Attacks on merchant shipping expand deep into Indian Ocean

Happy Friday everyone! Today our colleagues at the CSIS Scholl Chair for International Business launched an insightful report examining how U.S. economic, trade, and technologies policies can undermine its national security goals. We highly recommend giving it a read. On to the update! 

State of the Global Economy 

Among China’s myriad of economic issues is a slump in consumer spending. Chinese consumers already tend to save more than the global average, which was heightened when the COVID-19 pandemic and a real estate crisis knocked Chinese consumer confidence to an all-time low. To reverse this trend, China has gotten creative. On Wednesday the people of China celebrated Labor Day, but instead of only getting the usual one day off, the government created a 5-day weekend to boost travel and spending (to offset this, it turned Sunday April 28 and Saturday May 11 into working days). We’ll know the results of this experiment over the coming weeks, but, in the meantime, economic news out of China was slow given the long holiday. In one notable development, China’s purchasing managers index showed an expansion in the manufacturing sector for a second straight month in April, albeit at a slower rate than in March. 

In the United States, the Federal Reserve held interest rates steady on Wednesday, as inflation stagnates above the central bank’s 2% target. The personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, registered an annual price increase of 2.7% in March, up from 2.5% in February, while core PCE, which strips out the more volatile food and energy prices, remained level at 2.8%. First quarter GDP, meanwhile, came in at 1.6%, a notable drop from the 3.4% growth in the last quarter of 2023 and well below analyst expectations of 2.5%. An underwhelming growth figure would typically boost hopes that the Fed will lower interest rates, but continued inflationary pressures complicated that outlook. Fed Chair Jerome Powell indicated that rates may remain high for longer than expected given the stubborn inflation. 

In contrast to the sticky inflation in the United States, inflation in the Eurozone continues to cool. The consumer price index (CPI) registered an annual price increase of 2.4% in April, level with the previous month, while core CPI fell to 2.7% from 2.9% in March. Still, despite the diminishing inflation, concerns remain that bringing inflation down the “last mile” to the European Central Bank’s 2% target will prove challenging, while high inflation in the United States may dissuade central banks worldwide from cutting interest rates prematurely. At the same time, Eurozone GDP grew at a quarterly pace of 0.3% in the first quarter of the year after contracting 0.1% in the 3rd and 4th quarters of 2023. Somewhat surprisingly, this growth has largely been powered by southern European states such Greece, Spain, and Portugal. After years of painful austerity programs to manage debt, many of these nations made structural changes to attract investors and revive growth that are now paying dividends. 

Around the World 

Yemen-based Houthis attack merchant vessel deep in Indian Ocean, threatening further disruptions to global trade: Attacks on merchant shipping in the Red Sea has prompted many shipping companies to avoid the critical waterway altogether, adding weeks to their journey and raising costs. But despite the new shipping routes, it appears many of these vessels are not as safe as they believed. Last week, the Portuguese-flagged MSC Orion was attacked by a drone 375-miles off the Yemeni coast, expanding the area under threat to a large swath of the northwest Indian Ocean. The consequences of this specific attack will become more apparent in the coming weeks as shipping companies assess the threat. Meanwhile, the Houthi-caused disturbance to global trade continues to have both regional and global implications. Revenue for the Suez Canal has fallen by half, further pressuring Egypt’s already distressed economy, while JP Morgan estimates that the trade disruptions could add 0.7% to global goods inflation over the first half of 2024. 

Surge in global semiconductor demand boosts Taiwan’s economy: The semiconductor industry is notoriously cyclical, with periods of high demand followed by periods of low demand. While 2023 was a downturn in the cycle—global demand for semiconductors fell 8% from the year before—2024 appears to be a boom. The Semiconductor Industry Association forecasts a 13.1% jump in global chip sales this year, and sales in January and February increased 15% year-over-year. The upturn is greatly benefiting Taiwan, perhaps the most important cog in the global semiconductor supply chain. The island’s GDP expanded 6.5% in the first quarter from a year earlier, the strongest growth since the second quarter of 2021. Taiwan produces over half of the world’s semiconductors, including 90% of the most advanced semiconductors. While a boon right now, Taiwan’s economic reliance on semiconductors, which account for 40% of the island’s exports, is a point of concern for its leaders who seek to diversify its economy.  

Secretary of State Blinken visits China as the two nations search for common ground amid rising tensions: U.S. Secretary of State Anthony Blinken met with Chinese President Xi Jinping in Beijing last week as points of contention between the world’s two largest economies compound. Due to domestic economic issues such as a property sector crisis and low consumer spending, China has been relying extensively on manufacturing and exports to maintain economic growth. But the influx of cheap Chinese goods has become a concern in many foreign capitals, including Washington. At the same time, last week President Biden signed a bill forcing Chinese tech company ByteDance to divest TikTok’s U.S. operations in the next year else face a ban, while the administration could also tighten technology export controls and tariffs on China—denounced by Beijing as unfair treatment. On Wednesday, the United States also announced sanctions on a dozen Chinese companies for supporting Russia’s war effort in Ukraine. While last year’s summit in San Francisco and recent official trips may facilitate communication and small bilateral initiatives, the main issues at the heart of the U.S.-China relationship are far from resolved. 

As nations compete for foreign investment, a corruption crackdown in Vietnam dulls its appeal as an alternative to China: As tensions rise between the United States and China, many nations are marketing themselves as a stable alternative to China for international investment. Vietnam has been quite successful in this. Per the nation’s General Statistics Office, Vietnam attracted a record $36.6 billion in foreign direct investment in 2023, a 32% increase from the year before. And it wants more. The rapidly growing southeast Asian nation is deploying incentives to draw high-tech firms, while increasing diplomatic and economic ties with both the United States and China. But domestic issues dampen investor’s zeal. A decade-long corruption crackdown intended to attract foreign investment may in fact be dissuading it, as investors grow concerned that the campaign is being used to silence political rivals. Thousands of party officials have been sentenced to prison, two presidents have resigned with rumored ties to corruption scandals, and a property-tycoon was sentenced to death for embezzling more than $12 billion from the state. Many firms are glad the government is cracking down on corruption, but its tactics have instilled great fear in the civil service required to run the country. Government officials are reluctant to approve new projects for fear of graft investigations, resulting in what some describe as “bureaucratic paralysis.”  

United States approves $95 billion aid package for key allies around the world: When it comes to geoeconomic tactics, much attention is focused on the sticks used to suppress or coerce opponents, such as export controls, sanctions, and tariffs. But equally important are the carrots used to support allies and incentivize desired behavior. Foreign aid is one such carrot that is employed extensively—in 2023, nations distributed over $223 billion in foreign aid. The United States has long been the world’s largest provider of foreign aid, a tradition that continued last week. After months of stalling in congress, the United States approved several massive aid packages for key allies, including $60 billion for Ukraine, $15 billion for Israel, and $8 billion for Taiwan and other Indo-Pacific allies. The bills also include $9 billion in global humanitarian aid, including for civilians in Gaza. While much of the aid will replenish standard munitions and supplies, significant portions will go towards cutting-edge military tech, such as ATACMS long-range ballistic missiles for Ukraine, replenishing Israel’s Iron Dome defense system, and nuclear submarines for Taiwan. 

What we’re watching 

• May 29 – South Africans head to the polls on the 30th anniversary of their nation’s first democratic elections. The ANC, Nelson Mandela’s party and the winner of every national election, is under more pressure than ever before as the economy becomes a central issue in the BRICS member nation. By one measure, the World Bank has ranked South Africa as the most unequal country in the world. 

• June 11 – The U.S. Federal Reserve meets to decide on interest rates. 

• June 13 – 50th G7 Summit in Fasano, Italy.