One winner from the geopolitical war between China and the United States is Mexico. Indeed, such are the tensions that America is rewriting their global trade agreements where they are seeking to lessen their dependence on supply chains between themselves and their geopolitical rivals and look to find a source of imports closer to home.  

The main beneficiary of such agreements is Mexico, as they have now overtaken China as the largest supplier of goods to the United States, and as of July 2023 China’s share of American imports was 14.6% whilst Mexico led the way with 15%. 

Whilst Mexico is enjoying a resurgence in their export trade, it is interesting to note that 2023 data shows not only can the country boast one of the best performing stock markets, it also enjoys being the owner of the strongest currency. Globally, Mexico is attracting a raft of investors, such interest not being seen since 1994 when NAFTA (North American Free Trade Agreement*) was signed. 

*NAFTA – was enacted in 1994 and created a free trade zone between Canada, the United States and Mexico, and on January 1^st, 2008, all quotas and tariffs were eliminated on American exports to Canada and Mexico. As of 2018, Mexico represented America’s third largest trading partner (after China and Canada) and the second largest export market. 

However, history dictates that in the past Mexico has not grasped the opportunities when presented, to turn round their economy. Such opportunities as NAFTA, a great trade deal with the United States, still could not help the Mexican economy. One of the phrases that can be deemed the opposite of a growth miracle is a withering calamity and that could only be said of Mexico’s economy between 1994 and 2017. Trade agreements are supposed to help poor countries grow faster than their richer counterparts, yet by any standards, one can only say the Mexican economy has been sorrowful. 

Even today, Mexico’s growth rate has averaged circa 2% per annum, which is nowhere close enough to reduce poverty, and does not compare favourably with their peers in other developing countries. In fact, in 2000/2001 Poland, Turkey and Malaysia are just three examples of countries who were poorer than Mexico and data confirms that they are now considerably richer. 

So why is it that Mexico cannot use these trade agreements to improve their economy? The answer is that there are many roadblocks both new and old that could be an impediment to the continuation of the current boom. For starters, the current government is seeking to increase its role within the economy and, as a result, has often clashed with business interests across various sectors. 

Therefore, many Mexican companies have been somewhat recalcitrant when it comes to borrowing, which in turn would have increased investments across the board and turned the current boom into a more lasting period of growth. Another impediment to borrowing is the high interest rates, with smaller businesses therefore being unable to utilise credit as a means for expansion. 

Competition is another factor that could derail the potential for Mexican growth, with Japan, Vietnam and other countries, despite not being “near” the United States, are all vying to replace China as an importer to America. Furthermore, Mexican infrastructure is currently under increasing strain from current investments, as there are continuing bottlenecks being created by scarcity of water, limited industrial space and power transmissions that are becoming increasingly more erratic.

Examples of these bottlenecks as voiced by experts can be seen in Monterey, a northern industrial hub in Mexico. In this instance, one expert recounted that in 2021 Tesla was on the edge of opening a factory in Texas and was looking for a supplier of computers that allows autonomous driving for their electric cars. They were currently shipping these computers from China and were looking for a supplier closer to home, otherwise known as friend shoring and nearshoring*. In this instance, Quanta Computer Inc, who had a factory in Monetary, agreed to meet demand by outfitting a building in their complex. Once production started, output was hampered by power blackouts, as the city’s power grid could not keep up with growing industrial demand.

*Friend Shoring – This where companies move their supply chains from geopolitical adversarial countries to those countries considered as geopolitical allies. In the above example, shifting manufacturing from a Chinese supplier to a Taiwanese supplier. The ultimate goal is to stop countries like Russia and China from gaining advantages from leveraging key raw materials e.g., rare minerals, products such as energy, fertilisers and fuel, and computer parts which would disrupt western economies. In other words, it is a barrier to key supply chain blackmail.

*Nearshoring – This where a supply chain or production is shifted from overseas to a neighbouring country or nearby country, usually within the same continent or region. The above scenario, where Tesla moved their supply chain to Monterey to supply computers to their Texas factory, is a prime example.

Monterey is the capital of the district of Nuevo Leon and more than 30 companies have moved to this area after Tesla announced they were to build a factory in Monterey. However, other carmakers have announced EV investments in Mexico such as BMW, Kia Motors and General Motors, and other industries are growing such as plastics and aerospace, found just across the border from California, while home appliance and electronic companies are also expanding.

Data released by the Mexican Association of Private Industrial Parks shows that currently circa 75% of lessees are foreign companies and in 2022 vacancies fell to just 2.1%, whilst in Monterey in order to secure a lease, companies now have to commit to a minimum of 10 years.  Investment in industrial real estate is reaching an all-time high with Corporacion Inmobiliaria Vesta SAB, a real estate developer raising circa USD 450 Million via an IPO in the United States. Furthermore, Prologis, a real estate investment trust based in San Francisco, together with their Mexican arm, are planning a USD 1.2 Billion investment in land and warehouses.

Originally, back in the 1960’s Mexico made its name in the manufacturing sector where factories (maquilas) could be found alongside the US border. These factories employed low wage labour and were quite profitable exporting to the United States. They were also given a boost when NAFTA was signed, which had a knock-on effect to such cities as Monterey. However, small scale farming was a casualty of NAFTA, as Mexico imported American foodstuffs such as corn, thus putting the farmers in jeopardy to the extent that the countryside almost became derelict.

The current President Lopez Obrador, known for his thriftiness when it comes to the public purse, is intent on “levelling up” the north south divide. To this end, projects funded by the public purse include a railway line linking the pacific ocean to the gulf of Mexico. The idea being that the railway will be lined on either side with industrial parks. However, for investors, these proposed industrial parks are so much further from the American border, and this is pointed out by the boss of Nuevo Leon’s largest industrial park who says you can drive to the border crossing in circa 2 ¾ hours, with no red lights.

However, the current President is also known for his anti-business stance, and even sent troops to try and renationalise a private railway, whilst at the same time discouraging foreign companies away from Mexico’s energy markets. However, the president did engage with Tesla as they are seen as job creating initiatives.

Experts suggest that Mexico’s growth rate could increase by 0.7% due to nearshoring, which, whilst not much, would increase growth to almost 3%. In fact, few economies in Latin America have prospered like Mexico’s during Q1 and Q2 of 2023. Despite all positivity on nearshoring, many economists have been downbeat on Mexico’s economy and have been left scratching their heads as they have been proved wrong time after time with Mexico producing strong data and a resilient economy. 

Furthermore, with post-covid supply chain issues still being problematic between China and the United States, (covid related supply chain issues led to a 600% increase in the cost of shipping goods from Shanghai to Los Angeles), Mexico’s economy should continue to benefit form nearshoring, especially given the current strength of existing production and manufacturing with America. 

However, much of the improvement in Mexico’s economy could well depend on whether or not the United States enjoys their much trumpeted “soft landing*”. Such is the lack of agreement on a soft landing, Mexico’s Financial System Stability Committee has expressed caution over the Mexican economy in the coming months. Recently released data in Mexico is mixed, and whilst figures show retail sales and employment growing, exports on the other hand fell reflecting figures showing industrial production as flat. 

*Soft Landing – is a cyclical slowdown in economic growth that avoids recession.  There are mixed thoughts from economists in the United States as to whether or not America will enjoy a soft landing or will indeed go into recession. Some experts believe that a recession is still on the way, with a 5% interest rate (up from near zero in March 2022) yet to fully impact consumers and businesses. On the other hand, US equity investors are showing signs of a fading risk aversion, indicating that immediate fears of a recession have passed. 

There is much to be optimistic about Mexico’s economy, with some analysts predicting GDP to reach between 2.05% and 2.75%, going up to 3%. However, infrastructure is still a problem, and in 2022 a drought in Nuevo Leon left reservoirs empty. This impacted production for some companies who are still waiting for the promised aqueduct to be built by the government.

The on-going question is whether or not Mexico will see an increase in domestic investment, which will help put the economy on an upward curve of growth. However, some economists are downbeat, saying there will be no real value added locally as Mexico will just continue to import components for assembly then export the final product.

Much of the investment is centred around provinces such as Nuevo Leon, leaving a hefty divide between north and south. The President is determined to bridge this divide and spread the wealth evenly across Mexico. This is Mexico’s big chance to become an on-going success story, let’s hope they grab it with both hands. 

On the 14^th September 2023 the ECB, (European Central Bank), hiked its key interest rate for the 10^th time in 14 months to 4%, a record high. The ECB then went on to signal that this was probably going to be the last interest rate rise in the continuing fight against inflation. The ECB (covering 20 countries that share the euro) revised upwards its forecast for inflation, suggesting that it would return to 2% in the coming two years and at the same time revised downwards its forecast for economic growth.

When the ECB changed their monetary policy to quantitative tightening in July 2022, the key interest rate was at a record low of minus 0.5%, which meant that any bank depositing cash had to pay the ECB. Today, after the September 14^th rate increase the ECB now pays banks 4% for depositing cash. 

Although the ECB has signalled this is the end of interest hikes, their President Christine Lagarde said interest rates would remain high or restrictive for some time to come, adding that the ECB cannot completely rule out another increase in interest rates even though rates currently stand at their peak.

However, Yannis Stournaras, an ECB Governing Council Member, was quoted as saying, “The ECB as a next move was more likely to lower borrowing costs rather than raise them further”, one of the clearest remarks from the ECB confirming interest rates had probably reached their peak. At the Dutch Central Bank, President Klaas Knot seemed to echo Mr Stournaras’s words that he does not expect any change in the short-term, and added that he expects inflation to return to 2% in 2025.

Indeed, the Vice President of the ECB Luis de Guindos said that he hoped additional quantitative tightening would not be necessary. Furthermore, the Governor of the Croatian National Bank and ECB Council Member Boris Vujcic said that this was probably the last in a long line of monetary tightening. It would appear, therefore, that if inflation moderates the general consensus is that this will be the last in interest rate hikes by the ECB. However, taking a contradictory stance is Bundesbank President Joachim Nagel, who said that as inflation stubbornly remains at 5%, it is too soon to say if rates have peaked. 

The next question is how long will borrowing rates remain high? Investors and economists are already pencilling in spring of 2024 for the first rate cut, especially as the Eurozone economy is showing signs of increasing weakness. Experts advise that the latest increase by the ECB is slowing down the economies in all European countries with a number of central banks advising they will keep rates as high as needed to defeat inflation. 

However, some ECB council members argue that further rate rises may well kill the economy, especially as data shows continuing contraction in services and manufacturing. Indeed, some experts are now predicting a possible recession in the euro area, confirming that economic weakness is not just confined to Germany, which has suffered from high energy prices. 

With regard to Germany, in the week 18^th – 22^nd September 2023, German bonds fell dramatically which sent the cost of government borrowings to their highest level for 10 years, as investors and traders decided that Eurozone interest rates will remain at an elevated level with the ECB keeping policy tight for some time to come. Indeed, longer maturity bonds were badly hit in a sell-off across Europe, with experts advising that in the short-end debt market investors can achieve returns that are risk free close to circa 4%. 

Meanwhile, across the Atlantic Ocean on 20^th September 2023, the US Federal Reserve kept its benchmark interest rate unchanged but at the same time signalling there may be one more interest rate hike in 2023 with borrowing costs staying at an elevated level for longer. The FOMC, (Federal Open Market Committee- the US Central Bank’s policy setting committee), who held rates steady at 5.25 – 5.50%, were quoted as saying, “Officials will determine the extent of additional policy firming that may be appropriate”. After the announcement, yields rose to a decade high on two-, five- and ten-year government bonds as treasuries were sold off. 

Chairman of the Federal Reserve Jerome Powell went on to clarify by releasing a statement saying, “Officials are prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we are confident that inflation is moving down sustainably toward our objective”. He went on to say that we think we are fairly close to where we need to be and that the Federal Reserve is committed to a monetary policy that is sufficiently restrictive to bring inflation down to our goal of 2%.

However, quarterly projections that were updated showed that out of 19 officials in the FOMC, 12 were in favour of another rate hike this year reflecting their desire to ensure the deceleration of inflation. Their projections for the reduction of inflation show that the country will have to wait three years to the end of 2026 where they will see a projected federal fund rate of 2.9%, with the rate being 3.9% at the end of 2025. 

It is interesting to note that traders often take up a contrary position to the Federal Reserve, as when they signal that interest rates will not be dropping anytime in the near future, the financial markets take the opposite view by laying bets to the contrary. These interactions have taken place over the last 18 months, none more so than on the Wednesday during the week 18^th September – 22^nd September 2023 when the Federal Reserve published forecasts showing that at the end of Q4 2023 benchmark overnight interest rates would be 5.6%, which implies another interest rate rise before Christmas. 

They also announced that their policy rate for the end of Q4 2024 would be at least 5.1%, a full 50 basis points higher than announced three months ago. However, in the financial markets interest rate contracts are continuing to price in a 50/50 chance of increased quantitative tightening in 2023, where they see a 4.65% policy rate by the end of Q4 2024. 

The US economy continues to defy predictions and remains resilient with consumer spending and the labour market remaining steady while core inflation, (all data except for food and energy) has continued a steady decline. However, policymakers will be aware of the 30% increase in oil prices since June of this year plus the resumption in October of the student-loan payments* that will reduce spending power of consumers. They will also be aware of the impending shutdown of the US Federal Government.

*Student-Loan Payments – After a moratorium on Federal student loan payments, these will resume after 3 years in October with interest starting to accrue on 1^st September 2023. There are circa 40 Million Americans with federal student debt averaging roughly USD37,000 per borrower. 

Once again politicians cannot agree on the Federal Budget and the government is heading for a shut down in the coming October. Obviously the United States losing the coveted AAA rating and being downgraded to AA+ means nothing to politicians. Government funding shuts down October 1^st and a shutdown will effectively begin at 12.01am. This will have a direct impact on the economy, with the travel sector alone expected to lose USD140 Million per day. Some experts predict that economic growth will reduce by 0.2% every week, and the longer the shutdown goes on, there is a bigger probability of interest rates being impacted. It can only be hoped that the hardliners in the Republican Party can come to an agreement with their democratic counterparties. 

Returning across the Atlantic Ocean in London on 21^st September 2023, the Bank of England finally brought to a halt (albeit temporary), a highly aggressive cycle of interest rate rises, not seen for 30 years due to signs that the economy may be slipping into recession. Ending 14 successive interest rate rises that started in December 2021, (rates were 0.1%), the Bank of England held their key rate steady at 5.25%. It was a close-run vote with four members of the MPC (Monetary Policy Committee) wanting to raise interest rates to 5.5% and five members voting to leave the rate unchanged along with the Governor (Andrew Bailey) who had the casting vote.

However, as inflation remains three times above the Bank of England target of 2%, they signalled that policy would change if inflation did not fall as expected, with the MPC forecasting that the target would be hit in Q2 2025. Governor Bailey said following the decision, inflation had fallen decisively, but they would continue to take decisions to ensure inflation falls to the target figure. Reiterating its former guidance, the MPC said that interest rates would remain restrictive for a sufficiently long period implying in tandem with other central banks that interest rates will remain high for the time being.

Experts such as economists and investors are already betting on interest rates having peaked, with the pound falling against the dollar, its weakest since March 2023 with currency traders slimming down bets on further interest rate rises. During the week 18^th – 22^nd of September 2023, experts announced that sterling traded weaker down 4% against the dollar at USD1.2239 the biggest decline across the Group-of-10 Peers* over a period of one month. 

*Group-of-10 Peers – Not to be confused with the G7 or G20, this group consists of Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom, And the United States, (Switzerland enjoys a minor role within this group). This group of countries have agreed to participate in the General Arrangements to Borrow (GAB), which is a supplementary borrowing arrangement that can be invoked if resources from the IMF are estimated to be below a members’ needs, (e.g., to provide more funds for utilisation by the IMF).

It would appear that interest rates have reached their zenith with the Federal Reserve, the Bank of England and the European Central Bank, but with all three suggesting there may or may not be another interest rate hike, rates will stay high certainly for the time being. The Bank of England appears to be the prime candidate to raise interest rates one more time in 2023, with the Federal Reserve a close second with suggestions they may raise rates one more time.  

Once again, the Democratic and Republican politicians find themselves in a political arm wrestle over the approval of the federal budget as bitter ideological divisions come to the fore. This is not an unknown phenomenon, as this current deadlock has appeared many times in the past. On the previous occasion, the ratings agency Fitch was moved to reduce the United States sovereign credit rating from AAA to AA+, citing financial mismanagement over the debt ceiling and fiscal incompetence over many years.

Congress is expected to vote to pass 12 appropriation bills that will finance government operations for the start of the new financial year at 12.01am on 1^st October 2023, which means the politicians had until midnight on September 30^th to iron out their differences. Currently these bills are caught up in the Republican controlled House of Representatives because of demands for deep spending cuts from right-wing congressional republicans also referred to as the far-right “Freedom Caucus”. The good news is that Congress agreed before the deadline to pass a bill officially called HR 5860 that prevents the government going into shutdown. However, this bill only gives enough money to keep the government open for 47 days and was signed into law by President Joe Biden just before the deadline on September 30^th, 2023.

The Freedom Caucus is also at odds with their majority leader Kevin McCarthy for agreeing spending limits back in May of this year with the Democratic President Joe Biden, which they feel are far too generous and are in urgent need of pruning. In fact, any bill that is presented to the House is simply refuted by the Freedom Caucus, unless the House gives in to their demands. McCarthy has had five months to bring his rebellious right-wing to heel, but as can be seen by actions in the House, he has failed miserably. However, following a far-right Republican rebellion led by Matt Gaetz and seven Republican representatives and a handful of Democrats, a vote to remove speaker McCarthy was successful. The Freedom Caucus had been incensed for months as the speaker had been agreeing with Democratic spending plans and passing bill HR 5680 was the final straw. 

The Republicans have decided to wait until 12^th October 2023 before electing a new speaker, leaving the house rudderless for nearly two weeks, whilst in the meantime the 47 days are counting down to government shutdown. This is exactly the kind of behaviour as cited by the credit rating agencies as to why two out of three have already downgraded the United States’ sovereign credit rating to AA+. However, none of this matters to Congressman Gaetz and his cohorts, who, in their fervour to cut spending, may have single-handedly increased the cost of borrowing for the United States government. 

Previous shutdowns have cost the government literally billions of dollars, as federal workers are sent home as the government grinds to a halt. The misconception is that a shutdown will save taxpayers money, where in reality there is back pay for the thousands of government workers that are sent home, lack of sales from government gift shops and uncollected entrance fees at national parks, to name but a few. The combined cost to the taxpayer for the last three government shutdowns was circa USD4 Billion where some 800,000 federal employees are sent home. In 2019 a report by the Senate Homeland Security and Government Affairs Committee on government shutdowns for 2014, 2018 and 2019 showed that out of circa USD4 Billion, that USD338 Million went on various fees, including administrative work, late fees on interest payments, while USD3.7 Billion was paid in back pay to those workers who were sent home. 

There are many government departments and areas that are affected by a shutdown as listed below.

1. White House

During the last shutdown the Whitehouse furloughed about 60% of their staff within the President’s Executive Office and, whilst the National Security Council continued to run normally, other areas such as the OMB, Office of Management and Budget found themselves working with a skeleton staff.

2. Agriculture

 Rural development, conservation and research programmes would be shut down, and some laboratory services would be closed making the fight against animal disease more difficult.

3. Small Business Support

 Loans for small businesses would halt as the Small Business Administration would stop operations except for those businesses hurt by natural disasters.

4. Labour Market

Investigations into unfair pay practices would halt and safety inspections in the workplace would be severely curtailed.

5. Education

Most Department of Education employees would be sent home for th duration which could mean disruption to student loans and Pell Grants*.

*Pell Grants – these are needed based federal grants/aid for students in post-secondary education or college and differ from student loans as they very rarely have to be repaid.

6. Economic Data

According to the current administration the publication of major US economic data would be suspended, this would include inflation and employment data which is of major importance to investors and policy makers. 

7. Health

The CDC (Centre for Disease Control) would have over 50% of their workforce sent home though many public health activities would suffer though they would continue to monitor disease outbreaks. 

8. Transportation

Contingency plans for a shutdown allows for air traffic controllers to keep working, although history shows absenteeism could be a problem. Experts suggest that the travel sector alone will lose USD140 Million per day.

9. Science

The National Science Foundation, the National Institutes of Health and the NOAA, (The National Oceanographic and Atmospheric Administration) would send home most of their staff curtailing scientific research.

10. Financial Regulation 

Out of its 4,600 staff The Securities and Exchange Commission would send home circa 90% with only a skeleton staff available to deal with emergencies. Furthermore, the CFTC (Commodities and Futures Trading Commission) would also send home most of their staff, thereby halting regulation, enforcement and oversight. 

11. Social Security, Medicare and Other Benefits 

Circa seven million mothers who receive nutritional benefits via the Woman Infants and Children Programme would cease to receive such benefits. The Supplemental Nutrition Assistance Programme would continue to provide food benefits throughout October, but come November distribution could be affected.

12. Disaster Response 

There is the potential for FEMA (The Federal Emergency Management Agency) to run out of funding for long-term recovery projects and disaster relief. 

Experts are also warning that a government shutdown would spook the financial markets with some analysts predicting that economic growth would be reduced by 0.2% for every week it lasted. However, it is important to note that history shows that government shutdowns are only very short-term and investors worrying about economic uncertainty should satisfy themselves that any shutdown will only be temporary.

Another investor worry is how will the US Treasury market (government bonds) fare under a shutdown? Taking a look at the Move Index*, historical data shows market volatility rose by 3.8% during the government shutdown of 1990 and rose by 7.2% during the government shutdown of 1995 – 1996. However, during the shutdowns of 2013 and 2018 – 2019 market volatility fell by 12.6% and 14.8% respectively.

*Move Index – is a market implied measure of bond market volatility. The calculation of implied volatility is based on US Treasury Options utilising a weighted average of option prices on Treasury Futures across multiple maturities being 2,5,10 and 30 years. 

Historically, there has been a negative impact on US stock markets during government shutdowns which should calm any nerves of equity investors. In fact, data shows that the S&P 500 Index gained an average of 4.4% during such shutdowns. Experts suggest that investors should look for bargains in the healthcare and defence sectors, which depend greatly on contracts from the government. Such suggestions are due to the fact that both sectors are currently underperforming in the S&P 500 and buying opportunities may well present themselves in the event of a shutdown. Historical data show that since 1995, during shutdowns the defence sector and the healthcare sector advanced 5.2% and 2.3% respectively, and in the longer term both could benefit from government spending. 

Out of the big three credit rating agencies, Standard and Poor’s*, Moody’s and Fitch, the only credit rating agency that still gives the United States a AAA Sovereign Credit Rating is Moody’s (Aaa equivalent). However, since Fitch downgraded the United States Sovereign Credit Rating from AAA to AA+ (1^st August 2023) due to the debt ceiling crisis, Moody’s have announced that a government shutdown would negatively affect the country’s credit rating. 

In early August 2011, Standard and Poor’s downgraded the United States Sovereign Credit Rating from AAA to AA+ which followed an acrimonious and bitter debate in congress regarding national debt. They went on to say that the budget deal that was brokered between the Republicans and the Democrats did not do enough to address the gloomy outlook for the US finances.

Moody’s analyst William Foster recently advised that current evidence shows political polarisation is making policymaking in Washington DC weaker due to higher interest rates putting pressure on government debt affordability. A government shutdown would further enhance this evidence. Mr Foster went on to say “If there is not an effective fiscal policy response to try and offset those pressures … then the likelihood of that having an increasingly negative impact on the credit profile will be there, and that could lead to a negative outlook, potentially a downgrade at some point, if those pressures are not addressed.

The upshot is that due to the usual political machinations, the United States may well lose their last coveted AAA sovereign rating, (Moody’s Aaa), and the country may perhaps look less creditworthy and could be looking at paying higher interest on their debt. Indeed, updated costs on the shutdown from experts estimate that the cost to the US economy could be in the region of USD6 Billion per week. 

If bill HR 5860 had not been passed, the Federal Reserve would have had to fly blind without any data especially as employment and inflation data is due in early October, data that has an impact on interest rates. Thankfully, the Federal Reserve will receive this data, but once again the elected officials are doing their best to make it difficult for the unelected officials or experts to run the economy of the country, and do not think for one minute that a new Speaker of the House will bring the curtain down on continuing arguments over the federal budget. Matt Gaetz and his pals in the far right Freedom Caucus will continue to fight for spending cuts unless the Democrats at least begin to try and meet some of their demands.

How the paths of geopolitical fortune can change. It was only a few short years ago that some commentators and politicians took the view that the United States was in decline, and it was only a matter of time before China took over as the world’s leading economic power. The current view coming out of Washington and other capitals of the G7 is that they are gaining the upper hand against a weakening China, mostly due to deep-seated economic and structural problems. Experts suggest that flows of economic capital around the world that have been guided by economic narrative for the last twenty years or so are quickly being turned on their head.

Experts are suggesting that the combined wisdom of the G7 see both opportunity and risk as China’s economy begins to slow down and that concern over China’s inevitable rise to power as “The Political and Economic Powerhouse” of the 21^st Century has now turned to concern over a declining China economy and population. Indeed, President Biden at a political rally in Utah earlier this summer, referred to China as a “ticking time bomb in many cases”, because of weak growth and the many different economic challenges it is facing. 

Furthermore, on Tuesday 29^th August whilst travelling on board a high-speed train from Beijing to Shanghai, Gina Raimondo, the Secretary of Commerce for the United States of America, articulated that a number of US companies had advised her that due to increasing risk, China had become increasingly uninvestable. Global investors have been turned off by unpredictable crackdowns in sectors such as education and e-commerce. As a result, a record outflow of foreign net selling of USD 11.4 Billion (Renminbi 82.9 Billion) in Chinese stocks was recorded for the month of August with FDI (Foreign Direct Investment), at its lowest level since 1998, when records first began.

Secretary Raimondo went on to say that China’s policies are giving American firms a different set of challenges as they have charged exorbitant fines without any explanation, sending shockwaves through the American community by revising counterespionage laws and conducting raids on businesses. Furthermore, in May of this year, Chinese authorities in this case their Cybersecurity Administration, barred operators of key and influential domestic infrastructure from purchasing products from Micron, America’s biggest chip maker, citing without any detail that they are a national security risk. This was a strange policy as for China’s chip making industry to be effective and competitive, they need to import tools from the US, Japan and the Netherlands, and there are no credible alternatives in China.

In June of this year Janet Yellen, the United States Treasury Secretary said China is facing a challenge in terms of investment and growth due to their declining population. Secretary Yellen also alluded to soaring youth unemployment and the currently collapsing real estate sector which originally made up about 25% of aggregate demand. Many officials in the United States suggest that China has made a grave error and should have opened their economy more, instead they ignored decades of advice, and they now predict a brake on growth in the coming years. Even Secretary Yellen’s No2 Deputy Secretary Adeyemo recently said, “the Chinese are creating a less favourable environment for FDI and foreign companies. 

China is considered to be the world’s foremost growth driver, and administrators and officials within the G7, are already wondering how their own markets will fare, as the USD18 Trillion market begins to slide south. In fact, recent data released showed that China fell into deflation in July, with factory gate prices seeing an extended decline. Experts suggest that China is entering a period of declining economic growth with wages and consumer prices stagnating. The main gauge of inflation, the CPI (Consumer Price Index), fell by 0.3% in July as confirmed by the NBS (National Bureau of Statistics China), with analysts predicting a year-on-year decline of 0.4%. They confirmed that the data was a strong signal that the economy was weakening, which is a grave concern for eurozone economies and companies as China is a key trading partner.

The US-China Economic and Security Review Commission is a bipartisan panel which is a platform for warning of the consequences of China’s rise to economic and geopolitical power. The commission was created on 30^th October 2000, and was charged with reporting to congress the national security implications of the bilateral trade and economic relationship between the United States and China. On the 21^{st of} August Congress held a review into the commission’s findings on China’s current economy and implications for investors and supply chains. 

Among the speakers was Logan Wright, Director of China Markets Research at the Rhodium Group, who informed the hearing that China’s economic slowdown is structural in nature, saying “Beijing is no longer a current pacing threat or likely to overtake the United States in any significant measure of economic power over the next two decades”, citing issues such as China’s property sector and the local government debt crisis. 

Another speaker was Nicholas Borst, Vice President and Director of China Research at Seafarer Capital Partners, who suggested that three policy mistakes could be attributed to China’s current economic slowdown. He cited “a failure to moderate the real estate deleveraging campaign, a crackdown on the private sector that has damaged business confidence, and a failure to adequately prepare for the post-covid era”. Borst suggested that China will, over the next few years, place its focus on their economic domestic challenges. Given China’s need for on-going and increasing foreign investment, this would consequently place US policymakers in strong negotiating positions. Borst went on to say, “China is still one of America’s most important investment and export markets”. He suggested that in order to directly benefit American firms and boost exports, US policymakers should grab the opportunity and seek greater market access and other reforms. 

Just how long the slowdown in China will take is still unclear because as experts and analysts point out, the country has more than enough financial resources to avoid an out and out financial collapse. Even though Beijing, on an almost daily basis, has been making efforts to support the property sector, and despite recently announced plans to support the Renminbi, officials in Beijing have refrained from an all-out stimulus to the economy. As such, more than one in five people are unemployed, with some estimating that the actual jobless figure is much higher that the 21.3% as shown recently by data released from official sources. 

In recent months America’s economy has moved ahead of China’s economy, opening a substantial gap thanks to a stronger US Dollar, with analysts confirming that this trend is likely to continue. However, cautionary notes from European, American and Japanese officials is that there should be no indulging in triumphalism since concerns arise over the impact on their own companies and the global economy as a whole due to weaker demand from China. 

Sentiment is appearing to shift and is impacting on western governments’ policies, as was shown in August by the much-anticipated limits on outward bound investment in China. These limits released by the Biden administration were narrowly focused and fairly weak, but as a White House source said, the limits were deliberately dumbed down due to China’s own economic strains and hostile policies. Indeed, their own government is succeeding in discouraging any American investment much better than any White House restrictions might achieve.

However, certain officials suggest that within many strategic sectors, China remains a formidable challenge, and that challenge will remain in place for many years to come, suggesting that they will beef-up their own industrial policies whilst buttressing any alternative supply chains. One expert on American US trade with China suggested that China will now get old before it gets rich, but of equal importance is the strength and ability of China’s industrial policy that is trained on certain strategic industries, such as the electric car sector. Faced with all the negative economic factors and China’s slowing economy, America should not get overconfident as China still remains a formidable economic rival.

This is exemplified by China’s deepening links to countries in the Middle east and Global South, where an increasing number of countries are showing interest in joining the BRICS* group, further illustrating China’s increasing influence in emerging markets. However, China’s de facto leadership of BRICS is built on its own economic rise and growth, and that particular model is certainly looking somewhat patchy. With China’s economy slowing down there will be less demand for imports such as commodities, which may result in countries such as those found in Africa.

*BRICS – is a grouping of Countries of Brazil, Russia, India, China and South Africa formed in 2010 by the addition of South Africa to the predecessor BRIC. The common goal is to deepen cooperation between member countries, and to stand in contrast to the western sphere of power. The countries that were invited to join BRICS in 2023 are Argentina, Egypt, Ethiopia, Iran, United Arab Emirates and Saudi Arabia. Recent developments hint at a new currency backed by gold. 

This will also impact China’s ability as an economic partner with richer countries such as the G7 who US officials are trying to encourage to reduce economic ties with China. There is plenty of evidence to support the US officials, in fact on 28^th August, whilst addressing the Centre for Strategic and International Studies in Washington, the German Ambassador said Chinese markets are not as promising as they once were. He went on to say that the Chinese economy is not growing at rates it previously used to grow, and reports from Germany suggest they are currently making efforts to diversify away its economic relationships with China. However, a number of analysts suggest that they cannot really move away from ties with China especially if they wish to remain an export nation. 

Meanwhile in Italy, due to be unveiled in October a new foreign policy will be directed at increasing energy flows from the continent to Europe, which can only benefit Italy thanks to Russia’s war with Ukraine and China’s economic slowdown. Furthermore, the government recently passed a Golden Share law, allowing the government special powers within the strategic sectors to block transfer of technology abroad, (which is basically seen as to limit transfers to China) in areas such as semiconductors, energy and artificial intelligence. Also, the Prime Minister Giorgia Meloni has indicated to Beijing that she intends to withdraw Italy from the investment pact (which has partially strained relations with America) the Belt and Road Initiative* which was signed in 2019.

*The Belt and Road Initiative – also known within China as the One Belt One Road or OBOR/1BR for short. It represents a global infrastructure development strategy adopted by the Chinese government in 2013 to invest in more than 150 countries and organisations. There are currently 154 member countries ranging from Afghanistan and Algeria, to Bahrain and Barbados, to Saudi Arabia and Singapore, and to Turkey and the United Arab Emirates.

In Great Britain the authorities are somewhat sitting on the fence as they tread the fine line of treating Beijing as a national security risk and an important economic partner. The slowdown in China’s economy is welcomed not for any geopolitical reasons, but for the fact it will help bring down inflation which is currently the highest within the G7 group. 

Finally, in the capitals of the G7 countries it is reported that officials worry whether or not China’s economic travails will lead to them being more accommodating or more belligerent/ combative. There are of course two separate views on which way China may choose to go. One view is that a stagnant or receding economy will push Beijing into more aggressive moves on the geopolitical stage, while others suggest that they will concentrate on domestic matters rather than the global geopolitical stage. One think tank has even suggested a de-escalation on competition between the United States and China particularly in respect to the rest of the world. 

Whatever happens China will still remain a serious global force and competitor within the global economy, and despite problems at home their defence and military expenditure continues to increase. They enjoy global diplomacy on a par with their western counterparts and in some cases stronger relations, and they are according to a number of experts party to economic transactions and arrangements that America is not. So, hawks beware, write China off at your peril. Despite big economic problems at home, they are still a major force in global geopolitics and will be for some time to come.

Despite conflicting views from various experts and analysts, signals coming from the Federal Reserve suggest that officials are optimistic of avoiding a recession. Such is their optimism, there is a feeling that they can win the war with inflation without inflicting too much pain on the economy. Even though the Federal Reserve is committed to returning inflation to 2%, it appears that officials do not want to miss the opportunity of a “Soft Landing” by raising interest rates even higher. One expert pronounced the Federal Reserve when battling inflation tends to overtighten straight into a recession, and policymakers are determined to avoid this mistake this time round.

Bearing this in mind, experts suggest the Federal Reserve will now hold interest rates at the next meeting slated for later this month on the 19^th/20^th September. However, the common consensus is they may well increase them one more time if the officials feel one more hike in interest rates will finally put to bed the war with inflation.

The Federal Reserve, and indeed their Chairman Jerome Powell, have been on the wrong end of criticism suggesting that they, (along with the Bank of England) acted too late to fight rising prices. If indeed the Federal Reserve can restore price stability after an electrifying increase in inflation, without the economy going into recession, this would be a standout and even rare achievement in modern day policy decisions. 

The FOMC (Federal Open Market Committee), has raised interest rates eleven times since March 2022, and currently sit at their highest level of 5.5%, which is their highest level since 2021. Chairman Powell has been at pains to emphasise that the aggressive interest rate hikes are reaching the end of their cycle, and that economic data will decide whether or not there will be any more rate hikes.Despite the signals coming out of the Federal Reserve there are some experts who expect the hawks to keep a bias to keeping interest rates high as some of those who make policy have been let down by false dawns due to disinflation and are therefore mindful of confirming an end to interest rate hikes and quantitative tightening. Officials at the Federal reserve will see one more key data on inflation before their next meeting. Experts suggest that the FOMC will pass on a rate hike this month but are suggesting it is 50/50 as to whether or not interest rates are raised by a ¼ of 1% at the next meeting on October 31^st – November 1^st.

After a run of 2 defeats our congratulations go to Farsley as they bounced back with an away win at Gloucester City. Although Gloucester had a number of chances in the first half, the Celts defended extremely well and scored a goal on the counterattack to lead one nil as the referee blew for the end of the first half. Although Gloucester changed their formation from 433 to 422 for the second half, the Celts goalkeeper made some notable saves helping the team to run out one nil winners. This leaves the Celts in 13^th place but only 4 points off the leaders, in what is turning out to be a very tight division. Our congratulations once again go to the team and the staff, and we look forward to a win in the FA Cup qualifier this Saturday when the Celts play Scarborough Athletic.

The will they won’t they debate rages on as to whether or not the European Central Bank will raise interest rates by 25 basis points at their next meeting on 14th September. Experts suggest that recent data released shows Germany’s inflation slowing at a less than expected rate, as inflation in Spain increased. Whilst inflation remains low in Spain, it quickened again in August where consumer prices rose by 0.3% from July to 2.4% with analysts advising that the increase was driven by fuel costs.

Furthermore, recent figures released showed inflation accelerating in France rising by 5.4% from August 2022, with analysts advising the increase in the eurozone’s second largest economy was due to the cost of energy. Figures released today for August, for the eurozone which encompasses 20 countries confirmed overall inflation remained at 5.3% defying expectations that there would be a drop to 5.1%.

This has left the markets with a conundrum as to whether or not the ECB will raise interest rates again. However, with the latest data emerging from France, Spain, Germany and the rest of the eurozone, the markets appear to be leaning towards a hike in interest rates. The feeling is that if there is any evidence of strong consumer price growth, the ECB may well err on the side of caution and raise interest rates, especially if there are signs that any underlying pressures remain doggedly high.

There are growing signs that the bloc itself is heading for an economic downturn, however many investors feel that the price data will be enough to tip the balance in favour of the hawks whereby the ECB will raise interest rates for a 10th consecutive time on September 14th.  However, the doves on the ECB’s governing council will argue for at least a pause due to a rapidly deteriorating economic background across the eurozone.

Meanwhile, many economists are split on the subject of a rate hike. Some favour no rise saying that the upward pressure on underlying prices has continued to ease thereby negating a decision by the ECB to hike interest rates. Opposing opinions suggest that the latest inflation figures will probably ensure one more rate hike. Whichever way it goes, Christine Lagarde the president of the ECB is playing her cards close to her chest and has yet to give any indication as to where the cards will fall.

The City of London, The Square Mile or the affectionate term which has been used since the 1950’s “The City”, has, since Brexit, come under considerable pressure from Paris, as the financial centre of Europe. Sadly, the Brexit deal was bereft of any financial services agreements, and considering the city was earning 10% of GDP and provided 11.5% of tax receipts, this has been an unmitigated disaster both for the City itself and the British economy. 

An Exodus

It is estimated that in excess of 7,500 personnel and £1.1 trillion in assets had already fled the City to the European Union prior to the Brexit agreement. Back in November 2022, Bloomberg’s released figures showing that in US Dollar terms primary listings in Paris overtook London, and to add insult to injury, Paris is now home to Europe’s largest stock market by value. 

Even Wall Street is benefiting from the demise of the City as ARM, the titan of the UK’s Tech Sector announced it would do its IPO in New York, whilst CRH (the world’s biggest materials supplier), announced it would move its primary listing to the USA. This in itself is an indictment on the City, and further bad news may be lurking on the horizon with rumours that the City’s largest listed company Shell, may be considering upping sticks and moving to another jurisdiction.

As far as the City is concerned there was no Brexit deal. The City has already lost in excess of €6 billion to Paris and Amsterdam in euro trading revenues, and staff have been repositioned in various centres of Europe, with Paris being the major beneficiary. Even before Brexit, many of the big city firms anticipated that the City would be bereft of a Brexit deal, and as such companies such as Bank of America are now headquartered in Dublin, and in Paris they have opened a trading floor with a capacity for 1,000 traders and back-up staff.

The Post-Brexit Landscape

As of Q2 2023, the financial landscape post-Brexit had changed dramatically with a clear shift being seen across the English Channel, especially from the big Wall Street companies with the spoils being split amongst various EU cities, of which the lion’s share has gone to Paris. For example, Goldman Sachs co-head in Paris confirmed that Paris is their largest trading hub in Europe, with their staff at the global markets team more than doubling in the last two years. The staff at Bank of America Paris has increased by 600% since the 2016 Brexit vote, whilst JPMorgan Chase has increased their staff more than 20-fold since 2019. Currently Citigroup is building a new trading floor and even hedge funds have increased their staff, such as Millennium Management who circa doubled their employees in the last year.

The ‘ Edinburgh Reforms’

The UK government is so alarmed they have put in place the “Edinburgh Reforms”, which is, for the first time in twenty years, a major revamping of Britain’s financial services spanning insurance, asset management, capital markets and banking. This, they hope, will stop the haemorrhaging, and hopefully from a capital markets standpoint, the City will be able to provide a first-class and best possible funding environment for both global and UK companies.

However, all is not lost for the City, as over USD 3.8 trillion of foreign exchange trades (forex) are transacted in London, which is more than the combined forex trades of Tokyo, Hong Kong, Singapore and New York. Furthermore, according to the London Stock Exchange, 70% of global secondary bond market trading takes place in the City. The City, unbeknownst to many, is also the third largest fintech hub in the world. 

Conclusion

With regard to European finance, the City and London in general still remains the big fish in a big pond with their headcount still way above what the rest of Europe has to offer. It is still much bigger in terms of volume of business and assets, but since Brexit their status has been somewhat eroded. In essence, some of the companies who would use the City as the “default location” to obtain capital from the bond and stock markets are now looking elsewhere. 

The lack of access to EU markets and clients will continue to hamper the city for years to come and it is hoped that the City will be able to reverse the outflow of traders to Europe, otherwise their standing in the global financial markets will continue to diminish.

Farsley Celtic were looking to bounce back from an away loss to Chester last Monday, but in the end managed a hard-fought draw against Kings Lynn Town. The Celts certainly had the better of the first half, but in the second half Kings Lynn defended their box with great determination. This result leaves the Celts in 11^th place in the league, but only 5 points off the leaders Brackley Town. There is still a long way to go until the end of the season and we at IntaCapital Swiss guarantee our continued support and look forward to the team climbing back up the league.

On Tuesday 15^th August Farsley achieved a notable draw with a penalty goal in the dying moments of their home game against newly promoted South Shields. They had a number of near misses during the game but Farsley’s fighting spirit saw them through to a draw.

Moving forward to Saturday 19^th after a four-hour plus coach trip to Bishops Stortford, Farsley produced an excellent goal on the half hour, which allowed the visitors to walk away with all three points.Farsley remain unbeaten this season and their impressive start leaves them in 6^th place on 8 points, 2 points off leaders Scunthorpe United. Our congratulations once again go to the team and their management for an impressive start to the season.