Weekly Risk Outlook

Weekly Risk Outlook
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Leaders of Germany, France, and Ukraine meet to discuss Eastern Ukraine. U.S. data released before major Fed summit. Conference in Gabon will stress U.S.-Africa trade ties. Brazil releases economic figures. All in the Weekly Risk Outlook.

Leaders of Berlin, Paris, and Kiev Discuss Eastern Ukraine

On Monday, President Francois Hollande, President Petro Poroshenko, and Chancellor Angela Merkel will meet in Berlin to discuss the ongoing effects of the Minsk II Accord.

The absence of Russian President Vladimir Putin is noticeable, and may highlight a continuing disaffection with the peace process on the parts of France, Germany and Ukraine, as well as complaints that Russian military personnel are interfering in Eastern Ukraine.

All three parties have expressed skepticism regarding Russia’s commitment to the ceasefire, which was one of the reasons the European Union renewed its sanctions against Russia.

The conflict in Donetsk and Luhansk, as well as the loss of Crimea, has had a devastating impact on the economy of Ukraine, which has lost 23% of its GDP in the past two years and now has a debt-to-GDP ratio at 158%.

However, there may be some signs of improvement, as the free fall of the Ukrainian economy may be reaching a nadirRegardless, a number of concerns remain.

Ukraine’s perennial conflict with Russia over gas prices has again made its appearance, Russia may shut off access to Ukrainian agricultural products if the EU-Ukraine trade preferences agreement is enacted on January 1, and there are a series of IMF loan repayments due, with a $500 million payment in September.

Although Ukraine may be on the cusp of turning a corner (as its government claims), the ability of Ukraine to successfully traverse this mine field is a serious question, particularly given Russia’s ability to scuttle much of these potential successes.

U.S. Housing and Commerce Data Released Before Major Fed Summit

On Tuesday, the S&P/Case-Shiller Index will release home prices for 20 major U.S. cities, with any luck indicating a significant uptick in prices with rising home demand.

Paired with a Department of Commerce home purchases report, the housing report will likely show a July surge in home purchases following an unexpected fall in June.

Finally, the Congressional Budget Office will release “An Update to the Budget and Economic Outlook: 2015-2025,” which will likely include updated 2015-2016 growth estimates, as well as medium-term estimates.

These releases of economic data will be followed on Thursday by the yearly Jackson Hole, Wyoming Economic Policy Symposium, hosted by the Federal Reserve Bank of Kansas City.

Since 1978, the Jackson Hole conference has been the preeminent yearly meeting for the Federal Reserve outside Federal Open Market Committee (FOMC) meetings and has traditionally included central bank leaders from around the world. Last year’s conference included ECB President Mario Draghi and Bank of Japan Governor Haruhiko Kuroda.

This year, the theme of the gathering will be “Inflation Dynamics and Monetary Policy,” likely the key issue for the Federal Reserve in its interest rate decision.

The event will be followed carefully by Federal Reserve watchers for any signs from the FOMC members or central bank leaders from other countries regarding a possible rate hike in September’s meeting – even though Federal Reserve Chair Janet Yellen will not be one of those members, as she will not be attending this year.

Conference in Gabon Will Stress U.S.-Africa Trade Ties

On Monday, trade officials from the United States and several African countries will meet in Libreville, Gabon for a four-day conference to discuss the growing trade ties between the United States and Africa, particularly in the context of the Africa Growth and Opportunity Act (AGOA), which recently secured a 10-year renewal.

AGOA, which removes U.S. tariffs for a number of items (including several categories of textiles) extends tariff preferences to dozens of countries in sub-Saharan Africa. The President has the ability to extend AGOA preferences to countries that qualify and remove preferences for those that fall outside requirements – as President Obama did with Swaziland in January following human rights abuse accusations.

In addition, US Trade Representative Michael Froman has indicated a number of trade-related concerns from certain AGOA member states, particularly South Africa and its poultry policies, which has drawn the ire of a number of Senators and Members of Congress from major poultry-producing states. 

Adding a further wrinkle to the discussions, a number of African trade ministers and other senior government officials, including the Ambassadors of Gabon and Lesotho, have indicated their displeasure at the possibility of Vietnam receiving trade benefits under the TPP, which according to their joint letter to the USTR, would, “decimate the African apparel industry by de facto eliminating the AGOA duty preference.”

Brazil Releases Economic Figures – the Results Won’t be Good

On Friday, the Brazilian government will release Q2 growth figures, which likely reflect an economy in near-dire straits. Analysts already forecast an annual GDP contraction of as much as 2%, followed by a .15% contraction next year.

Compounding the economic figures for Latin America’s largest economy, the Brazilian government has been roiled by twin political crises: the collapse in support for Brazilian President Dilma Rousseff and the ongoing effects of the Petrobras scandal.

Despite President Rousseff’s low popular support (currently polling at 8%) and increasing discontent from Congress, the Brazilian business class has begun to coalesce around the President, recognizing that enacting the appropriate macroeconomic policies to right Brazil’s economic ship will be easier without political upheavals.

Additionally, the recent formal accusations against PMDB House Speaker Eduardo Cunha on connections to the Petrobras scandal – in which the prosecuting team has requested 184 years in prison for accepting $5 million in bribes – have informally removed the largest political impediment to President Rousseff’s administration.

The PMDB President of the Senate, Renan Calheiros, has largely fallen in line with President Rousseff and Vice President Michel Temer and has thus far avoided the fallout from the Petrobras scandal.

The GRI Weekly Risk Outlook (WRO) provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, the WRO presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.

The Weekly Risk Outlook is written by GRI analyst Brian Daigle.

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