Weekly Risk Outlook

Weekly Risk Outlook
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U.S. economic data shows signs of improvement. Brazil GDP figures shed light on economy as political transition is underway. OECD releases global economic report. Foreign ministers meet to discuss Israel-Palestine peace process. Shangri-La Dialogue likely to discuss South China Sea dispute. All in the Weekly Risk Outlook.

U.S. economic data to show signs of improvement

On Tuesday, the U.S. Department of Commerce will release data on personal spending for U.S. consumers for the month of April. Economists expect U.S. spending to have picked up after relatively slow spending in the beginning of the year. Increased consumer confidence in the U.S. economy could have significant political and economic consequences for the year ahead.

On the economic front, rising consumer spending is likely to spur job gains — Friday’s Department of Labor announcement of employment statistics showing a jump in job growth and lowering of the unemployment rate to 4.9% would be a sure sign of the rebounding economy — and could further strengthen GDP growth. On the political front, any significant economic improvements heading into the November general election are likely to benefit Democrats in three ways.

First, historically job growth and general consumer assessments of the economy have gone a long way in influencing whether the president’s incumbent political party will make gains or suffer losses in the next election as presidents get disproportionate blame or praise for the health of the economy. Second, Republican nominee Donald Trump’s narrative of economic doom and gloom will be difficult for voters to process if they view the economy as improving. Finally, without negative economic headlines to turn to, many political figures and the media will turn to many of the other narratives facing the country. In several of these — transgender rights and LGBT discrimination, immigration policy, and income inequality — the Democratic Party is playing on offense while the Republican Party on defense.

 

Brazil GDP figures will shed light on economy as political transition is underway

On Wednesday, Brazil’s 1st quarter GDP figures for 2016 will be released by the central bank, with most economists expecting contractions in line with Brazil’s 2015 numbers. Although this would typically be bad news for government, given the transition from PT President Rousseff to PMDB Vice President Michel Temer following the impeachment vote that has removed Rousseff as the trial commences, President Temer can argue that his government intends to move beyond bad poor economic policies to spur Brazilian growth.

However, President Temer’s new administration has already experienced a number of bumps in the road, frequently around the composition and structure of his cabinet. His announcement of an all-white, all-male cabinet was criticized as failing to recognize Brazil’s diversity; the appointment of a lawmaker who discounts evolution as science minister spurred controversy; and the folding in of several ministries into other cabinets, including women’s rights and culture led to the protests of thousands.

Although one could argue that such measures do not necessarily imply that economic policy will be affected, President Temer entered the presidency on shaky popular ground. Polling of the Brazilian public indicated many did not want Temer to replace President Rousseff, with 60% wanting both Rousseff and Temer to be removed. And with the significant pushback of the PT against the PMDB, it remains to be seen whether President Temer can successfully maneuver a shaky economic as well as political environment.

 

OECD releases global economic report

On Wednesday, the Organization for Economic Cooperation and Development will present its Global Economic Outlook. In their February interim economic outlook, the OECD strongly urged governments across the developed and developing spheres to adopt policy responses to staunch falling growth. Chief among the concerns from the February report, and likely to be fleshed out with Wednesday’s report, are weak trade and investment, low inflation, and volatile capital flows and high debts. The main policy prescriptions likely to be advanced by the OECD include coordinating monetary policy, mirrored by IMF suggestions, shifting fiscal policy to support investment, and bolstering productivity through major structural reforms.

These suggestions may fall on deaf ears though. In last week’s G7 summit in Japan, the Canadian government pushed for expansive fiscal policy to fill spending gaps, and Prime Minister Trudeau has made a robust Keynesian argument in favor of increased spending during economic downtimes. However, that approach did little dissuade the much more fiscally conservative governments of Germany and the UK from altering their current spending and taxation policies. And even if a new global consensus arose which, in principle, advocated for a more fiscally loose approach to bolster global economic growth, the lack of political stability in major developed (the United States, the UK, and South Korea) and developing (Brazil, the Philippines, and South Africa) economies is likely to make any major coordinated effort difficult if not impossible.

 

Foreign ministers meet to discuss Israel-Palestine peace process

On Friday, the foreign ministers of 20 major countries, including the United States, France, Egypt, and the Arab League, will meet in Paris to discuss the Palestinian-Israeli peace process without the presence of Israeli or Palestinian representatives. Acknowledging the absence of the two parties that would need to actually hammer out the deal, French foreign minister Jean-Marc Ayrault indicated that he hoped beginning with non-direct talks could make a final agreement easier.

The Israeli government has rejected this approach and has called for direct negotiations between the two parties. The new cabinet of the Netanyahu administration, which includes the addition of the right-wing party Israel Our Home Yisrael Beiteinu to the government, could make negotiations more difficult. In particular, the addition of party leader Avigdor Lieberman as defense minister was seen as a controversial choice given his previous positions on settlements. However, Prime Minister Netanyahu rejected that criticism, noting that Israelis would likely be more willing to defer to a more hardline right-wing government’s approach to an actual Israeli-Palestinian peace deal because they would be less concerned that the government did not adequately protect Israel’s security concerns. However, it does not appear, at this point, that the political will exists on either side to advance a peace deal in any significant way, though Defense minister-designate Lieberman said he was committed to the peace process, which makes the Paris summit this week even more perplexing.

Shangri-La Dialogue likely to discuss South China Sea disputes

On Friday, the 15th annual Shangri-La Dialogue will bring together global military leaders in Singapore to discuss security and defense issues in the Asia-Pacific region. The keynote speaker, Thailand’s Prime Minister Prayruth Chan-Ocha will have the distinction of representing the concerns of a Chinese border country that has had to balance the concerns of representing national interests in foreign policy, particularly in the maritime space, without disrupting the significant economic relationship between the country and the PRC.

Heading into the Dialogue, the Institute for International Security Studies (IISS), which hosts the summit, released its own assessment of the Asia-Pacific regional security situation. From the IISS perspective, likely to be the guiding points of the Shangri-La discussion, the main issues facing the region include: Japan’s shifting notion of its own pacifism, the militarization of the South China Sea, the emergence of the defense industry in Asia, and economic cooperation in the region. Finally, America’s “evolving” views of China and the region generally will likely be a significant topic of discussion in Singapore, particularly among China’s smaller neighbors.

 

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.

This Weekly Risk Outlook was written by GRI analyst Brian Daigle.

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