GED Under the Radar – April Edition

Every month there are some economic stories that fall through the cracks. In this segment,  the GED Team will present to you those economic stories, which we found most interesting each month but felt received less popular media attention than they actually deserved. These stories can come from all over the world. They can be relevant and important for the global economic system as a whole or just affect a select group of few, they can be serious or they can be humorous. In any case they will be interesting. This is “GED Under the Radar”!

Aprils’s Radar Stories in Short:

• A Land of Never Ending Growth
  
• The British Elections
  
• Geopolitical Consequences of Brexit
  
• Trump and the Looming Shutdown

Australia: The Land of Never Ending Growth

Close to a decade after the world was shook by the largest economic crisis since the great depression in 1929, many countries in Europe and around the world are still struggling to readjust to pre-crisis levels of economic growth. Yet, there is one country where growth never actually stopped and where the word recession seems but a memory from a distant past. Australia, in fact, is marching strongly towards a milestone no other country has ever reached before: its 104^th quarter without a recession, 26 years of continued growth, world record.

Experts talk of a recession in the case of two consecutive quarters of negative growth in an economy. The last time such an event took place in the land down under, in 1991, the world was very different still from the world we live in today. The cold war had just ended, Michael Gorbachev governed as the Soviet Union’s last head of state and the internet was still not much more than a toy for academics rather than the global driver of information, entertainment and commerce it is today. But while the times have certainly been changing, Australia’s continuing economic growth has not.

Only one other country, the Netherlands, ever achieved 103 quarters without a recession. Their run from 1982 till 2008 saw an abrupt end with the dawn of the world financial crisis. So what does Australia have that other countries don’t? One possible answer to this question could be its geographical and economic proximity to China. Australia is profiting from the powerhouse emerging market in a twofold way. On the one hand it has used China’s near insatiable hunger for raw materials to export large quantities of iron ore, gas, oil and coal to the world’s second largest economy. On the other hand Australia has established itself as a primary destination for both Chinese tourists and students, promising China’s growing, western education seeking, wealthy middle class both a closer and cheaper alternative to Europe and the US. On the housing market, too, China’s interest in Australia can be felt. With an average converted price of 800.000 Euros per flat, Sidney ranks second world wide, only after Hong Kong, in cost of accommodation. Finally, Australia’s population growth and immigration policy play a vital role in the country’s unrivaled growth path. In 1991, 17 million people lived on the continent, today it’s nearly 25 million and every year the country accepts an average of 200.000 new immigrants to the country.

But Australia’s success story is not without its own risks either. Some economists warn that the expanded economic prosperity could easily lead to complacency. A whole generation of young Australians who has never experienced anything but growth and who are faced with skyrocketing housing prices already has no problem getting into debt far beyond a normal rate. With an average household debt burden of twice its available income, Australia ranks among the top of the world in terms of personal debt. Still, even though there was a short time at the end of 2016 when the world record seemed in danger as the third quarter turned a slight minus, this negative trend did not continue into the fourth quarter and it now seems all but guaranteed that Australia will indeed become the first country to go a full 104 consecutive quarters without a recession once the numbers for its first 2017 quarter will be officially released. How far Australians will be able to extend the record remains to be seen.

UK Elections: Are the LibDems Going to Surprise Us?

On Tuesday, April 18, Theresa May announced that she wants to hold a general election on June 8. Most observers predict an easy victory for the Conservatives led by May since they are 21 percent ahead in the polls over Labour, the largest opposition party. But maybe another party is going to surprise everyone: The Liberal Democrats, aka the LibDems.

After an unsuccessful episode as junior coalition partner of the Conservatives in Cameron’s first government, the LibDems had massively lost seats in the 2015 elections. However, there are reasons to believe that they might perform well in the next elections: Since Theresa May announced the new elections, the LibDems obtained 12.500 new members (as of April 24), boosting their total membership over a 100.000, near their all-time record. Also financially the LibDems seem to be doing well: Within two days after the announcement, they collected GBP 500.000 in donations, more than twice the amount Labour collected in the same time.

The reasons for the LibDem’s surge are simple: Together with the Scottish National Party, they are the only major party adopting a clear pro-EU stance and they have announced a second referendum on EU membership in case of a victory. The path to a potential victory, however, is more than cumbersome: in the last polls previous to the election announcement, the LibDems obtained only 12 percent, much less than the Conservatives (44) and Labour (23) and only a little ahead of UKIP (10). The majoritarian election system is also not working in favour of the LibDems. It is yet impossible to predict how well they will do – but one should have a close eye on them.

Brexit and its Geopolitical Consequences: The Ever-Shrinking Empire?

As Brexit looms around the corner, some geopolitical questions are at stake too: Exemplarily, at the beginning of April, Gibraltar became the issue of interest. Located at the southern peak of the Iberian Peninsula, Gibraltar, also called “the rock”, constitutes a British overseas territory since an Anglo-Dutch force captured Gibraltar from Spain during the War of the Spanish Succession in 1704. Thereupon officially ceded to Great Britain with the peace Treaty of Utrecht in 1713, Gibraltar, which is only about 14 km away from the Moroccan coast and therefore forms an important “bottleneck” entry to the Mediterranean, became inter alia an essential base for the Royal Navy during World War II and has remained strategically important until today, as a major part of maritime trade passes through the strait. Under its own constitution, Gibraltar oversees its own affairs whereas particular fields, such as foreign policy and defense, remain under Downing Street’s aegis. And even though the citizens of “the rock” refused proposals for Spanish sovereignty in two referenda (1967 and 2002), Gibraltar remains a controversial issue to Anglo-Spanish relations.

This controversy recently gained new momentum with Brexit in sight. According to the EU’s recently published draft Brexit negotiation guidelines, the Spanish government shall have a veto right on decisions about Gibraltar – or, according to the EU’s own words: “After the United Kingdom leaves the Union, no agreement between the EU and the United Kingdom may apply to the territory of Gibraltar without the agreement between the Kingdom of Spain and the United Kingdom”. The EU therefore presents London with the choice of either agreeing with Spain about Gibraltar’s future or pushing it (and therefore also its citizens) outside any EU-UK deal. Whereas the spokesperson of the Spanish government expressed his government’s contentment to the EU’ proposed conditions, the British side is rather not amused. In the case of former Conservative leader Michael Howard, this reaches as far as suggesting that Theresa May would be prepared to go to war to protect Gibraltar, just as Margaret Thatcher did for the Falklands. Yet his comments were criticized immediately and May talked to Gibraltar’s chief minister in order to underline the UK’s steadfast commitment towards Gibraltar.

Speaking of the Falklands, Argentina, too, has started to think of the potential geopolitical consequences a Brexit could bring along. The Falkland Islands, an archipelago in the South Atlantic Ocean in front of the Patagonian coast, are also a British overseas territory. Even though having internal self-governance, again, London has responsibility in matters of foreign affairs and defense. As Argentinian forces occupied the islands temporarily in 1982, the UK restored its sovereignty over the archipelago after a ten-week war between the two countries.

Argentina now believes that due to Brexit, London may lose its European support for its control of the Falkland Islands. According to the Argentinian foreign minister, Buenos Aires is watching the developments closely, even if it was too soon to say whether Brexit may actually impact and cause a softening of the EU’s backing for the UK. One thing is for certain though. For a country who’s empire once spanned a good half of the world, Brexit seems to spell a whole new string of territorial problems.

Trump: 100 Days and a Shutdown?

Whether you are a Trump critic or A Trump supporter, the start into his presidency certainly has been a tumultuous one. After a string of controversial appointments, an immigration ban that got stopped by court – twice – and a proposed new public healthcare bill that died before it even got to be voted on, the Trump administration is still searching for a major success to show for. Now it faces a whole new problem however. At Midnight on Friday, April 28^th, one day before President Trump’s 100^th day in office, the government of the United States of America officially runs out of funding.

If Trump’s administration fails to reach at least some sort of deal on the government’s budget by 11:59 pm on Friday, this means that on Monday the whole American government would go into shutdown mode. Public employees would be sent home, national parks would be closed, as would be most of its administrative bodies and authorities. For the administration, certainly, this would be an immense blow right at the politically very important 100 day threshold. But how likely is it really to happen?

The answer is we really can’t be all that sure. America has been at this point many times before. With a two party system and a large divide between the two political parties, agreeing on an actual budget for the country has proven to be incredibly difficult. There are alternatives to a full-blown budget plan though. Usually both parties simply agree on a so called continuing resolution, basically extending funding under the current status quo and pushing the decision for an actual budget onto an agreed upon future date. Only one time since the dawn of this millennia, in September 2013, have parties in the US failed to agree even on such a continuing resolution. So could Trump’s 100^th day in office mark another such historic occurrence?

There are certainly some signs that seem to suggest that this week’s budget talks could prove even more difficult and perhaps unsuccessful than usual. President Trump has not exactly proven to be a man of subtle diplomacy so far and there are various groups, skeptical of his plans. These include of course the democrats, of which at least 8 positive votes are needed in the senate to pass an agreement, but also certain republicans such as the so called house freedom caucus who already played an instrumental role in the failure of the Trump-backed healthcare proposal. But even if both sides agree on pushing the budget decision a few weeks down the road, Trump’s problems will not go away and with a current average approval rating of only about 41 percent, Trump might have to make concessions if he wants to avoid even further damage to his administration’s perception.