Highlights of the week: Temporary decrease in interest rates in the US, oil giants simulate a 'green' transition, two views on the Beyoncé effect
Overview of the main events of the past seven days and the reaction of the foreign press to them
May forecasts have come true: after two years of rampant inflation, which forced the Federal Reserve to raise interest rates, the US government finally announced last week that it is halting the rate hikes. According to Consumer Price Index (CPI) data released earlier last week, it is currently hovering around 4%, down from the peak of 9.1% in June of last year. However, the Federal Reserve's target is 2%, so it may eventually raise interest rates again.
This decision by the Federal Reserve is expected to slightly ease the burden on borrower countries that repay loans in dollars, as reported by The New York Times in a big analytical article titled "Why It Seems Everything We Knew About the Global Economy Is No Longer True." The article concludes that the geopolitical landscape, which has shifted since the start of the war in Ukraine, has already begun to redirect the economy towards seeking more secure sources rather than cheaper ones. The aim is to avoid any dependency. After all, China currently produces 80% of the world's solar panels, and Taiwan produces 92% of tiny modern semiconductors. A significant portion of global trade and transactions are conducted in US dollars. And what is the worth of the world's (especially the US's) dependence on russian uranium and its enrichment services…
The new reality is reflected in American policy, according to NYT. Security concerns have compelled the Biden administration to block Chinese investments in American businesses and restrict China's access to new technologies. Furthermore, it has implemented an industrial policy in the Chinese style, offering massive subsidies for electric vehicles, batteries, wind power plants, solar power plants, and more, in order to secure supply chains and accelerate the transition to renewable energy.
Activists are outraged by the slow pace of oil companies towards the 'green' transition. Meanwhile, Musk has once again made money out of nothing
This, of course, is also reflected in the traditional energy resource markets, especially the oil market. The peak of global oil demand is expected to occur by the end of the decade, according to The Guardian, citing a statement from the International Energy Agency (IEA). According to the IEA's forecast, this demand will increase by 2.4 million barrels per day in 2023, reaching a record high of 102.3 million barrels. However, it is a prediction for the end of the decade.
Currently, the International Energy Agency believes that the recovery of oil demand, which was observed due to the relaxation of COVID restrictions, will likely end this year, and growth will slow down from the following year onwards. "The slowdown has been hastened by russia’s invasion of Ukraine amid heightened energy security concerns and by governments’ post-Covid recovery spending plans, with more than $2tn mobilised for clean energy investments by 2030," the IEA statement says.
However, it seems that the oil giants already do not agree with this forecast. In line with the International Energy Agency's announcement, Shell has declared that it is abandoning previous plans to reduce oil production by 1-2% annually by 2030. The reason is simple – shareholders are unwilling to give up profits, as mentioned by The Guardian in another article.
The company announced that it had actually achieved this goal within seven months of its announcement through the sale of its stake in the Al project for $9.5 billion later in 2021. In 2019, Shell's production was 1.9 million barrels of oil per day, and in 2020, it decreased to 1.5 million barrels per day, a 21% decline. Therefore, over the next 12 years, Shell plans to invest $40 billion in oil and gas production, while only $10-15 billion will be allocated to low-carbon products.
Similarly, French oil company TotalEnergies, which came under intense pressure from activists last week, accusing it of insufficient 'green' investments. "Let’s not forget that demand for hydrocarbons continues to grow worldwide," Bloomberg quotes TotalEnergies CEO Patrick Pouyanné, who justified the group's strategy, where 80% of revenue will come from oil and gas by 2030.
However, supporters of renewable energy are also not at a disadvantage. Influential American magazine Time tells the story of how Musk accidentally created a major business in electric vehicle charging. Accidentally, because none of the companies studying various business models in the electric vehicle charging sector had proven it to be profitable. However, a recent analysis by investment bank Piper Sandler & Co. showed that within ten years of Tesla opening its charging network to other carmakers could generate up to $5 billion in annual revenue for the company.
Reckless global fiscal policy and unsynchronised global economy. Optimism is not evident
However, this concerns the income of a specific company rather than overall economic growth. Therefore, some media outlets critically discuss whether the United States should persistently support the green transition, spending enormous amounts of money amidst unprecedented economic threats.
The British outlet The Economist pondered on these threats last week, noting that as of May, the federal US government's revenues fell short of expenditures by $2.1 trillion, or 8.1% of GDP…
The outlet depressingly stated, "In the European Union politicians are finding that rising interest rates mean the debts financing much of the bloc’s €800bn ($865bn) in post-pandemic recovery spending threaten to drain the common budget.
Japan’s government recently omitted from its economic-policy framework a timetable for balancing its primary budget, which excludes interest payments but is still in the red by more than 6% of GDP. And on June 13th Britain’s cost of borrowing for two years rose above the levels reached after its calamitous “mini-budget” in September." Therefore, The Economist, being sceptical that the Federal Reserve will freeze interest rate hikes for long, deems such global fiscal policy reckless and inadequate to the challenges of the present.
The Wall Street Journal appears more restrained, labelling the global economy as "unsynchronised". In just 24 hours last week, the central banks of the world's three largest economic blocs came to radically different conclusions: the eurozone raised rates, the US paused, and China lowered them. Investors are finding it increasingly difficult to comprehend the world economy, while the Federal Reserve struggles to contain inflation, as per the outlet.
It states that higher rates in Europe should reduce demand, particularly for American exports to the region, and also redirect some investors to more lucrative European bonds. Both of these factors will be harmful to the American economy and American stocks.
Beyoncé Effect versus The Beatles Phenomenon: What's Behind the Global Inflation?
The Atlantic, an esteemed American outlet, analyses not the 'house of cards' effect on the global economy from the Federal Reserve's interest rate hikes but rather the direct causes of inflation. Such an approach is fair, only if inflation was solely caused by a consumer boom, as emphasised by the Federal Reserve. However, economists are uncertain about this, pointing to price increases by big businesses, which occurred under the guise of various geopolitical factors, including russia's war against Ukraine.
Currently, there is no definitive answer to the question of what or who truly caused the inflation. Economists and the media are meticulously searching for it. Last week, they even accused Beyoncé of European inflation, claiming that her Revival tour led to a rapid rise in prices in Stockholm.
The beginning of the singer's world tour in Sweden last month generated such a tremendous demand for hotels and restaurant meals that it was reflected in the country's economic statistics. BBC reported a 9.7% inflation in May due to rising prices in hotels and restaurants, along with many other media outlets.
On the other hand, The Guardian, a British newspaper, published an extravagant review titled "Money, Money, Money: the singers lifting economies with their vocals". For instance, Taylor Swift's tour could contribute $5 billion to the US economy, as each concertgoer spends an average of $1300. The outlet points out that there is nothing new about this phenomenon.
Sweden expressed gratitude to Abba for their music by awarding the group a prize for their contribution to the country's exports. It is rumoured that U2 was one of Ireland's top three exporters in the 1990s. And Björk, in collaboration with venture company Audur, saved Iceland from the financial crisis by launching a stable investment fund.
Certainly, the phenomenon of The Beatles also comes to mind, which was included in the IMF report for 2014. Beatlemania contributes approximately £82 million to Liverpool's economy annually and supports over 2,000 jobs, as stated in the document. And to this day, prices have not changed.
By the way, this year's Eurovision Song Contest final can bring almost half of that amount to the city (the final figure will be announced in 2024). And Ed Sheeran brings £1 million to the local economy for every 10,000 attendees at his concerts. So while macroeconomists debate the Federal Reserve's interest rates, music is saving not only the world but also local economies.
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