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Mounting Geopolitical Risks Catching Market Attention despite Positive Data

The world economy has begun the year  in fine form.The world economy has begun the year  in fine form.

The world economy has begun the year in fine form. America is cruising along, China is growing faster than expected, Britain is muffling the Brexit downdraft. Even the usually lagging eurozone is perky. Pity about what lies ahead.

Almost every major economy’s data releases these days seem to follow a similar pattern. First, they are generally positive—either better than previously or only a little weaker. Then, policymakers and economists come out and say there are too many uncertainties ahead to know whether it will continue or crumble, Reuters reported.

“Geopolitical risks are mounting and increasingly catching market attention in such fashion as to risk overshadowing most other developments,” Canada’s Scotiabank told its clients.

The risks are primarily political. How will US President Donald Trump’s “America First” protectionist talk translate into policy? Will Brexit finally come back to bite Britain by cutting off commercial growth and breeding inflation.

For the eurozone, meanwhile, the risks are existential. Elections in France, Italy, Germany and the Netherlands could result in anti-euro political parties gaining significant ground or even taking office. And Greece’s hold on its place in the currency union remains flimsy.

In the past week the extra money investors demand to buy French bonds rather than German ones jumped—much of it because of a comment to Reuters by an official of the far-right National Front that it would put leaving the euro at the heart of its economic platform.

Polls suggest National Front candidate Marine Le Pen will not win the presidency—but after the Trump and Brexit surprises last year nothing can be ruled out.

Other risks are more Keynesian, revolving around whether years of stimulus from central banks in the form of asset-buying and negligible interest rates is finally producing inflation, which in turn will stop consumers from buying, slowing economic growth.

Economics can be very much a game of whack-a-mole. 

The coming week may well be dominated by China, which returns from a holiday with a large slate of data, including the services purchasing managers index, foreign reserves data and possibly trade figures.

In the eurozone, there will be German, French, Spanish and Italian industrial production data. All are expected to show growth.

For the United States, the weekly outlook is thin, with monthly trade figures a highlight with a little changed $45 billion deficit expected.

 

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