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08/12/2016

Weekly News Bites: Canary in the coal mine

Our top picks from this week's Morning Chat

Canary in the coal mine: Australia's economy contracted by 0.5% in the third quarter, ending five years of uninterrupted growth as all actors in the economy – households, firms and the government – slowed their spending (i.e. someone else's income). If the fourth quarter sees another contraction, the economy will enter its first recession in 25 years. It will rest partly on commodity prices, which are crucial for Australia's economy. They have been falling for years, and mining investment fell for the 12th consecutive quarter. However, expected increases in Chinese and US infrastructure spending are causing a fillip in the sector. (7/12)

Trading pleasantries: US President-elect Donald Trump has appointed Terry Branstad, the governor of Iowa, as the next ambassador of China. He will front one of the most complex and fraught relationships in the world. Luckily, Mr. Branstad, considers Chinese President Xi Jinping an “old friend”, having hosted the Chinese leader when he was a young civil servant on his first US visit; his appointment is the velvet glove to the clenched fist of Mr. Trump's rhetoric. In return, China described Mr. Branstad as “an old friend of the people,” a phrase only used for those closely trusted. Now, there is still the small matter of $483 billion in annual US imports from China versus $116 billion in exports. (8/12)

Unveiled: German Chancellor Angela Merkel won confirmation as chair of the centre-right Christian Democratic Union with 89.5% of the vote, reflective of her popularity in spite of the controversial decision to allow a million asylum seekers into the country. Nonetheless, aware of the populist winds du jour, she did throw her support behind a “burka ban” for the first time. She will hope it blunts a surge in popularity for the anti-immigrant Alternative fur Deutschland party. In the last election, it took 5% of the vote; latest polls suggest it would win 12%. (7/12)

May or May not: The UK’s Supreme Court begun a hearing on a case regarding whether Parliamentary approval is required before official Brexit negotiations can begin. At its heart, the issue is one of Parliamentary sovereignty versus Executive authority, and will set a landmark legal precedent whichever way the Lord Justices finally lean. It will also set the tone for Sterling: the currency is likely to rally if the invocation of Article 50 must go through the filter of Parliament, which should dilute the “hard Brexit" stance of the May government. (6/12)

Bunga Bunga: Italians voted resoundingly against constitutional reform; it was a de facto tidal wave of no confidence in technocrat Prime Minister Matteo Renzi. While political convulsions lie ahead – PM Renzi has resigned – no advanced Western economy is more adept at carrying on calmly, as four Silvio Berlusconi administrations will attest. Perhaps more lamentable is the opportunity lost for genuine reform in an economy which is screaming for it. Italy’s GDP ended 2015 8.3% smaller than in 2007, contracting in three of the previous four years. The unemployment rate is 11.5%, contributing to a painful output gap of 2.5%. It has gross government debt of 133% of its GDP, the most of any major economy in after Japan. And now, the country doesn’t have a leader with a plan, and instead will prepare for its 64th government in 71 years. (5/12)

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