Three economic plot twists

While everyone was watching the war, three economic plot twists just dropped, starting with…

1. China’s new rules

Xi Jinping has channelled his inner Dua Lipa to announce some pretty stringent ‘new rules’ — but rather than warn about toxic exes, Xi’s big new supply chain regime seemingly makes it illegal to break up with China.

Officially published last week, his 18 new points are a big deal because they…

• Really treat China’s supply chains as a national security issue for the first time

• Punish foreign firms if they ditch Chinese suppliers due to political pressure, and

• Grant sweeping enforcement powers, like blocking execs from leaving China!

Half the world is already trying to secure supply chains, so what’s the problem here?

The biggest issue — flagged in a remarkably blunt letter by the local European business chamber — is that these new rules are so vague: vagueness is a pretty common approach for the Party to preserve control, then blame officials if something goes wrong.

Yet terms here like “harm to supply chain security” are undefined, rattling execs who fear getting burnt for legitimate commercial decisions, or just complying with laws back home.

It’s all an attempt to counter the West’s ‘de-risking’ away from China, which was in turn a response to China flexing its bottlenecks on things like rare earths. And yet many investors already see these rules as vindication of that rush to de-risk in the first place: “we’ll punish you if you leave” seems like a preeeeetty good reason to leave, no?

Speaking of leaving…

2. Luxury’s new headache

Shares in French luxury group LVMH (Louis Vuitton Moët Hennessy) dropped another 4% on Monday — they’re now down ~25% this year already, in the firm’s worst start on record. Hermès is likewise down 15% and Kering (Gucci, Bottega Veneta, etc) is off by 8%.

Why? Unveiling some disappointing Q1 sales figures, LVMH executives cited a wartime ~50% drop in Middle East foot traffic as rattled tourists avoid the glitzy walls. But if that region accounts for ~6% of the group’s revenues, why the broader 25% share slump?

First, the entire luxury sector has been slowing post-2022 as consumers blow through their Covid savings and grapple with slower growth plus a higher cost of living.

But second, luxury tastes seem to be changing, too: in a massive market like China, for example, fewer folks are rocking foreign logos from head to toe, perhaps also reflecting today’s more nationalist mood plus broader disillusionment towards the West.

It’s all another example of a sector more exposed to geopolitics than you might think. 

And talking about thinking…

3. The IMF’s new warning

The International Monetary Fund is a harbinger of doom these days — if you see their acronym in the headlines, they ain’t calling to praise your government’s great work.

This time, it’s the IMF’s latest mid-year Global Economic Outlook, warning the Iran war and resulting energy shock have halted whatever momentum the world economy still had.

The Fund’s boffins have issued new forecasts to boot, contrasting between a…

• Best-case scenario (the war ends soon), in which the world economy might get 3.1% growth this year (down from 3.3%), with inflation accelerating to 4.4%. And a…

• Worst-case scenario (a more prolonged war), in which growth slows further to 2.5%, and inflation rises further to 5.4%.

And true to doomy form, chief economist Pierre-Olivier Gourinchas has just warned that this report might already now be outdated! “Every day that passes and every day that we have more disruption in energy, we are drifting closer towards the adverse scenario.”

This time, however, we don’t have the same tight labour and loose monetary cushions that got us through the 2022 energy crisis.