The prospect of a military response by Israel to Iran’s sustained, if unsuccessful, drone and rocket attack is already shaking confidence on equity markets, which have slipped several per cent from recent peaks.
The big question here at the International Monetary Fund (IMF) gatherings is: could there be a ‘Ukraine effect’ which skewers economic policy across the West?
One of the ironies of the latest World Economic Outlook report is that, in spite of Western sanctions, Russia looks set to be one of the fastest growing countries in 2024 with a 3.2 per cent expansion following 3.6 per cent growth last year.
The US is working to step up financial sanctions against Iran for sowing chaos and destruction across the Middle East.
Israel has written to 32 nations asking them to suspend trade relations with Iran, especially those providing components for missile systems.
In action: A battery of Israel’s Iron Dome defense missile system. The prospect of a military response by Israel to Iran’s attack is already shaking confidence on equity markets
The IMF’s immediate concern is that an escalation of the conflict with Iran could lead to a 15 per cent increase in oil prices and surging shipping costs.
Secondary effects would be an impact on business confidence, investment and inflation. That would require action by central banks which would need to tighten policy.
This would be unhelpful in that growth in the eurozone and for that matter the UK already is fragile and recovery is struggling.
It would be a new shock at a time when borrowing and national debt levels are already over-stretched in response to the pandemic and war on Ukraine.
The latest geopolitical perils would complicate a tricky background. Diplomatic fallout from the European war is causing fragmentation in trade relations.
Overall, trade between the West and its allies and supporters of Moscow is down 2.4 per cent with commerce in strategic goods, such as steel and chemicals, down 4 per cent.
This is in addition to the fallout from President Biden’s aggressive campaign to re-shore semi-conductors from China and its environs to the US.
Samsung this week received a $6.4billion subsidy from the US to move chip making capacity to Texas. American ‘securonomics’ is testing the global trading system.
Danger zones
When it comes to financial stability, it’s the unexpected which gets you. As Liz Truss notes in her new book Ten Years To Save The West, no one ever briefed her on liability driven investments (LDI), the pension fund fancy finance which brought down her brief reign as Prime Minister. Nobody saw the collapse of Credit Suisse, one of the world’s largest investment banks.
So everything has to be taken with a pinch of salt. The explicit risks seen by the Fund in its Financial Stability report relate to China and disinflation.
Clearly, the property meltdown in China symbolised by Evergrande is far from over.
Half-finished construction sites abound, the stock market is 45 per cent off its peak and Chinese retail investors are highly exposed to an unstable corporate bond market.
The real estate overhang in the world’s second largest economy cannot be ignored.
There is concern at the Fund that as disinflation occurs, central banks may take their foot off the monetary brakes too early by cutting interest rates, a policy that may have to be reversed.
It is a worry relevant to Britain, where today’s inflation numbers might be expected to, rightly, increase pressure on the Bank of England’s Andrew Bailey to cut rates ahead of America’s Federal Reserve.
The Fund’s top financial regulator Tobias Adrian also has concern about the volatility of bitcoin and the rush into exchange traded products since funds were authorised by US regulators in January this year.
Could they pose a systemic risk? Unlikely. Nevertheless, regulators have much work to do in better understanding and controlling a market menace.
Paper tiger
The lack of resistance by the DS Smith board and investors to the £5.8billion takeover by the US’s International Paper is to be regretted.
Too often the UK allows home grown innovators, with an original business model, to escape overseas.
To the credit of International Paper it has recognised the sensitivities by pledging a secondary quote in the UK and using DS Smith HQ as its European base. I suppose we should be thankful for small mercies.
