To begin this week’s newsletter, we look at the results of recent elections in Mexico, South Africa, and India, and look ahead to the upcoming election in the US. Then, we examine the signals of a potential slowdown in the US economy alongside currencies that are weakening against the dollar. We then move to a discussion of a potential invasion of Taiwan by China in the light of Beijing’s economic strategy. To end this week, we examine the looming challenges that Europe will have to face, focusing particularly on the cases of France and the UK.

Global Elections Increase Investor Skepticism

Mexico fought for democracy. Could it slide back to a one-party state?

Mary Beth Sheridan, New York Times

A shock election result in India humbles Narendra Modi

The Economist

The era of ANC dominance in South Africa is over

David Pilling, Financial Times

America’s Coming Age of Instability

Steve Levitsky and Lucan Way, Foreign Affairs

Mexico’s recent presidential election brought the country’s first female president, Claudia Sheinbaum, to power and consolidated MORENA as Mexico’s dominant political party, signifying a shift towards the potential reemergence of a one-party state and raising concerns about the erosion of democratic institutions. With MORENA now controlling both the executive and legislative branches, there are fears of decreased checks and balances that could result in the potential capture of the judiciary branch and constitutional amendments. These potential outcomes could have profound economic implications, as investors grow wary of a less stable political environment, leading to decreased foreign investment, economic uncertainty, and drops in the Mexican peso’s value. Sheinbaum will immediately have to address a fiscal deficit that widened from 2% of GDP at the beginning of Andrés Manuel López Obrador’s presidency to the current 6% of GDP, while economic growth is expected to slow from 2.4% presently to 1.5% next year. In South Africa, the African National Congress (ANC) has lost its majority for the first time since Apartheid ended, obtaining only 42.9% of the vote. Economic stagnation, high unemployment, and rampant corruption were the main drivers of the disappointing results for the ANC. The party will now have to form a coalition government either with centrist-to-right wing parties that would be favorable for markets or with leftist parties that campaigned on land and wealth redistribution policies that will almost certainly negatively impact the investment climate.

Meanwhile, in India, Narendra Modi’s Bharatiya Janata Party (BJP) suffered a surprising setback in the recent national elections, signaling a significant shift in the country’s political landscape. Before the election, Modi had claimed that the BJP and its allies would win over 400 legislative seats, but official results show that they only won 292 seats out of the 543 up for grabs. This result potentially weakens Modi’s grip on power, likely forcing him to make decisions multilaterally with alliance partners versus his favored unilateral style. Economically, the unexpected electoral outcome may introduce uncertainties for investors, especially regarding the implementation of key economic reforms and infrastructure projects. Additionally, the newfound political balance could lead to more cautious decision-making, impacting India’s ability to navigate global economic challenges effectively. Modi may also revert to social spending to alleviate some of the economic concerns of poorer Indians—a voting block from which BJP lost support in this election. Looking forward to the US elections, uncertainties abound. Some academics have sounded the alarm bell over what they perceive as an increasingly authoritarian Republican party that would be unwilling to limit the autocratic tendencies of a potential second Trump administration. According to Steve Levitsky and Lucan Way, they believe this could lead to a period of instability in the United States in which constitutional crises and increasing political violence could take place.

Slowing US Economy and Weakening Currencies Abroad

Key Engines of US Consumer Spending Are Losing Steam All at Once 

Augusta Saraiva, Bloomberg

There is currency stress on the horizon 

Gillian Tett, Financial Times

American consumers, who have been keeping the US economy flying high, seem to finally be hitting a rough patch. Incomes haven’t grown much recently, and the savings built up during the pandemic are mostly gone. This means people are increasingly relying on credit cards to maintain their spending habits. As a result, spending on things like cars, restaurants, and entertainment has dropped in recent months. This slowdown coincides with a cooling job market, where wage growth is slowing and companies are noticing a shift towards cheaper brands. Economists predict this trend will continue as people have less income and more debt, leading to more cautious spending. This data signals that the US economy may be slowing down after a strong 2023. This slowdown in spending is likely good news for the Federal Reserve, as lower consumer demand should help bring down inflation. However, there are concerns about how long this economic slowdown can be sustained without tipping into recession. The Fed will be closely watching upcoming jobs data to see how the labor market is faring.

Meanwhile, there are worries about currency instability as the Japanese yen and Chinese renminbi have both weakened significantly. The yen’s drop to a multi-decade low against the US dollar sparked intervention from Japanese authorities. Meanwhile, China seems determined to prevent the renminbi from further depreciation, fearing capital flight. This is a shift from 2015 when China devalued its currency, and it highlights the potential for future “currency wars” as central banks around the world take diverging approaches. One concern is China’s ambition to challenge the US dollar’s dominance. While the renminbi has gained some ground against other Asian currencies, it’s still not widely used in international trade. Chinese companies themselves are hesitant due to a complex regulatory environment and a lack of hedging tools. Despite these hurdles, some countries are already looking to reduce their reliance on the dollar. This, along with rising protectionist trade policies, creates a tense atmosphere in the global financial system. The takeaway for investors? Don’t be lulled by the recent calm. The tectonic plates of the global economy are shifting, and we could be in for a period of disruptive currency fluctuations.

Chinese Aggression and Overproduction Increases Tensions with the West

China’s drills appear to be ‘rehearsal’ for Taiwan invasion: U.S. admiral – Nikkei Asia 

Ryo Nakamura and Rintaro Tobita, Nikkei

China’s economic model retains a dangerous allure 

The Economist

China’s underutilized factories fan export dump fears in U.S. and Europe – Nikkei Asia 

 Cissy Zhou, Nikkei

The escalating tension between the US and China over Taiwan, highlighted by recent Chinese military drills interpreted by US INDOPACOM Commander Samuel Paparo as potential rehearsals for an invasion, carries significant geopolitical implications. The possibility of military conflict in the Taiwan Strait could trigger a broader regional crisis, drawing in other major powers and disrupting global trade routes. Such escalation may lead to heightened militarization in the Asia-Pacific region, prompting neighboring countries to reassess their security strategies and potentially align more closely with either the US or China, further exacerbating existing geopolitical rivalries. The US is likely to continue supporting Taiwan in building up its military capacity while enhancing security partnerships in the region, particularly with Japan, in a strategy labeled as integrated deterrence, according to Paparo.

On the economic front, China’s ongoing reliance on its state-led economic model poses a challenge to global economic stability. Despite concerns about its sustainability and the potential for market distortions, this model retains a dangerous allure, particularly for emerging economies seeking rapid development but not democratization. Meanwhile, China’s surplus production capacity and the potential for export dumping raise alarms in the US and Europe, where fears of unfair competition and trade imbalances persist. For instance, with 77 car manufacturers and 129 vehicle brands, China’s domestic market is oversaturated, according to experts. These concerns have already led to increased protectionist measures by the Biden administration, fearing the influx of cheap subsidized Chinese goods that could outcompete domestic producers, while the EU is expected to conclude an anti-subsidy investigation into Chinese exports, likely resulting in increased tariffs. Such developments strain already tense economic relations between China and the West, with potential ripple effects across global markets. To address Western concerns, Beijing could consider curbing production, increasing imports of European goods, urging companies to ease up on price wars, or relocating production abroad. However, these actions may negatively impact the Communist Party’s popularity, especially as it aims to enhance economic opportunities for younger Chinese. Some experts suggest that the government should raise wages in China to stimulate domestic consumer spending, thus absorbing excess production, but caution that this would be a challenging and long-term endeavor.

European Economic Clouds on the Horizon

Another Lost Decade Looms for the Old Continent 

Lionel Laurent, Bloomberg

France’s bad grade from Standard & Poor’s shakes its economic credibility 

Le Monde

Can Britain’s economy grow as fast as it needs to? 

The Economist

Europe faces an uneasy economic situation. While it has mostly avoided recession, it struggles to regain momentum due to stretched public finances. The lingering effects of an inflation shock have strained the social contract. Geopolitical risks loom large, with economic pressures from the US and China and ongoing conflict in Ukraine. Voters now prioritize supporting the economy and job creation over climate change, likely due to the energy crisis impacting living standards, according to polls. Europe still boasts strengths, including major global companies, higher life expectancy, and lower income inequality compared to the US. However, achieving stability and cohesion requires addressing growth challenges. Despite state support, GDP remains only slightly above pre-pandemic levels, and private consumption is stagnant. Experts push for the EU to reduce dependencies in energy, tech, and defense. Pushing for European integration amidst conflicting agendas is a challenge, but investing in defense and security could be a pragmatic step.

Two countries, France and the UK, exemplify the worrying trends on the old continent. Recently, S&P downgraded France’s sovereign credit rating from AA to AA- due to a chaotic budgetary situation: The French government overestimated 2023 tax revenues by €21 billion due to a misjudgment of the country’s growth slowdown. As a result, the deficit ballooned beyond expectations. Facing pressure, the government announced €20 billion in savings without providing detailed plans. S&P expressed concern about France’s rising debt-to-GDP ratio, which stands at over €3,100 billion. The downgrade’s impact is likely to be felt politically, affecting the government’s credibility and weakening President Emmanuel Macron’s leadership claims. Meanwhile, across the Channel, the UK’s upcoming election highlights the country’s lackluster growth record. Conservative Prime Minister Rishi Sunak emphasizes that the economy is at a turning point and urges voters to “stick with the plan.” Labour, poised to win a significant majority, explicitly prioritizes economic growth. It recognizes that sustained growth is essential for improving living standards. Both Labour and the Tories have ruled out major tax increases and changes to borrowing rules. Instead, they rely on growth to fund public services. However, Britain faces challenges. Productivity growth declined after the financial crisis, especially in comparison to other wealthy nations. Housing shortages and poor infrastructure hinder growth. Brexit also impacted the economy, reducing its potential size. While some improvements are plausible, Labour’s ability to deepen ties with Europe may be the key to transforming growth prospects. Other proposals, such as enhancing workers’ rights or heavy industrial spending, may have limited impact or even prove detrimental to Labour’s goal of growth.