The Week Ahead

The Week Ahead

UK digests the impact of a new coalition arrangement. South Korea hosts second AIIB summit. Federal Reserve discusses 2017 rate hike. All in The Week Ahead. 

UK digests the impact of a new coalition arrangement

Following last week’s parliamentary election, which saw the Conservatives lose over a dozen seats and Labour picking up nearly 30 seats, the Conservatives have arranged to form an informal coalition arrangement with the conservative Democratic Unionist Party (DUP) of Northern Ireland. The DUP conditions for joining this coalition — it won’t officially join the Conservatives but will allow Theresa May to remain as prime minister — were relatively straightforward, suggesting moving forward will be far less difficult than the 2010 Conservative-Liberal Democrat coalition.

The main concern from the DUP was preventing Labour leader Jeremy Corbyn from becoming prime minister, though DUP leader Arlene Foster also indicated a desire from the DUP that the government pursue a “soft” Brexit. Northern Ireland voted against Brexit — though some of the Unionist areas in the north voted in favor — and there are concerns across the Northern Irish political spectrum that a hard border with the Republic of Ireland could harm trade, movement, and the ongoing peace agreement between Northern Irish unionists and republicans. Complicating matters, the DUP called in its manifesto for a “frictionless border with the Irish Republic,” which will be a particularly delicate arrangement in Brexit negotiations.

Aside from this arrangement, the new government will have a host of problems: without an ongoing majority, PM May will have to forge majorities for every major bill; she will also have to reshape her Cabinet after 5 of her Cabinet members lost their reelection bids; and a final Brexit arrangement will have to survive both a DUP vote as well as prevent any defections from hard Brexit Conservatives. An election that was designed to make Brexit easier will now make it immeasurably more difficult.

South Korea hosts second AIIB summit in Jeju

From Friday to Sunday, South Korea will host delegations for the second annual Asian Infrastructure and Investment Bank (AIIB) meeting. This meeting will focus on communication and collaboration between AIIB member states, particularly as membership in the bank has expanded substantially since it was announced. A new tranche of members form across the world, including Canada, Sudan, Peru, Ireland, and Venezuela, were added to the group in March.

Although there were initial concerns that the China-led bank would serve as a substantial expansion of China’s soft power and a competitor with the World Bank and Asian Development Bank (ADB), the bank has committed to extensive collaboration with other major international banking institutions, both as a source of funding as well as for due diligence and rule-setting. Collaboration with organizations like the World Bank also limits the impression that the China-led bank is only choosing to invest in projects with strategic significance for China. Last year, the bank loaned out over $2 billion in funding, including projects to fund a road and a hydropower extension in Pakistan as well as an Azeri pipeline to Europe. This week’s meeting is likely to include a readout on future investment project proposals, and will represent the first opportunity for the new members to collaborate with the founding members.

Federal Reserve discusses additional rate hike for 2017

This Wednesday, the Federal Reserve is likely to raise U.S. interest rates from 1.0% to 1.25%. This will be the second rate hike in 2017 (an additional one also occurred in late 2016). The Fed has vacillated somewhat in the number of interest rate hikes it expects to undertake this year, so the Federal Reserve’s statement following the likely rate hike will be important in understanding the likelihood of rate hikes in the months ahead.

Markets have been fairly skeptical on multiple rate hikes, however. As the Federal Reserve has slowly moved to raise rates, most other major economies have opted to remain stable: Canada has remained at 0.5% from 2016 onward, and Japan, the EU, and Australia have largely kept interest rates stable from 2016 onward. The UK has only changed once immediately following the Brexit vote.  As U.S. interest rates slowly rise, U.S. savers stand to incrementally benefit while U.S. consumers taking out loans are likely to see increased costs.

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 Analyst Brian Daigle.

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