Current economic challenges from around the world

With economic circumstances varying around the world and governments trying to find a way out of the challenges of the pandemic, we are currently seeing a picture of mixed results for the global economy. Even though the markets have observed some optimism with economic indicators being on the rise and the vaccination process carried out intensely, a closer look into some of the biggest economies and their concerns at the moment, could help traders understand the significance of the progress. Moreover, barriers could also be identified that could be equally important.

The US government’s infrastructure plan

At the moment, most of the focus placed on the US economy leans towards the new $2.3 trillion infrastructure plan, the Biden Administration is currently preparing. This is a rather large package that will be spread over the next 7-9 years. This plan includes investment in Electric Vehicles, Buildings, Transportation, Manufacturing, Utilities and Education. Other aims of the large infrastructure package are the care for the disabled and elderly, an increase in jobs and innovation. Some of the actions currently in place to support the infrastructure plan’s funding process are to increase the corporate tax to 28% along with the global minimum tax for US multinational corporations to 21%. Furthermore, some new measures to avert companies from moving profits and jobs outside the US, will also apply along with IRS enforcement to corporations. On a separate note, the airlines sector is also expected to be supported by spending committed to improving airports. The Biden administration sees an investment of $25 billion in airports as appropriate, including funding for the Airport Improvement Program. However, the losses suffered by airlines in the past year from reduced traveling may not be covered in this case even though tourism and travelling is expected to rise substantially in the next six months. Another major mater that relates to the new infrastructure plan, are the suggested changes to labor laws. Labour law changes have not been made for decades and passing such changes to the Protecting the Right to Organize Act may be a difficult. We must note that the efforts of the US government and the Federal Reserve seemed to have supported the economy effectively in the past and improved circumstances may be the way ahead.

The European Commission is looking for ways to raise capital

The European Commission is on the search for ways to raise €13bn-€15bn of revenue a year to service the borrowing that it will start to issue this year under the €750bn recovery plan. Even though Brussels have already put down some ideas on how to get the funds some members of the block seem to strongly disapprove of them, making the matter critically important at this stage. According to the Financial Times, the revenues could be derived from the EU’s emissions trading scheme. In more detail, a new carbon border adjustment mechanism and a levy on digital companies are some of the measures proposed to generate revenues. It must be cleared that designing and implementing these taxes is a rather multipart procedure and could prove challenging for the EU and its members. Yet, proposals to raise revenues in order to cover for the package in the first place were agreed upon thus we believe that the EU is most probably to find a solution within its scope on this front. Nevertheless, digital levies within the EU may be on the verge on becoming a difficult subject to deal with as the matter seems to be catching up on a global scale. Digital levies are now discussed globally and this can impact the willingness of the EU’s group members to conclude domestically first.

BOE steps up bond buying

At the moment, the BOE has surpassed all private investors and investment funds to become the largest holder of bonds issued by the UK Government. According to the Financial Times, the Bank of England currently holds an amount nearby £741bn of gilts and the bond buying program has started since 2009. The BoE is expected to maintain its bond-buying program at £150bn this year while the total value of assets by the end of 2021, could be worth £895bn. This has indeed kept borrowing costs on the low and has also created expectations of the BOE moving into negative interest rates. According to Tenreyro, a member of the Monetary Policy Committee the rise in online payments during the pandemic and the subsequent decreased use of cash tends to improve the economic circumstances for negative rates to be introduced. This is what many analysts expect to see from the BOE at a later stage, as the matter continues to produce new headlines on a weekly basis.

China’s digital currency testing

China’s plans for a digital yuan seem to captivate the interest of investors at the moment but also the interest of some of the country’s main competitors. The Chinese central bank is currently testing the digital yuan in some cities across the country. The digital yuan however could possibly be on track to become the first digital currency issued globally by a central bank. This fact is currently putting the US in a watcher’s position and is monitoring the risks that may follow in case the project falls to pieces. The Chinese stated they aim to use the digital yuan to substitute banknotes and coins, to avert the use of the current popular cryptocurrencies which have proven to be very risky and to strengthen the current private-sector electronic payments system. According to Bloomberg, the PBOC is also seeking the use of the digital yuan in international payments as a test process. Some countries that may be participating in this testing process are the United Arab Emirates, Thailand and Hong Kong. As noted the Chinese digital Yuan is getting major attention at the moment as it could destabilize the use of other important currencies like the USD. Finally it could also inspire other governments to create their own digital currencies which again tends to create uncertainties.

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Disclaimer:

This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.

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