The US and UK eye interest rate hikes. South Korea, Japan, and US hold security talks. Concerns grow at the UN over growing civil war in South Sudan. The European Council meets post Brexit. Italy and New Zealand see fresh leadership. Hot spring diplomacy unites Japan and Russia. All in The Week Ahead.
Italy and New Zealand see fresh leadership
On Monday morning, New Zealand’s governing center right National Party voted for the country’s new Prime Minister, Bill English, to replace John Key who has resigned after 10 years in office. The result was largely expected as English ran unopposed. English can largely be expected to continue National Party policies which have moderately leaned socially liberal and fiscally conservative.
Italy also gained a new leader this week. Italian President, Sergio Mattarella, has named Italy’s foreign minister Paolo Gentiloni as the center left government’s Prime Minister after Matteo Renzi’s resignation following public rejection of his proposed constitutional reforms put to a referendum last week. The parliament is expected to give approval on Wednesday. Gentiloni’s appointment should provide stability in the short term as he is seen as a Renzi loyalist who will be capable of shepherding the country’s troubled banking sector through its current crisis. However, there remains uncertainty in the medium term, as opposition parties, including the anti-establishment populist Five Star Movement, call for an early election ahead of the one planned for 2018.
The US and UK eye interest rate hikes
Starting on Tuesday, the U.S. Federal Open Market Committee (FOMC) will hold its usual two-day meeting on economic projections, with Janet Yellen announcing a decision on interest rates on Wednesday. The Fed is largely expected to increase interest rates by at least 25 basis points given strong economic indicators in the last quarter, with unemployment down, inflation near 2 percent, and the U.S. dollar soaring higher. While there are broader questions about how increased rates may fit into the still uncertain, longer term Republican tax and spending plans, investors should expect a small increase in the short term with the Fed continuing to be cautious on further rate increases in the long term.
On Thursday, following the US Fed announcement, the Bank of England (BoE) is also set to release its decision on interest rates. Given the impact of the Brexit vote on the British market, the BoE is largely expected to keep interest rates low. The immediate impact of the Brexit vote has put the BoE in a current bind. With weakened projections for growth, the Bank would mostly likely look to keep rates low to bolster the market. However, with inflation expected to rise sharply, at least in the short term due to the dramatic drop in the value of the pound sterling, the Bank will need to also weigh the value of raising rates. Given these conflicting concerns, the Bank is expected to keep rates the same, with many analysts expecting a moderate increase coming later in 2017.
Concerns grow at the UN over growing civil war in South Sudan
On Wednesday, the UN Rights Council will call a special South Sudan session at the request of 40 member nations, led by the United States. Given the breakdown of the August 2015 peace agreement, violence in the newly independent state has increased dramatically in recent months, leading many analysts concerned that the civil war could escalate to genocidal levels not seen since Rwanda. The session will hear expert claims that ethnic cleansing is already taking place.
However, any international action on the issue will largely be stalled in the short term. Key leaders seen with political influence on the matter, President Obama and UN Secretary General Ban Ki-moon, will each be ending their terms at the end of the year. Other Security Council members, Russia and China, are expected to push back on US-led efforts to impose an arms embargo without the unlikely unanimous support of the regions IGAD (Intergovernmental Authority on Development) member states, who each have opposing political and economic interests in South Sudan.
The European Council meets post Brexit
On Thursday, the European Council will meet for its annual “Christmas” summit to discuss matters related to security, migration, and the economy including: the reform of the Common European Asylum System and plans between the EU and Turkey to introduce visa free travel for Turkish citizens likely starting in 2017. Both remain contentious issues in EU politics whose oversight many see as responsible for the continued rise of the extreme right and backlash against the establishment in many countries.
Attention will also be given to EU defense coordination and spending. EU Commission President Jean-Claude Juncker recently announced a desire to standardize and streamline the European defense industry in order to increase efficiency and decrease dependency on the US. This should not come as a surprise considering concerns that, under the incoming US administration, the NATO alliance may come under increased scrutiny and that European NATO members will be expected to contribute more to their defense.
The summit will end with a dinner attended by European Council members to discuss Brexit. Seen as a tactical snub, new British Prime Minister Theresa May was not been invited, signaling the 27 member block’s intent to maintain a united front and firm stance on denying negotiations ahead of a declaration of Article 50.
Hot spring diplomacy between Japan and Russia
On Thursday, Japanese Prime Minister Shinzo Abe will host Vladimir Putin at hot springs in his hometown of Nagato with the hopes of signing a peace deal that will formally settle World War II between the two countries. Disputes over the Kuril Islands, a small chain of islands off Japan’s northern coast which were seized by the Soviet Union at the end of the war, have kept the two sides from formally concluding the war.
If the two are able to reach a deal, Abe would win considerable political capital, especially among the more nationalistic members of his conservative base. Putin also stands to gain given that Abe may wish to break with Western sanctions in place over Crimea in order to leverage a better deal for Japan. However, with an incoming US administration largely seen as friendly to Russia, this strategy may not hold as much sway over Putin as before and with close to 80 percent of Russians against any deal trading the islands, a deal during the meeting remains unlikely.
Despite this, both sides are set to sign trade and financing deals at the summit, including Japanese-backed loans to Russian gas giant Gazprom. The summit marks a shifting relationship between the two countries, as Japan seeks to counter Chinese influence in the region and Russia tries to build new economic relationships given current Western opposition.
South Korea, Japan, and US hold security talks
On Friday, South Korea will hold trilateral security talks with the United States and Japan in Seoul. Discussions will largely revolve around the breakthrough General Security of Military Information Agreement (GSOMIA) between Japan and Korea which guarantees the sharing of intelligence information between the two countries related to North Korea.
The deal and security talks come at a strategically important time as this year saw an increase in nuclear testing from the North, with its fifth test occurring in September. Talks come at a time when the incoming Trump administration has stated that it would like allies to take a larger role in regional defense initiatives and the Japanese military has been given an expanding role, not seen since World War II, under Prime Minister Abe.
The Week Ahead provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, The Week Ahead presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.
This edition of The Week Ahead was written by GRI Senior Editor Luke Iott.
