A glimmer of hope for the global economy

This is an audio transcript of the FT News Briefing podcast episode: ‘A glimmer of hope for the global economy’

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, July 26th, and this is your FT News Briefing.

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Investors gave Alphabet’s earnings report an A-plus. The state of the global economy is better than expected. And a southern California lender is set to merge with the troubled PacWest Bank. Plus, the Israeli parliament is trying to reshape the country’s democracy. Businesses there are pushing back. I’m Marc Filippino, and here’s the news you need to start your day.

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Google’s parent company, Alphabet, smoked Wall Street expectations in its earnings report yesterday. It said revenues hit about $74.5bn. That’s nearly $4bn more than the estimates. Revenue from Google Cloud, Google Ads and YouTube ads all beat forecasts. Investors ate all this up. Alphabet’s share price was up over 6 per cent after the bell. But Alphabet’s artificial intelligence rival, Microsoft, did not dazzle markets even though it beat Wall Street’s revenue expectations. Microsoft’s cloud service, Azure, which has been a big moneymaker for the company, saw growth slow last quarter.

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The future of the global economy is looking a little brighter than it did a few months ago. That’s what the International Monetary Fund said when it released a new forecast yesterday. The FT’s Colby Smith spoke to IMF chief economist Pierre-Olivier Gourinchas. Colby says he told her . . . 

Colby Smith
. . . the economy more broadly has shown a resilience that I think was unexpected, at least in the first half or so of this year. So consumer spending has held up. You’ve seen labour markets around the world are still quite stable. And at the same time, we’ve seen inflation come down to a certain extent.

Marc Filippino
But Colby says economists aren’t breathing a sigh of relief.

Colby Smith
The economy and policymakers are not out of the woods yet. That’s what the chief economist told me. He was quick to kinda point out that there’s still a number of concerns on the horizon. And I think the biggest problem that’s still hobbling policymakers is the fact that although we’ve seen declines in the headline rates of inflation core measures, which really measures kind of like underlying price pressures in the economy, those remains stubbornly high. And one of the kind of key stats that I think we heard from the Fund is that, you know, inflation is set to remain above target in 89 per cent of economies who have inflation targets next year.

Marc Filippino
Plus, Colby says the economy might not yet be feeling the full effects of aggressive interest rate rises. The Federal Reserve and the European Central Bank are expected to raise rates again this week.

Colby Smith
It does take time for policy adjustments, especially, you know, as it relates to interest rates, to impact economic demand. The typical phrase is that monetary policy works with long and variable lags. And it’s a big debate right now as to where we are in that process. Is the full impact ahead of us in terms of economic growth slowing or has the full effect actually peaked? And central banks might need to do more to kind of rid the economy of some of this momentum.

Marc Filippino
Colby Smith is the FT’s US economics editor.

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There was more fallout from the US regional banking crisis yesterday. California-based PacWest agreed to merge with Bank of California. PacWest was one of the lenders hit hardest by deposit outflows after Silicon Valley Bank collapsed in March. Customers got spooked because of the similarities between the two of them. They both had close ties to the tech industry and a large amount of uninsured deposits. Bank of California shares and PacWest shares jumped sharply higher after the announcement.

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Protests in Israel are continuing over proposed changes to the justice system (Rallyists chanting and beating drums). Some of Israel’s biggest businesses went on strike over a vote by the Israeli parliament earlier this week. It approved the first part of an effort to limit the powers of the country’s top court. To learn more about the business response, I’m joined by the FT’s Jerusalem correspondent James Shotter. Hi, James.

James Shotter
Hi.

Marc Filippino
So why are businesses upset about the reforms? What are they taking an issue with?

James Shotter
I think it’s a mixture of factors depending on the businesses. I mean, there are some businesses who are concerned about the legal uncertainty that the reforms could provoke. Basically, the reforms remove checks and balances on the government, make it harder for the top court in Israel to hold it to account. You know, some companies that are worried about the sort of laws that Israeli prime minister Benjamin Netanyahu’s far right and ultrareligious coalition partners might want to pass. I mean, some of them, the finance minister, for example, has previously called himself a proud homophobe. So they’re worried about the implications about some of these laws, what it would mean for employees if the environment became less welcoming. I mean, for example, in Israel, for some minorities.

Marc Filippino
As I understand it, there are some businesses that are striking. What does that mean exactly and what kind of impact does it have on Israel?

James Shotter
Yes. There was a strike on Monday, about 200 tech companies that said they were going to either close themselves to make it possible for their employees to attend protests against the bill that was going through parliament on Monday, which was the first part of the judicial overhaul to get signed into law. It wasn’t crippling for the economy. In future it really depends above all on what Histadrut, which is the main union in Israel, does as to whether future strikes have the ability to make the government change course or not.

Marc Filippino
Am I correct in saying that there’s been resistance from parts of the military too?

James Shotter
Yeah, that’s right. So Israel’s military depends a lot on reservists. And you know for the last few months, particularly in the last few days, the battle over this law has come to a head. There have been large numbers of reservists saying that they will refuse to volunteer for service if the overhaul goes ahead. So there’s definitely been a strong pushback from the military. I think that’s been probably one of the biggest factors in forcing the government to go far more slowly with this reform.

Marc Filippino
So it sounds like these military protests are making a difference.

James Shotter
I mean, they have had an impact, though. You know, the government initially set out its plans in January, and at that point, they were much more wide ranging than what it’s been able to pass so far. So in January, there were there were two particularly contentious things they wanted to do. One was to give the coalition control over the body that appoints judges. Another was to make it possible for parliament to override decisions by the Supreme Court to strike down legislation. Neither of those things have been done so far. And the one thing they did do on Monday was to limit the Supreme Court’s ability to strike down government actions by using the principle of reasonableness, which is a far smaller change than what they were hoping to do in January. So in that sense, you can definitely say that the protests have had an impact. Government has said that it wants to make further reforms here in the next parliament session in the autumn. So although the protesters definitely say the government down is not yet clear what the final outcome will be.

Marc Filippino
James Shotter is our Jerusalem correspondent. Thanks, James.

James Shotter
Thanks so much. 

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Marc Filippino
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news. 

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