The economics of uncertainty

The 360-degree view of the world economy this week can be summed up as cautiously optimistic. Or maybe optimistically cautious. Either way, the emphasis is on caution. While the International Monetary Fund forecast a milquetoast 3.2% global economic expansion with a continued decline in inflation, low productivity and international trade tensions loom over the landscape. It also doesn’t help that the past week has provided a jarring lesson in how world economies are inextricably linked with geopolitics. With escalation tied to the war in Gaza pushing the Middle East closer to conflagration, central bankers are girding for potential oil shocks that could reignite consumer-price growth. And the US Federal Reserve this week indicated it will wait longer to cut interest rates, with American inflation reluctant to fall back to its 2% target, in large part due to commodity and rent prices. Some Fed observers are now even floating the possibility that the central bank, which long ago paused its rate-hiking campaign, might resume with a fresh bump aimed at reducing demand across a robust US economy.

But this further delay of rate cuts doesn’t occur in a vacuum. In another example of that interlocked global economy we spoke of, fallout from this cautious approach is spreading around the world, sending the dollar surging and forcing other currencies lower. In turn, post-pandemic economic recoveries from Latin America to Asia are being kneecapped. As Marcus Ashworth writes in Bloomberg Opinion, “the strength of the US currency risks fracturing global trade.” But there’s another, curious theory about this entire dynamic that’s getting attention of late. While much of the progress in lowering US inflation has come from the supply side of the economy—untangling supply chains and immigrants filling vacant jobs—monetary policy mainly works through the demand side. And consumers are still emptying their wallets despite higher costs. So on Wall Street, where two years of recession predictions tied to high interest rates failed to materialize, some are now entertaining a fringe economic theory: The US economy is booming because of higher rates rather than despite them.

Israel struck back at Iran, hitting a military site in a drone operation that was limited in scale after Tehran, retaliating for an April 1 attack on its diplomatic compound in Damascus, fired more than 300 missiles and drones at Israel a week ago. The latest attack, which Iran portrayed as a failure, may have been sufficiently modulated to avoid further escalation, though Israeli Prime Minister Benjamin Netanyahu faced criticism from his hard-right coalition partners for a “weak” response. US President Joe Biden and UK Prime Minister Rishi Sunak had told Netanyahu to “take the win” and not strike back, since Israel’s upgraded air defenses (with robust assistance from the US military and others) shot down virtually every Iranian weapon. “Israel’s security would be best served now through resolve and restraint, rather than military escalation,” Bloomberg’s Editorial Board wrote. Still, a perilous scenario looms if tensions continue to rise: Israel could choose to attack one of the Iranian nuclear plants that have long caused international friction—and Iran retaliates by launching a counterattack on facilities holding Israel’s nuclear weapons.

In a breakthrough for Ukraine’s faltering effort to defend against Russia, Republicans finally relented on their opposition to helping Kyiv and advanced $95 billion in aid that also assists Israel and Taiwan. But for Ukraine’s beleaguered forces, the GOP’s shift may have come too late. House Speaker Mike Johnson was forced to turn to Democrats to help overcome the GOP’s ultra-conservative members and push through the legislation. In doing so, Johnson may have put his job on the line.

China has ramped up its already robust manufacturing sector as part of an effort to bolster its economy, and that’s ruffling feathers in the US and among other trading partners over concerns about cheap Chinese goods—like solar panels—flooding the market. The US reiterated this week its concern about China’s industrial overcapacity, while Beijing maintains its companies are being penalized by developed nations that can’t compete on price. China’s GDP expanded 5.3% in the first quarter from a year earlier, though the labor market is still showing weakness. And there’s no silver lining in sight for the real estate crisis.

Tesla is terminating more than 10% of its workforce, or thousands of employees, in the largest reduction in its history, as it struggles with slowing demand for electric vehicles and its own underwhelming sales. To make matters worse, Chief Executive Elon Musk later conceded that some of the severance packages were too low. The mass firings, Liam Denning writes for Bloomberg Opinion, feel “more like saving pennies than something transformational for the finances—and the stock.” For that, Denning says, the company needs a new low-cost model or a functional robotaxi. Tesla’s earnings will be released next week as Musk travels to India, where he’s meeting with space startups.

Jamie Dimon makes no secret that JPMorgan is all-in on artificial intelligence. As the head of the world’s biggest bank, he kicked off the second season of the Bloomberg Originals series The Circuit with Emily Chang by laying out his vision for the future of money in an AI world. And on the latest episode of The Deal with Alex Rodriguez and Jason Kelly, we discover how an NFL star become a Wall Street player. FormerArizona Cardinals wide receiver Larry Fitzgerald explains why a banker’s pep talk and a board seat elevated his financial game.

Iran’s retaliatory attack on Israel last weekend highlighted how dramatically drones have changed conflict. In How Drones Are Revolutionizing the Economics of War, Bloomberg Originals shows how the relatively inexpensive but accurate technology has altered the dynamics of battle, upending modern warfare in the process. Andreas Krieg, a senior lecturer at King’s College London, points to this leveling effect when he calls drones the “the AK-47 of 21st century warfare.”

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