As we approach the fourth quarter, we begin this week’s newsletter by looking at the global economic outlook and assessing the current year’s emerging winners and losers in economic growth. Next, we assess the West’s relationship with India amidst its recent diplomatic fallout with Canada. Across the developing world, there is a debt crisis that demands the attention of major lenders, including, and perhaps most importantly, China. To end, we continue to dive into the changing relationship and economic competition between Europe and China.

McKinsey’s Global Economics Intelligence, August 2023

McKinsey & Company



While the US is still experiencing better-than-expected economic activity, Europe is still facing persistent inflation and choppy growth. China’s growth continues slowing down while emerging market economies like Brazil and India are seeing good growth. The US in particular is seeing good equity market performance, increasing consumer confidence, and mostly-steady inflation. In the Eurozone, however, countries like France and Spain grew around 0.5% in the second quarter, while Germany stagnated and Italy contracted by 0.3%, propelling fears of recession across the bloc. China, for its part, faces troubling numbers: industrial output growth fell from 4.4% in June to 3.7%, and investments in real estate fell even further from the contraction of -8.8% in April to -9.6% in July. On the other hand, India and Brazil are emerging as economic winners this year. India, on the other hand, saw its Purchasing Managers’ Indexes (PMI) for the services and manufacturing sectors rise to a 13-year high of 62.3, which signals the strength of the country’s economy. In South America, Brazil’s consumer confidence rose from 92.3 in June to 94.8 in July, the highest since January 2019. This is likely a result of public perception of a rosy outlook towards Brazil’s economy and the public’s own financial situation.

The west’s Modi problem

John Reed, Demetri Sevastopulo, & Jaren Kerr, Financial Times

The Nijjar affair, which has created a diplomatic rift between Canada and India over the killing of a Sikh separatist in Canada, has once again shined a spotlight on the incongruencies between the West and Narendra Modi’s government in India. The dispute could not have come at a worse time, as Western states actively seek to court India to pull it in as an important partner in balancing against a rising China. Whether it be the US, UK, France, or Australia, all have actively engaged India to bring the country into a tighter alliance with the West. Yet the Modi government, which has been accused by critics both within India and beyond of stoking sectarianism and undermining Indian secular values, has put all such efforts in a bind as both he and the West grapple with the diplomatic fallout of the accusations that Indian agents were involved in the assassination of Hardeep Singh Nijjar. Should evidence emerge that supports Canada’s accusations, Washington especially will be faced with balancing the relationship with its neighbor and its rising Indo-Pacific ally.

The Coming Debt Crisis in the Developing World

The Great Debt Conundrum

Anne O. Krueger, Project Syndicate

Crisis and Bailout: The Tortuous Cycle Stalking Nations in Debt

Patricia Cohen, The New York Times

A Tragedy Is Unfolding in the Poorest Countries

Indermit Gill & M. Ayhan Kose, Project Syndicate

While foreign lending has been critical for the development of poor countries, it may also be connected to development’s greatest unfolding disaster. When these debts accumulate without the countries being able to keep up in repayment capacity – such as what occurred during the surge of borrowing during the COVID pandemic – a dangerous environment emerges. Ghana, for example, defaulted on billions of dollars in December. As leaders become unable, either economically or politically, to repay these debts, they are cut off from credit markets. Economic malaise deepens in these countries, ensuring social and political unrest that could give rise to crises.

International institutions, like the International Monetary Fund (IMF), must address the gathering storm. Traditionally, the IMF and the Paris Club, a group of sovereign creditors, consult with the debtor countries and private lenders to assess a restructuring. However, today’s landscape is different; China, which has refused to join the Paris Club, has become a major lender to developing countries. Indebted countries in default have suffered delays in their debt negotiations because China wishes to be repaid in full instead of agreeing to the marked-down terms of the Paris Club. Due to its new, prominent role as a debt lender, these institutions must find a way to incorporate China and prevent a domino effect of debt crises across the developing world.

Changing Economics Between the EU and China

Macron Is Pushing Europe Into $900 Billion Fight With China

William Horobin & Ania Nussbaum, Bloomberg

Teetering China Property Giants Undercut Xi’s Revival Push

Bloomberg news, Bloomberg

The European Union (EU) has begun taking a tougher approach towards Chinese electric vehicle imports so as to protect European industry from subsidized Chinese imports. The move contradicts the EU’s historic policy of free trade and is in response to French concerns that subsidized electric vehicles from China are rendering European electric vehicle manufacturing non-competitive. While the EU, at present, is packaging its new approach as an attempt at seeking fairness in the market, the action nonetheless comes amidst a backdrop of increasingly protectionist industrial policies in both the US and China that seek to improve domestic manufacturing competitiveness, in contravention of free market principles.

While any tariffs that the EU could levy may be responded to by China across a spectrum of business activities, the EU’s new approach comes at a time when China’s property sector is showing more and more signs of problems. For starters, Evergrande Group has stated its intent to revisit its debt restructuring. Beyond Evergrande, China Oceanwide Holdings Ltd. is facing liquidation, while Country Garden Holdings Co. is attempting to avoid a default. The larger developers reflect a general problem in the market, as consumers have become concerned over unfinished apartments, falling property values, high unemployment, and dwindling incomes. The net result is that consumers are not buying and developers are becoming increasingly distressed. And while some local authorities have stepped in to deal with the issue, China’s property sector woes portend to a weakened economic hand overall.