President Xi and Prime Minister Abe renew their authority, the Korean standoff subsides, but Saudi Arabia takes a turn.
Politics took center stage in China in October. President Xi Jinping secured his second term in office at the culmination of the 19th Congress of the Communist Party. Xi’s status as a leader was elevated, and he was given the rare distinction of having Xi “thought” enshrined in the Party’s constitution. Also, the congress ended with the Politburo Standing Committee — the Party’s decision-making body — having no obvious successor, which has led to some commentary that Xi might be thinking of an unprecedented third term in office. Despite the speculation, we think this is unlikely.
Xi is an old Maoist, who believes in tighter political control
Tighter political control has one very immediate consequence; China is losing the small amount of policy experimentation that was possible while individual provinces had some freedom to maneuver. The centralization of decision-making will lead to a very managed process of deleveraging and reform in heavy industry. While this may reduce the tail risk of a sharp downturn in the economy, it also increases the likelihood that growth will be slower for longer. We expect economic growth will slip as official growth targets edge down.
Since the process will be managed by Beijing, it will inevitably take longer. Still, China remains important for the evolution of global supply and demand. The world’s second-largest economy is well integrated into the global economy. We expect to see greater conflict between China’s aspirations to greater technological sophistication and its insistence on maintaining party control over all aspects of political life.
China is losing the small amount of policy experimentation that was possible while individual provinces had some freedom to maneuver.
Abe snaps up votes
In Japan, Prime Minister Shinzō Abe’s party won a majority in snap parliamentary elections on October 22. This signaled likely continuity of the Abenomics policy of fiscal spending, monetary easing, and structural reforms. Abe’s victory also reduces the risk of a monetary policy change. There is no need for him to offer up a change in leadership at the Bank of Japan (BoJ) as a bargaining chip with other politicians, inside or outside the Liberal Democratic Party. It is not certain whether BoJ Governor Haruhiko Kuroda will be offered, or will accept, a second term, but it seems likely that he will.
Abe’s victory also reduces the risk of a monetary policy change.
We expect the BoJ’s monetary policy to remain unchanged, and this is significant for the global interest-rate outlook. Economic data from Japan continues to be fine, and the central bank is forecasting growth to continue through 2018. Our nowcast for quarter-on-quarter GDP growth slipped a little over the summer and now looks to be edging a little higher. We think it can continue above trend given decent global expansion and Japan’s beta to the global cycle. Inflation, however, continues to be low. The BoJ described this as being “mainly against the background that firms’ wage-and price-setting stance has remained cautious,” and expects that, as the output gap shrinks, inflation will drift up to 2%.
Tweets for the time being
While political stability prevailed in China and Japan, the prospects of a nuclear confrontation between the United States and Pyongyang have loomed large in recent months. In September, a tunnel at a nuclear test site in North Korea collapsed and reportedly killed about 200 people, according to various media reports. While this may delay plans for the next round of testing, the incident is not likely to derail the program. Meanwhile, President Trump and North Korean leader Kim Jong-un have taken to Twitter in an exchange of creative insults.
The markets continue to anticipate that the conflict will remain a war of words and not escalate further. We agree with this view, but the risks of military conflict remain higher than one would like.
Game of thrones in Saudi Arabia
In far western Asia — aka, the Middle East — the geopolitical development of note is the corruption crackdown in Saudi Arabia. Crown Prince Mohammed bin Salman ordered a sweeping roundup in early November, and many members of the business elite and royal family, including billionaire Saudi Prince Alwaleed bin Talal, were arrested. This is business as usual in much of the world; a new guy takes over, and he shows he’s in charge by throwing some of the old guard in jail. What is different in this case is that the arrests took in a lot of people we thought were untouchable. We are monitoring the situation to determine whether serious change is underway in Saudi Arabia, in which case we’ll have to rethink the geopolitics of the Middle East.