Geopolitical tensions threaten outlook for global economy

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Good evening.

Geopolitical tensions and increasing protectionism are reshaping global investment, threatening to depress growth and lead to more financial instability, according to a flurry of reports ahead of the spring meetings of the World Bank and IMF.

The IMF said that the rise of “friendshoring” — foreign direct investment flowing more between countries that are political allies than those that are geographically close — was likely to increase the risk of economic downturns and could cut long-term global output by 2 per cent.

“The estimated large and widespread long-term output losses show why it’s crucial to foster global integration — especially as major economies endorse inward-looking policies,” the reports’ authors said.

The message comes as governments increasingly take to protectionist rhetoric, from US Treasury secretary Janet Yellen’s call for prioritising supply chains “with countries we can count on” to Washington’s export restrictions on Chinese semiconductor technology.

Emerging economies that are more dependent on inward investment by foreign companies were most likely to feel the impact, the IMF said.

In a separate report, the World Trade Organization warned that rising interest rates and financial instability would add to the problems of protectionism and hit growth in exports.

Export volumes increased by a lower than expected 2.7 per cent in 2022 compared with 2021 as the war in Ukraine and sanctions on Russia disrupted supply chains already fragile from the pandemic, the WTO said. It forecasts that growth in exports will slow this year to 1.7 per cent, well below the past decade’s average expansion of 2.6 per cent. The report also highlighted global food insecurity stemming from the war, with famine still a possibility.

Chief economics commentator Martin Wolf in his latest column explores the ramifications of this shift in trading relationships, and especially the decoupling of the US and China, which he characterises as a “significant turning point, with unpredictable and, in all probability, damaging outcomes”.

It follows a World Bank warning earlier this week that technology decoupling and trade restrictions were hurting knowledge generation and innovation in both superpowers, posing a long-term threat to growth across Asia.

What then should the rest of the world do? One answer, Wolf suggests, is to create a free trade agreement on WTO principles — but then going beyond them, building on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). “Add in the Atlantic and Indian oceans. But also leave the superpowers outside. The rest of the world can still co-operate,” he concludes.

Disrupted Times is taking a short holiday break and will be back in your inboxes on Wednesday April 12.

Need to know: UK and Europe economy

Bank of England chief economist Huw Pill hinted at another interest rate rise in May so the bank can “see the job through” in its fight against inflation. Sterling this week hit its highest level against the US dollar in 10 months as fears of recession lessened. The pound is the best-performing G10 currency this year.

German factory orders were far higher than expected in February, adding to positive indicators on exports and business confidence. Economists also reversed their 2023 economic forecasts from a decline in GDP of 0.4 per cent to an expansion of 0.3 per cent, pointing to the less-severe-than-feared energy crisis.

EU house prices on the other hand had their first quarterly fall since 2015 in the last three months of 2022, as rising borrowing costs ended the almost decade-long boom in residential property.

Need to know: Global economy

Taiwanese president Tsai Ing-wen is meeting US House Speaker Kevin McCarthy in California today, while her predecessor has been in China as the country’s two main parties debate which superpower to side with. Here’s our Big Read on Taiwan’s deepening political divide.

The world’s need for copper is driving a surge of interest in mining, highlighted by Glencore’s offer for Teck Resources. Other recent moves include BHP’s bid for Oz Minerals, Rio Tinto’s takeover of Turquoise Hill and Newmont’s offer for Newcrest.

Openings for new US jobs fell below 10mn in February for the first time since May 2021 in a sign that the labour market is cooling, a trend confirmed in private sector hiring data. The closely watched monthly jobs report (aka non-farm payrolls) is published on Friday. There’s no DT that day but FT.com will have all the details.

Countries negotiating a crucial treaty on pandemics at the World Health Organization are struggling to agree key points — including a basic definition of the term.

Need to know: business

Johnson & Johnson proposed an $8.9bn settlement to resolve tens of thousands of lawsuits alleging its talcum powder caused cancer, in an attempt to resolve a decade-long legal battle. If approved, it would become the largest product liability settlement in bankruptcy history.

JPMorgan chief Jamie Dimon hit out at regulators that he said had stoked the recent sector turmoil by encouraging banks to load up on government securities and imposing flawed stress tests.

Credit Suisse chair Axel Lehmann apologised to investors for the 167-year-old Swiss bank’s collapse at its final shareholder meeting as an independent business. Shareholders at its new owner, UBS, have been voicing their concerns about the government-engineered takeover.

Chinese billionaire Robin Zeng, aka “the battery king”, is in the crosshairs of regulators in Washington as well as Beijing over his company’s market dominance of the highly strategic and fast-growing electric vehicle battery market. Although 70 per cent of the world’s electric car batteries are currently made in China, Tesla in the US has plans to upend the industry.

Companies in Japan are bracing for a surge in ransomware demands after last year’s hacking attack at Fujitsu, the country’s largest IT company. Cyber attacks have risen sharply in recent years, with the global cost to companies put at $4.5mn, according to IBM — not including the payment of the ransom itself.

The World of Work

How should company bosses plan for a crisis and deal with risk? Listen to the new Working It podcast.

“Our clients are saying to us, ‘how can we encourage more people to return to the office?’” Companies are on the hunt for better facilities to comply with green regulations and attract workers back, with occupied office space in London still below pre-Covid levels.

New FT analysis shows 80 per cent of UK employers pay men more than women. The gap has widened since the start of mandatory gender pay gap reporting six years ago.

Some good news

New research in The Lancet confirms the benefits for cardiometabolic and mental health from “nature prescriptions”, where patients are recommended to spend a fixed amount of time a week in a natural setting, such as a park.