(Bloomberg Businessweek) -- All politics, the saying goes, is local. Is the same true of economics? In the past, not so much. Right now, more and more.
Cast your minds back to the 1990s and early 2000s—the era of go-go globalization, and the unipolar moment for US economic heft and geopolitical power. Stock markets around the world marched to the beat of Wall Street’s drum. Central banks moved in line with the Federal Reserve or faced the consequences as hot money flooded in or fled out, placing currencies and price stability at risk. America’s friends benefited from access to US markets, investment and technology, all of which helped propel their prosperity. America’s foes labored under the weight of sanctions and export controls that kept them isolated, technologically backward and poor. The diverging fortunes of the Soviet Union, a foe that collapsed, and China, a friend (at least back then) that boomed, are a case in point.
Now consider the situation today. Major economies are in very different places. In the US, the problem for the past two years has been post-pandemic inflation. Europe suffered from the same affliction, made worse by the war in Ukraine, which cut off supplies of cheap Russian gas. In Japan, higher inflation is good news—a sign that its anemic economy may be perking up. In China, the problem isn’t prices-too-high; it’s prices-too-low.
As a result, many central banks are moving at different paces—or even in different directions. The Fed was late to hike rates when inflation surged and late to cut when it moderated. The European Central Bank and the Bank of England started lowering rates ahead of the Fed, as did many central banks in emerging markets. In China, by contrast, policymakers are scrambling to arrest a slow-motion property market collapse and prop up the stock market. As for the Bank of Japan, it isn’t cutting but hiking.
When central bank pathways diverge, strange things happen. Consider the recent history of the yen. Japan’s currency plunged in the first half of the year, then soared over the summer, then plunged again as Fed and Bank of Japan expectations moved on separate tracks.
Currency volatility has consequences. A weaker yen meant more profits for Japan Inc. and a bull run for the Nikkei index. When the yen strengthened, that process ran in reverse—triggering a 12% plunge in Japanese stocks on a single day in August. For global markets, the $4 trillion yen carry trade—investors borrowing cheap in Japan and investing in high-return assets elsewhere—was a major driver. When yen gains made those bets unprofitable, they unwound in a hurry, dealing a blow to everything from US stocks to the Mexican peso to Bitcoin.
The Fed isn’t the only venerable Washington institution that’s facing diminished global influence. Think about US policy on Russia. In 2022 the Biden administration unleashed a barrage of sanctions aimed at crippling Vladimir Putin’s war economy. But India’s oil purchases kept Moscow’s coffers full of cash, China’s exports kept Russian industry operational, and North Korea’s artillery shells kept Putin’s weaponry firing. As a result, in 2024, Russia is headed for a year of 3.5% growth, and its troops continue to make advances in Ukraine.
What’s going on? First, the structure of the world economy has changed, and the US and its allies command a smaller share. In 1990 the US accounted for 21% of global gross domestic product and the Group of Seven for 50%. In 2024 their shares have fallen to 15% and 30%, respectively.
Second, important parts of the world are shifting away from the US-designed operating system. It used to be the G-7 that made the big decisions. Then—with the rise of China and other major emerging markets—the club was expanded to the Group of 20. Now deep fissures between the US and Europe on one side and China and Russia on the other have rendered the G-20 largely ineffective. One measure of its declining influence is the emergence of competing groupings, such as the BRICS—originally conceived as an investing category, it’s morphed into a real-life club, with Brazil, Russia and the other emerging market members take turns hosting summits.
The dollar is still the world’s main reserve currency, but it doesn’t enjoy the dominant position it once did. The greenback’s share of global central bank holdings fell from 72% in 2000 to 58% in 2023, according to the International Monetary Fund. Data from the People’s Bank of China show that China now settles a quarter of its trade transactions in yuan—up from zero a little more than a decade ago.
Small wonder that the gravitational pull of the US has been reduced. Other economies, notably that of China, are starting to exert more influence. In the months ahead, the Fed’s calibration of the pace and size of rate cuts will matter. But it’s possible Beijing’s stimulus blitz will matter more. A Bloomberg Economics model suggests the package of measures the Politburo announced in late September will add about $300 billion to global GDP in the year ahead—and much more if the Ministry of Finance delivers on fiscal stimulus.
For governments fighting to keep their economies growing, businesses aiming to keep their supply chains functioning and investors looking to maximize returns, all of this matters.
In a world where local economies are out of sync, business executives need to exercise more caution. Decisions on where to source and where to sell get more consequential. Get it right, and supply chains work smoothly and revenue grows. Get it wrong, and a company could suddenly find itself on the losing side of tariffs, sanctions or slumping demand.
For investors the complexities are the same, but the profit or loss comes faster. In the space of just a few weeks we’ve seen the British pound soar and then swoon as the Bank of England got out of step with the Fed; China’s stock markets make up a year of losses in just a few days as the Politburo pumped stimulus; and oil shoot up $10 a barrel, to $80 in early October, as war in the Middle East expands and escalates.
Economics is getting more local. Understand that, and if the world’s your oyster, it’s at least your collection of barnacles.
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