Global economy faces new age of volatility

Today’s top stories

• A US-led effort to allow humanitarian aid into the Gaza Strip and provide an exit from the bombarded territory for foreign nationals faltered, despite international warnings of the mounting human toll from the Israel-Hamas war. Full coverage here.

• Donald Tusk has secured a potential path to power in Poland, according to election exit polls that give the former European Council president the upper hand over his rightwing rivals. Investors welcomed the prospect, pushing up Polish stocks and the zloty

• BioNTech has written down about €900mn on its Covid-19 vaccines because of lower than expected demand for the shots it developed with partner Pfizer. Other vaccine makers have also suffered as investors become concerned over demand and how the companies plan to spend their pandemic windfalls. 

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Good evening.

“Maybe the most dangerous time the world has seen in decades”.

Whether you agree with JPMorgan boss Jamie Dimon or not, fears of a wider conflict in the Middle East have added to concerns for a global economy already rocked by war in Europe and still feeling the aftershocks of Covid-19.

Finance ministers and officials voiced their concerns as they finished off a round of meetings with the IMF and World Bank in Morocco last week, including fears that higher energy prices would revive inflation (the IMF says a 10 per cent rise in oil prices would raise global inflation by about 0.4 percentage points). Higher costs of imported energy and higher borrowing costs also spell trouble for the euro.

“Debt levels are at record levels and at the same time we are in this higher-for-longer interest [rate] environment. There is a lot . . . that could go wrong” said Gita Gopinath, deputy head of the IMF. 

Globalisation has slowed as economic nationalism has grown, most notably in spats between the US and China, while the latter’s property crisis could yet worsen. And that’s not to mention the greatest threat of all: the potential catastrophic impact of climate change, especially on developing countries that are already struggling with expensive debt.

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The FT editorial board says the global economy has rarely seemed so turbulent since the 1970s, highlighting how the tragic return of conflict to the Middle East only underscores the pattern of rising geopolitical risk.

Volatility is also back in financial markets. Bond markets were already in turmoil before last weekend’s events but analysts say if rising oil prices start feeding through, expectations of fresh action from policymakers could bring a renewed rout.

Trading in options tied to the Vix volatility index — dubbed Wall Street's “fear gauge” — was already on course to hit a record volume this year, as cautious investors looked to protect themselves from the risk of a sudden stock market reversal. 

A new source of risk comes from artificial intelligence, according to Gary Gensler, chair of the US Securities and Exchange Commission, who tells the FT that without intervention from regulators it was “nearly unavoidable” that AI would trigger a financial crisis within a decade.

The FT also notes that the World Uncertainty Index, which tracks how often the word “uncertain” crops up in analysts’ reports, has been trending upwards for years, jumping significantly since 2021.

This environment of uncertainty makes policymaking even more fraught than usual. Central bankers’ interventions are based on historical data but with so many things in flux, the chance of errors increases, and the effectiveness of monetary policy, which operates with a lag, is dimmed, the FT says.

Attempts to make sense of geopolitical events only introduce more human error into markets, it concludes. “Active strategies, shorter time horizons, less focus on models, and policy errors all risk creating a vicious cycle of instability. The world of higher-for-longer volatility may be hard to shake off.”

Or, as European Central Bank president Christine Lagarde opined at one of the final panels in Morocco: “There are all these balls in the air. We are not exactly sure where they are going to land.”

Need to know: UK and Europe economy

Ex-Tory adviser Iain Anderson is devising a plan for a UK business “partnership” with a future Labour government.

Italy announced €24bn in tax cuts and public sector pay rises next year to spur consumption and support weakening growth, despite market concerns over the country’s finances.

France is ready to accelerate public spending cuts and structural reforms as it seeks to return to “sound public finances” said finance minister Bruno Le Maire, as rising bond yields pile pressure on governments to bear down on their deficits.

Spanish central bank chief Pablo Hernández de Cos said higher borrowing costs from the recent bond market rout supported a pause in the European Central Bank’s programme of interest rate rises.

A spat between Germany and France over nuclear power threatens the EU’s transition away from fossil fuels. A Big Read explains.

Airlines hit out over a Dutch plan to phase out EU fossil fuel subsidies before there are affordable greener alternatives.

Need to know: Global economy

Austan Goolsbee, a top official at the Federal Reserve, told the Financial Times it was “undeniable” that the slowdown in US inflation was a trend, rather than a blip, but cautioned against tying forthcoming monetary policy decisions to a narrow set of data.

The centre-right Daniel Noboa won Ecuador’s presidential election, beating leftist rival Luisa González in a run-off vote. Noboa campaigned on a market-friendly platform of youth employment and promoting foreign investment.

Patricia Bullrich, the mainstream conservative candidate in Argentina’s presidential election told the FT she wanted to rethink her nation’s relationship with China, scrap entry into the Brics bloc and probe billions of dollars of recent state loans.

Need to know: business

Online sales of Japanese-made cosmetics in China have been hit by a boycott on beauty brands that shoppers fear could be contaminated by radioactive water released from the stricken Fukushima nuclear plant.

“Corporate Britain is dying” writes chief economics commentator Martin Wolf. The reason? Pension and insurance companies have dumped UK equities, reducing the ability of companies to raise capital and expand.

Analysts warned that the predicted extraordinary growth for drugs such as Novo Nordisk’s Wegovy and Ozempic, which is prescribed for diabetes but commonly used for weight loss, could hit sales of packaged food and drinks as patients reduce their calorie intake.

With a portfolio of toys, movies and theme parks and booming revenues, brick behemoth Lego has big ambitions. Read more here.

UK mining group Cornish Tin has been granted rights by King Charles to explore for gold and silver in the latest boost for Cornwall’s ambitions to revive its mining heritage.

The World of Work

The number of over-65s working is rising as older people take an active role in the world: is it time we stopped talking about retirement? How about “third life”?

The plight of Mind Gym, the corporate training business, highlights a key problem in the $370bn global market for corporate leadership and development courses, the Lex column says: It is very hard to see what, if anything, much of this training accomplishes. 

Some good news

The Royal Zoological Society of Scotland has an encouraging update on the first release of wildcats into Britain through its Saving Wildcats campaign. Nineteen were introduced in the Cairngorms National Park throughout the summer and have been tracked daily using GPS-radio collars.