UK reaches deadline for answers to move forward on a FTA with the EU. Former Brazilian president supports campaign rally despite conviction. India may change interest rates for the 4th time this year, though uncertainty over strong economic data may temper movement. U.S. government needs to pass bill to avoid government shutdown. All in The Week Ahead..
UK reaches deadline for answers to move forward on FTA with EU
This Monday, the UK government reaches its deadline to move forward on the three pillars of the EU negotiating framework for the EU to agree in its mid-December meeting to open free trade negotiations.
The three conditions the EU has highlighted – protecting the rights of EU nationals living in the UK, agreeing to the terms of a UK divorce bill, and resolving the Ireland border question – have had varying degrees of movement from the UK side. Last week, the May government agreed to a deal on the divorce bill with the EU government, though the agreement will remain secret even after the UK formally withdraws from the EU.
On the other two questions, the UK government has offered far fewer concessions. On the protection of the rights of EU nationals, while the May government has told 100,000 EU nationals living in the UK in an October letter that they would not be used as a “bargaining chip”, as several hard Brexit supporters have suggested, EU nationals remain unconvinced.
Finally, the Ireland question remains particularly intractable. After months of the UK government telling the Irish and EU governments that the Irish border question would be resolved, the absence of any formal plan has led to skepticism that Ireland would sign off on the Irish component of the three preconditions.
GRI take: If the UK fails to make sufficient progress, discussions of trade talks would not begin this year, and given the scale of the challenges facing the EU-UK relationship, an FTA may not be ready to come into force by the March 2019 Brexit deadline.
Former Brazilian president supports campaign rally despite conviction
This Thursday, former President “Lula” da Silva is expected to support a campaign rally for the 2018 Brazilian presidential election. Should his conviction for corruption be upheld, though, he will likely be barred from contesting the presidential election.
Lula maintains a loyal following among approximately 1/3 of Brazil’s population, and has repeatedly campaigned in the poorer northern sections of the country, last month in Mina Gerais.
Lula has said he would tear down some of the policies enacted by President Temer, who is also facing corruption charges. Should his conviction be overturned, he will be in a commanding lead against any potential contenders, though he may not be able to secure a majority in the first round.
GRI take: Lula’s candidacy could create trouble in a second election; in recent cases of close elections in the region, front runners in the second round have frequently under-performed relative to their competitors in the first round, notably the case of Daniel Scioli in Argentina, who won the first round in the presidential elections, only to lose in the second round to Mauricio Macri. Should Lula formally be barred from running on the other hand, the Workers’ Party does not seem to have any idea who it would nominate, which would lead the field totally open and could knock the PT out in a second round election.
India may change interest rates for the 4th time this year
This Wednesday, the Central Bank of India will meet to decide on interest rates for December. While currently at 6%, the central bank has lowered the interest rate 3 times this year as economic data has suggested a slump in India’s growth rates. With news out last week that India’s growth had rebounded in the last quarter, the central bank may decide to raise interest rates 25 basis points.
While the majority of economists surveyed have expected rates to remain unchanged, a minority have stated their belief that the bank will raise rates to 6.25%. Prime Minister Modi’s decision at the tail end of last year to end circulation of the two largest bank notes in the Indian economy, in an effort to reduce corruption and terrorism, was met with a substantial consumer and business backlash, and was widely blamed for reducing growth from 7% last year to somewhere around 6% this year.
An additional reform of the country’s tax system in July also took a toll on the business community, though there appears to be some adjustment.
GRI take: The bank may be more cautious with any current changes so it is still likely that rates will remain the same for this month. However, an interest rate hike would not be totally unexpected by markets.
U.S. government needs to pass bill to avoid government shutdown
This Friday, the government of the United States will shut down unless Congress passes a spending bill or temporary measure to keep the government lights on. While this situation has typically involved brinksmanship, this was thought to be less likely now as the Republican Party controls both Congress and the White House.
However, Democrats are fully aware that not only will their votes be necessary in the Senate — where a 60-vote threshold will be needed to avoid a filibuster — but also in the House, where it is expected there will be enough defections from Republican lawmakers to necessitate Democratic votes for support. Last week the Democrats left talks with the White House and Congressional Republican leaders after the president indicated the Democrats’ weakness on crime.
The absence of Democrats has forced Republicans to find a way to corral their own lawmakers into supporting a temporary spending bill. The House Republicans floated a 2-week spending bill to December 22 to reduce Democrats’ negotiating power, but conservatives have already balked.
GRI take: With the chairman of the powerful Republican Study Committee putting odds of passage at 50-50, markets need to start seriously considering the impact of a potential, temporary government shutdown. If the Republicans aren’t able to corral any Democratic votes, even with every Republican voting yes, the bill will fail in the Senate. Democrats are likely to demand something in exchange for their support, and if history is any guide, they’re going to get it.
