It is often a good sign for economic prospects if the news on macroeconomics is not on the front page. While conflicts and geopolitical tensions dominate the agenda, economic activity in some of the world’s largest markets has revived and recessions have been averted.
The jobs growth data for September in the US surprised most commentators. Non-farm payrolls jumped 254,000, around twice the amount expected by most economists. It was too soon after the 50 basis points interest rate reduction in mid-September for this to have been the likely or only cause. Data were also revised upwards slightly for July and August, showing 72,000 more jobs created than the previous figures indicated. The official unemployment rate fell to 4.1% from 4.2%. Ten-year US Treasury yields picked up, indicating the possibility of interest rates staying at the current level of 4.75-5.0%, rather than being cut, which had been the expectation before the announcement on employment. The Federal Reserve chairman Jerome Powell, by signalling a series of cuts, may have announced too much, as the data may not support the moves.
In China, the Government has acted decisively to inject stimulus, after a period of sluggish growth and deflation. On 24 September, a week after the US Federal Reserve cut interest rates, the People’s Bank of China cut the official rate. It also eased reserve requirements for banks and reduced the cost of mortgages. The stock market responded with a surge in valuations, with shares on the Hong Kong index rising around 20% in a six-day period in late September, early October. Given some internal challenges around indebted construction companies and local authorities, the stimulus may be only for the short- to medium-term, but it is substantial in scale.
This month delegates gather for the annual IMF summit meeting in Washington. It is likely that there will be more attention focused on politics than on economic data. The next possible interest rate cut would be in November, but the prospects for a cut have receded following the US jobs data; moreover this is the month of the US presidential election. There are sharp divides between the two candidates, Kamala Harris and Donald Trump, although many of the most significant differences are on social and cultural issues. There is less difference on economic policies, although some of the differences are substantive. Neither is advocating free trade policies. Trump has talked in terms of a general import tariff, as well as sector-specific levies. Harris favours subsidies for strategic industries and a lower level of tariffs.
The economic effect of the US election will also be felt in terms of shifting allegiances and geopolitics. Trump has openly asserted that he would be able to oversee a deal to end the Ukraine war. This would presumably mean agreeing new frontiers on what is roughly the current front line of the conflict. This would potentially displease both sides, and there would be the significant issue of monitoring and policing any peace deal. If a truce were to hold, however, there would be a chance for Ukrainians and Russians and their economies to recover.
There is even less chance of peace in the Middle East, where Israel continues its attacks against Hamas and Hezbollah. All-out war between Israel and Iran would probably help Trump’s campaign. A win for Trump could signal more wins for populist, anti-immigration right-wing parties in Europe. Economic policy is a challenge for Europe, where populations are ageing and growth has been subdued.
Another consideration for the US election, considering how sharply divided political allegiances have become, concerns how close election result is, and whether the result is contested. A narrow win for Harris would mean continuity in terms of White House policy, but with potentially a backdrop of social and political unrest domestically.
Regarding emerging economies, the IMF summit will likely include discussions on bailouts and debt relief. Fewer bailouts were necessary following the rise in interest rates in 2022-23 than had been feared – just Pakistan, Bangladesh and Ghana were affected. The pressure should ease now that rates have fallen, although the prospects of further cuts have fallen back.
A period of relative economic stability in major markets combined with geopolitical turbulence is unusual, and unlikely to last. Political instability shows little sign of easing, and ultimately there will be economic consequences.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.
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