Russia, like a difficult teenager is testing the limits of what it can get away with, while the US – the exhausted parent in this analogy – is making threats of discipline without really the stamina or force of will to follow them through.
Ultimately this will result in a humiliating climb-down from Ukraine, some face saving diplomatic deal from the US and just enough concessions from Russia to stop any real sanctions from hurting their economy.
When predicting how international politics will play out, it is usually a safe bet to look at what each party involved stands to gain or lose.
In the UK a further fall in inflation must have finally banished the spectre of a hike in interest rates. Elsewhere global markets seem to be experiencing a roller coaster of sentiment, as shots of positive data buoys temporarily markets before new developments in Ukraine drag them back down.
UK: Low inflation assists real wage growth
Inflation as measured by the Consumer Price Index fell to 1.6 per cent in March, the lowest since late 2009 and just below February’s 1.7 per cent figure.
Source: Bloomberg
The lack in price growth was once again mainly driven by sticky fuel prices. However, combine this with average earnings growing 1.9 per cent in the three months to February, and we have finally reached a ‘milestone’ where wages are now growing in real terms.
Looking past the matter that, should the Bank of England have hit its 2 per cent inflation target, real wage growth would still be negative, this news should reward those previously bullish on a UK recovery – should it become a long term trend.
Another positive sign was unemployment falling to 6.9 per cent in the three months to February, which is below BoE governor Mark Carney’s old-fabled threshold of 7 per cent.
Would the economy really be able to deal with a rise in rates now? It seems unlikely, and reinforces the logic behind Carney’s flexible approach to monetary policy management.
EU: Ukraine hikes rate to combat capital outflows
As violent demonstrations take centre stage once again in Ukraine, the nation’s central bank raised its key interest rate to 9.5 per cent from 6.5 on Monday night, in an attempt to bolster the currency and prevent or even just slow the rate of capital outflow.
Source: Bloomberg
Given the extreme political circumstances and that foreign exchange reserves are critically low swift and decisive action is necessary.
However to us this seems meagre in comparison to challenges faced; business and investor sentiment has already taken a hammering, and strengthening the currency may ease short-term trade strains, but if full-blown conflict erupts then we find it hard to see slightly higher interest rates attracting foreign trade flows.
As expected, attempts by the West to intervene have been met with stark opposition from the corporate world.
The possibility of trade disruptions with Russia presents too large an obstacle. Especially given the Eurozone just had its lowest inflation in four years, leading many to call for the ECB to provide stimulus – a move which we have seen as necessary for some time now.
China: Growth slows but slightly above expectations
The Central Bank came under fire from the US Federal Reserve this week for weakening the renminbi via its enormous stockpiling of foreign exchange reserves; these reached a record high of just below $4 trillion during the first quarter of the year.
However what seems odd if not ridiculous is that investors or even international politics are piling on the pressure for the government to sustain high growth, yet shun the act of the CB maintaining artificially low currency.
May we highlight what the first arrow of Japan’s ‘Abenomics’ was again, in essence a massive devaluation of the yen to stimulate export competitiveness.
Chinese GDP growth came in at 7.4 per cent in the first quarter. While this is 0.3 per cent lower than then previous figure, it was actually ahead of analyst forecasts.
Source: Bloomberg
If we take these figures at face value, it does hint towards sharp slow-down, however just because for now the CB has ruled out large-scale stimulus, elsewhere we have seen several times now how quickly monetary policy can be flipped on its head.
