The same, just different | interest.co.nz

By David Skilling*

The reduced frequency of these notes over the past few weeks is due to the fact that I was on the road in New Zealand and Singapore, my first return trip since the pandemic. The long flights gave me ample opportunity to reflect on my conversations and observations. This note therefore gives my point of view on certain similarities and differences observed between Europe and Asia.

Airports, Covid and recovery

A distinct difference, evident before departure, was the operation of the airports! Arriving at Schiphol well before 7am, I encountered queues already forming outside the short-haul terminal. I was lucky: it only took a few hours to pass. But the tensions in the labor market in a strongly recovering European economy were clear.

In contrast, Singapore’s Changi Airport was its usual model of efficiency. And New Zealand airports were quiet, in part because the borders had not yet fully reopened.

The second obvious difference was the political approaches to Covid. Although infection rates in Singapore and New Zealand remain relatively low, mask-wearing is ubiquitous, including outdoors in tropical Singapore. Having not seen a mask in the Netherlands for a long time, it was shocking to see the current reality of Covid precautions in Asia.

Asia’s difficult approach to initial Covid management casts a long shadow – while Europe has continued its relatively liberal approach. There are clear differences in national Covid risk tolerance, which will have impacts on economic behavior.

Indeed, a third striking difference between Asia and Europe is the state of the Covid economic recovery. Asian economies have done well during the pandemic – in part because strong initial Covid control measures allowed them to reopen relatively quickly. Many (large) European economies have not done as well.

But now the Asian economies are in decline. Singapore posted negative quarter-on-quarter GDP growth in the second quarter, and the Reserve Bank forecasts weak GDP growth in New Zealand from the end of 2022. A weaker Chinese economy weighs on the outlook in Asia. In contrast, European GDP figures for the second quarter were surprisingly strong, although the economic outlook in Europe is clearly clouded by high energy prices.

Geopolitics & inflation

But beyond those differences, the conversations with policymakers, investors, and business leaders were surprisingly similar to those I have in Europe. Two topics that dominated almost every conversation were rising geopolitical tensions; and the economics and politics of runaway inflation.

Geopolitics

The debate in Europe is dominated by the direct and indirect impact of the Russian invasion of Ukraine. Previous notes have described the changed geopolitical landscape and different national decision-making: NATO enlargement, commitments to increase military spending, and tough sanctions against Russia. Economic and energy relations with Russia have changed structurally, leading to substantial short-term costs in terms of higher energy prices.

Public sentiment may weaken in the coming months as high energy prices persist through the northern winter months. But I feel that support for Ukraine (and the sanctions against Russia) in all European countries will be maintained – and certainly by the United States, the main supplier of financial and military support to Ukraine.

The complacency of many European countries vis-à-vis geopolitics has diminished. Indeed, European governments and companies are much more cautious vis-à-vis China: it is considered a strategic competitor and not just a big market. The tone of the European debate converges with that of Asia, where it is widely recognized that geopolitical realities shape the ability to pursue economic engagement.

The geopolitical concern in Asia over the past fortnight has been Taiwan, following Ms Pelosi’s visit. Once news of his proposed visit broke, it became politically difficult to back down. But the level of tension around Taiwan has increased structurally following his visit, and even beyond it due to China’s increasingly aggressive behavior.

China’s extended live-fire exercises around Taiwan are likely to be seen more often, and the United States is also likely to become more assertive in various ways. It is likely that there will be more frequent episodes of high tension around Taiwan, with associated economic costs.

Although a military conflict seems unlikely in the short term (Russia’s problems in Ukraine are a warning sign for China), the risk of error or miscalculation has increased: the Deputy Prime Minister of Singapore, Wong, spoke during the week about the dangers of ‘sleepwalking into conflict‘. A military-economic conflict involving China and the West would be a far more serious matter than Russia’s invasion of Ukraine, with catastrophic economic and political consequences. Geopolitical risks outdated Prime Minister Lee’s National Day Message Last week.

Although the specific focus of geopolitical concerns varies from region to region, there is a shared feeling that countries and businesses are facing a more challenging geopolitical context. And those choices will have to be made as the global system fragments.

Indeed, there has recently been a hardening of rhetoric in New Zealand on geopolitical issues: sanctions against Russia, hardening against China (Pacific, Taiwan) and a more Western-aligned stance. There are even rumors of New Zealand joining AUKUS, although that seems entirely unlikely in the short term.

Inflation

Inflation has reached multi-decade highs in advanced economies for various reasons: excess demand, supply-side constraints, high energy and food prices, etc. This is true in Asia as in Europe, although inflation rates are somewhat lower in Asia (partly because Asian economies are less exposed to rising energy prices, especially gas).

“Happy families are all alike; every unhappy family is unhappy in its own way’, Leo Tolstoy (Anna Karenina)

Central banks in Singapore and New Zealand tightened monetary policy in response. Indeed, on Wednesday, the RBNZ raised its key rates by 50 basis points and more are expected. The ECB has started raising the policy rate, but it will be a much more gradual process (partly limited by high levels of public debt in countries like Italy and Greece).

Inflation is important not only because it can be economically damaging (destruction of demand, need for higher interest rates), but also because high inflation can impose political costs. After decades of relatively modest (and below target) inflation, households quickly acquired a distaste for the resurgence of inflation. Even when part of the inflation is due to external forces (such as rising energy prices), this is considered an indicator of the competence of the government’s economic management.

Governments in Asia and Europe are scrambling to deploy policy measures that will offset or control inflation: from household energy subsidies to various price controls. And countries like Singapore are also acting to strengthen the functioning of labor markets, to alleviate skills shortages – as I noted recentlyLabor market disruptions in the post-Covid global economy are one of the underlying causes of high inflation.

Climatic records

Finally, while Europe experienced one of its hottest and driest summers on record (with the Rhine at historic lows), much of New Zealand experienced its July on wetter on record. Although I dodged the worst of New Zealand’s torrential rains, a return to the arid, brown Netherlands reminded me of climate change across the world.


*David Skilling (@dskilling) is director of economic consultancy Landfall Strategy Group. The original is here. You can subscribe to receive David Skilling’s notes by email here.

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