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The prospect of a military response from Israel to Iran’s sustained but unsuccessful drone and rocket attack is already shaking confidence in stock markets, which have fallen several percent from recent highs.
The big question here at the International Monetary Fund (IMF) meetings is: could there be a “Ukraine effect” affecting economic policy across the West?
One of the ironies of the latest World Economic Outlook report is that, despite Western sanctions, Russia looks set to be one of the fastest growing countries in 2024, expanding by 3.2 percent, following from 3.6 percent last year.
The United States is working to intensify financial sanctions against Iran for wreaking chaos and destruction throughout the Middle East.
Israel has written to 32 nations asking them to suspend trade relations with Iran, especially those that supply components for missile systems.
In action: a battery of Israel’s Iron Dome missile defense system. The prospect of an Israeli military response to Iran’s attack is already shaking confidence in stock markets.
The IMF’s immediate concern is that an escalation of the conflict with Iran could lead to a 15 percent increase in oil prices and an increase in shipping costs.
The secondary effects would be a hit on business confidence, investment and inflation. That would require measures by central banks, which would have to tighten their policy.
This would be useless for eurozone growth and, in fact, the UK is already fragile and the recovery is struggling.
It would be a new shock at a time when national debt and indebtedness levels are already at their limit in response to the pandemic and the war against Ukraine.
The latest geopolitical dangers would complicate a complicated context. The diplomatic consequences of the European war are causing the fragmentation of commercial relations.
Overall, trade between the West and its allies and supporters of Moscow is down 2.4 percent and trade in strategic goods such as steel and chemicals is down 4 percent.
This adds to the fallout from President Biden’s aggressive campaign to repatriate semiconductors from and around China to the United States.
Samsung this week received a $6.4 billion subsidy from the United States to move its chip manufacturing capacity to Texas. American ‘securonomics’ is testing the global trading system.
Danger zones
When it comes to financial stability, the unexpected is what catches you. As Liz Truss points out in her new book Ten Years to Save the West, no one ever told her about liability-driven investing (LDI), the sophisticated pension fund finance that brought down her brief reign as Prime Minister. No one saw the collapse of Credit Suisse, one of the largest investment banks in the world.
So you have to take everything with a pinch of salt. Explicit risks seen by the Fund in its Financial Stability report relate to China and disinflation.
Clearly, the real estate crisis in China symbolized by Evergrande is far from over.
Half-finished construction sites abound, the stock market is 45 percent below its peak and Chinese retail investors are highly exposed to an unstable corporate bond market.
The glut of real estate in the world’s second-largest economy cannot be ignored.
There is concern at the Fund that as disinflation sets in, central banks could remove their foot from monetary brakes too soon by cutting interest rates, a policy that may need to be reversed.
It is a relevant concern for Britain, where today’s inflation figures could rightly be expected to increase pressure on the Bank of England’s Andrew Bailey to cut rates before the US Federal Reserve.
The Fund’s chief financial regulator, Tobias Adrian, is also concerned about the volatility of bitcoin and the flood of exchange-traded products since US regulators authorized the funds in January this year.
Could they represent a systemic risk? Unlikely. However, regulators have a lot of work to do to better understand and control a market threat.
paper tiger
The lack of resistance on the part of DS Smith’s board and investors to the £5.8bn takeover by US-based International Paper is to be regretted.
Too often, the UK allows local innovators, with an original business model, to escape abroad.
To its credit, International Paper has acknowledged the sensitivities by promising a secondary listing in the UK and using DS Smith HQ as its European base. I guess we should be grateful for small mercies.