No summer calm

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.

The full note is available here: https://davidskilling.substack.com/p/no-summer-break