped less for consumer goods (-0.2% vs -0.4%), food (-0.2% vs -0.9%), and durable goods (-1.2% vs -1.5%) while cost rose at slower rates for both daily use goods (0.6% vs 0.8%) and clothing (1.0% vs 1.5%). On a monthly basis, producer prices edged up 0.2%, the first increase in nine months, after a 0.2% fall in July.
Russia Economy Expands 4.9% in Q2
Russia’s gross domestic product sharply increased by 4.9% year-on-year in the second quarter of 2023, recovering from a 1.8% contraction in the previous period and aligned with the preliminary estimate. Notably, it marks Russia’s first GDP expansion since the first quarter of 2022, when the nation’s invasion of Ukraine led to international sanctions. The expansion is seen as a positive sign by the Central Bank of Russia, indicating a recovery in domestic demand and foreign trade from the shocks of Western sanctions, strengthening the case for interest rate hikes. The sectors contributing to GDP growth include agriculture, forestry, hunting, and fishing (4%), manufacturing industries (10.6%), construction (11.7%), wholesale and retail (11%), hotels and restaurants (15.2%) and activities in the field of information and communication (3.5%). On the other hand, the economy contracted for health and social services (-3.2%) and water supply, sewerage, and wastewater disposal (-1.7%).
Russia Inflation Rate Picks Up More than Expected
The annual inflation rate in Russia rose to 5.2% in August 2023 from 4.3% in July, marking the highest level in six months and above market expectations of a 5.1% increase. The central bank has indicated its potential interest rate hikes this year, aiming to bring prices back to its 4% target by 2024, as it predicts that inflation will likely range between 4.5% and 6.5% by the end of this year. Prices saw accelerated increases for food (3.6% vs. 2.2% in July) and non-food products (3.6% vs. 2.3%). Conversely, services inflation slowed to 9.5% from 10%. Meanwhile, core consumer prices accelerated (3.95% vs. 3.2%). On a monthly basis, consumer prices increased by 0.28%, following a 0.6% rise
Russia Budget Deficits Extends All-Time High
The Russian Federal Government recorded a budget deficit of RUB 2.361 trillion in the first eight months of 2023, the widest on record, and swinging from a surplus of RUB 291 billion from the corresponding period of the previous year. Revenues dropped by 3.5% to RUB 16.99 trillion, as sanctions against Russia’s energy sales and a slowing Chinese economy drove essential oil and gas revenues to plunge by 38.2% to RUB 4.386 trillion. Limiting the blows to revenues, increased value-added taxes for importers and exporters increased taxation revenues by 24.2%, pinning an also 24.2% rise in non-energy revenues to RUB 12.155 trillion. In the meantime, government expenses soared by 11.8% to RUB 19.351 trillion as Moscow finances its prolonged invasion of Ukraine. The results continued to underscore the unsustainable developments that pressure the state’s fiscal side, forcing the Kremlin to raise borrowing through bonds and squeeze its rainy-day National Welfare Fund.
The Week Ahead
Next week, all eyes will be on the United States’ CPI report and retail sales. Headline consumer prices are expected to have risen by 3.6 percent last month, accelerating for the second consecutive month. On the other hand, the core index is likely to have increased by 4.3 percent, the least since September 2021. Also, retail sales is expected to have grown only 0.2 percent month-over-month, down from July’s 0.7 percent. There are several other reports worth watching, including industrial production, producer and foreign trade prices, the preliminary estimate of Michigan consumer sentiment, business inventories, the NY Empire State Manufacturing Index, and the government’s monthly budget statement. Elsewhere in Americas, investors will also be keeping an eye on Canada’s international transactions in securities, Mexico’s industrial output data, and Brazil’s inflation rate, retail trade, and business morale.
In Europe, ECB‘s will be deciding on the course of its monetary policy on Thursday. The central bank is expected to keep borrowing costs unchanged, marking a pause in the rate-hike campaign after nine consecutive increases that brought the rate on the deposit facility to a 22-year high of 3.75%. Traders will also await further clues regarding the central bank’s plans for the rest of the year, and new economic forecasts will be closely scrutinized. On the data front, it will be interesting to follow final inflation figures for Spain, France and Italy; ZEW economic sentiment and wholesale prices for Germany; and Euro Area industrial production, labour costs, wage growth and trade balance. In the UK, a batch of important indicators will offer insights into the country’s economic health, namely unemployment rate and wage growth, GDP growth for the month of August, trade balance and industrial production. Finally, Turkey will release industrial production, retail sales, unemployment rate and current account.
In China, a batch of economic data for August will give the latest insights on whether initial government support measures may have already had an impact on its slowing economy. New releases are set to show slight rebounds in consumer prices, new yuan loans, industrial production growth, and retail sales, while fixed investment and house prices will be closely eyed for turns following Country Garden’s missed bond payments. In Japan, investors await the Reuters Tankan index for September and July’s machinery orders. In India, inflation is expected to have slowed, contrary to a rebound in industrial output and a stable trade balance. Elsewhere, South Korea will share its August unemployment rate. In Australia, key releases include forward-looking indicators such as September’s Westpac consumer confidence, August’s NAB Business confidence indices and range of labor data.
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