I usually aim to concentrate on geoeconomics in these mid-month reports but inevitably the political situation always overshadows this, even more so this month.
The conflict in the Middle East has entered a new phase with the Houthi group in Yemen – which is supported by Iran – having taken much of the coastline along the Red Sea, including the strategic city of Mokha and its port. This puts them in position to shut down the Bab al-Mandab Strait, though for now they have said they will only target Saudi Arabian shipping. That alone is already starting to have an impact on global oil supplies since the Saudis have got around the closure of the Strait of Hormuz by piping oil to its facilities on the Red Sea and shipping from there. As it is, drone attacks have forced the Saudis to shut down the pipeline anyway.
This comes at a time when there are signs that more ships are making it through the Strait of Hormuz, though not enough to make a significant difference to global oil prices. However, the American blockade is starting to hurt Iran, which probably explains this new front at the Bab al-Mandab Strait. The Americans do not appear to have any strategy other than vague threats for breaking the deadlock, meaning the conflict – and associated high oil prices and risk of inflation – will continue on into next year. Indeed, there is a distinct possibility that Russia and Iran are pursuing a strategy of locking the US into another forever war to drain American resolve and resources.
More worryingly, a report in the Financial Times claimed that Russia has been helping Iran develop a supersonic cruise missile that would pose a serious threat to American warships in the area. Such a transfer of technology is the real price that the West must pay for its failure to more fully help Ukraine defeat the Russian attack. Instead, the current US administration has renewed its efforts this month to pressure Ukraine to give in to Russian demands. For its part, Ukraine appears to have more cards to play now, and is a lot less dependent on American ‘help’. One example of this comes from the Times of India, which claims that Russia is now importing 70 percent of its oil from India despite Russia itself being a net exporter of oil. That suggests that Ukraine has had considerable success with its campaign against Russia’s oil refineries.
Looking beyond Russia, rising energy prices will almost certainly lead to higher inflation for most countries in the later half of this year. In anticipation of this, lenders are also asking for higher yields from government bonds, pushing up the amounts that governments must pay to service their national debts. This reflects the sense amongst traders that many government simply don’t have solid plans for growing their economies enough to service or repay those debts.
At the same time, many large tech companies are borrowing astronomical sums to invest in AI data centres. Companies such as Google, Amazon and Meta might collectively have borrowed $40 billion a year in the past but this year such companies have raised some $219 billion, also helping to push up yield rates.
There have been apocalyptic warnings from within the AI community that developers might be losing control over the systems they are creating, and that those systems might choose to wipe out human life. It’s important to remember that these AI systems are not sentient beings, they are lines of computer code that have been trained to act like human beings but much faster and more efficiently. Unfortunately that means they are really good at lying, cheating and plotting ways to kill people en masse. Who would have thought that could happen? Despite calls to rein in this technology, including from those running these companies, there is zero chance of this actually happening. There is simply too much money at stake and too high a strategic risk that others might take a lead.
Meanwhile, the latest UK figures from the Office for National Statistics show that the British economy grew by 0.4 percent, better than the zero growth that had been predicted. According to the ONS director of economic statistics, Liz McKeown, this was partly due to companies developing AI and related technologies. Overall, the economy grew by 0.4 percent in the three months to July, compared to the first quarter. However, higher energy prices are expected to hit growth for the rest of the year and mortgage rates are already going up.
The EU is looking at ways to reduce its €1 billion-a-day trade deficit with China, mostly by calling on the Chinese to play nicely. Trade commissioner Maroš Šefčovič has said this means both reducing trade from China, and persuading the Chinese to import more European goods, noting: “We need to have tangible results by October.” The EU is also trying to persuade European companies to diversify their supply lines to reduce the bloc’s reliance on Chinese products. There is a risk that forcing up the prices of Chinese products in Europe may lead to higher inflation.
On the flip side, the Chinese economy is struggling, mainly due to collapsing domestic demand. The Chinese government has injected some $54 billion into financial institutions, mainly state insurance companies, to stimulate more investment into stocks of Chinese companies. Such insurance companies have struggled to remain profitable due to persistently low interest rates.
India’s latest quarterly figures show that its gross domestic product grew by 7.8 percent though some have disputed this claiming that the government had revised down last year’s figures and that the true figure is closer to 2.6 percent – which is still better than some European countries. Narendra Modi’s government has been accused of massaging economic data for political gain, leading to the International Monetary Fund last November downrating India’s accounts to a C on a scale where A is the top and D is the lowest.
European nations have begun moving their gold reserves out of the US. France switched its gold reserves from the US to France earlier this year. And this month the Netherlands also confirmed that it had earlier moved 86 of its 313 tonnes from the US and Canada to London, citing “increasing geopolitical unrest.” Central banks have also increased their gold holdings, up from an average of 500 tonnes a decade ago to around 1000 tonnes in recent years. The price of gold, which is a good indicator of just how much trouble central bankers think we are in, is expected to keep rising.
Nessan Cleary 
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