US braces for costly government shutdown in eight days. In only eight days, the U.S. government is set to shut down, unleashing real and wide-ranging financial hardship on American families, workers and businesses. (The Washington Post)

The Federal Reserve held off hiking interest rates but it may still be too early to start popping the corks. Federal Reserve officials held interest rates steady at their monthly policy meeting on Sept. 20, 2023—only the second time they have done so since embarking on a rate-raising campaign a year and a half ago. But it is what they hinted at rather than what they did that caught many economists’ attention: Fed officials indicated that they don’t expect rates to end 2023 higher than they predicted in June—when they last issued their projections. (The Conversation)

UAW poised to expand strike to more auto plants. UAW President Shawn Fain has said he would instruct workers to walk out of more factories unless “serious progress” is made in talks with General Motors, Ford Motor and Jeep-maker Stellantis. (WSJ)

Germany went from envy of the world to the worst-performing major developed economy. What happened? For most of this century, Germany racked up one economic success after another, dominating global markets for high-end products like luxury cars and industrial machinery, selling so much to the rest of the world that half the economy ran on exports. (AP)

Justin Trudeau’s India accusation complicates western efforts to rein in China. Prime Minister Justin Trudeau’s allegation that the Indian government was involved in the assassination on Canadian soil of Hardeep Singh Nijjar, a Sikh independence advocate, will undoubtedly erode Canadian-Indian relations at a time when the West is trying to appeal to India. (The Conversation)

Western firms in China are historically glum about outlook. Western firms in China are the gloomiest they’ve been about the outlook for business and want Beijing to do more to reassure foreign investors as geopolitical tensions and economic woes dent sentiment. (Bloomberg)

Why some economists still think a recession is coming. For most of the year, the narrative that the U.S. could pull off a soft landing—in which growth slows without tipping the economy into recession—has gained traction. (Axios)

Biden announces $325 million in Ukraine aid during Zelensky visit. Zelensky's visit comes at a crucial moment for Ukraine, as it seeks to shore up support and secure additional funding for its counteroffensive against Russia. (Axios)

US launches new economic working groups with China in bid to quell tension. The United States has launched new economic and financial working groups with China, as the two major powers seek to deepen communication amid intensifying competition. (Al Jazeera)

Worries are rising about inflated profit expectations on Wall Street. Corporate profits may have already hit bottom: After falling for much of the last year, S&P 500 companies are expected to report 0.2% profit growth for the summer. (AP)

Ghana arrests demonstrators protesting against the country's economic crisis. Police in Ghana arrested protesters on Thursday during demonstrations against the cost of living and the economic crisis gripping the country. Some journalists who were covering the protests, which took place outside the main government building, were among those arrested. (AP)

China: Slowdown a Test for Xi

PRS Group

President Xi Jinping’s steady consolidation of political power over the course of a decade at the top of the CCP hierarchy was confirmed at the 20th National Congress of the ruling party last October, at which the president was officially elected to a custom-breaking third five-year term as general-secretary, a decision endorsed in March 2023 by the elected National People’s Congress, which likewise approved a five-year extension of Xi’s tenure as both president and chairman of the Central Military Commission.

The concentration of such extensive political power in the hands of an individual carries an inherent risk that bad policy decisions will go unchallenged and their adverse results will be obscured by underlings fearful of delivering bad news. That danger is already rearing its head, amid rapidly accumulating worrisome economic data that has triggered warnings of a potential legitimacy crisis for a regime that has long depended on its ability to deliver rising living standards to forestall challenges to its monopoly on political power.

That the government possesses the wherewithal to at least temporarily stave off a crisis is not in dispute. However, a long-term fix will require more than tinkering around the edges, and any aggressive fiscal stimulus measures and moves to bolster defenses against a debt crisis will only delay a reckoning unless accompanied by significant structural reforms. But even as numerous signs of distress are flashing red simultaneously, Xi appears to be reluctant to intervene decisively to prop up the economy.

It is possible that the prospect of the Chinese economy blowing up on his watch will convince Xi of the urgent need for market-friendly reforms, including the loosening of state control over credit. However, to the extent that the looming economic difficulties threaten to undermine rather than enhance Xi’s political control, the record to date suggests that he might instead respond by tightening control over information (as is already happening) and cracking down on any sign of dissent, which would likely mean renewed pressure on the tech sector and foreign entities (including non-tech foreign investors) more generally, no matter the economic cost. The negative economic reverberations arising from the latter scenario would extend far beyond China’s borders.

The growing threat of a protracted economic slowdown that contributes to increased political difficulties for Xi on the home front increases the risk that he might be tempted to deflect public attention from his government’s domestic policy failures with provocative foreign policy moves designed to stoke nationalist passions. Such a scenario would hold especially ominous implications for Taiwan, but would also create heightened risks for the several countries that dispute mainland China’s expansive territorial claims in the South China Sea and could complicate efforts to contain the risk of conflict between China and India over unresolved border disputes.

The government was counting on the lifting of pandemic-related health restrictions in late 2022 to unleash a flood of pent-up demand, but those hopes have been disappointed, and a modest revival early in the year has more recently shown signs of fizzling out. The composite PMI has remained above the 50.0 mark dividing expansion from contraction, but the reading has moved lower in recent months, and the outlook is more pessimistic among manufacturers, reflecting the dampening effect of worldwide monetary tightening on external demand.

Thus far, Beijing has given no indication of any plans for fiscal stimulus measures to jump-start the economy, and the central bank is expected to maintain a cautious posture on monetary policy. Annual real GDP growth will exceed last year’s figure of 3%, but will come in well below the pre-pandemic trend, and headwinds will gain strength moving into 2024 if the government fails to act.

The analysis above is taken from the August 2023 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.

Week in Review Editorial Team:

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate