WEBVTT - Global Pillars of Prosperity are Getting Increasingly Shaky

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<v Speaker 1>Hello, and welcome to Stephanomics, the podcast that brings you

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<v Speaker 1>the global economy. And this week, all of this week,

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<v Speaker 1>I'm in Singapore for the Bloomberg New Economy Forum, and

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<v Speaker 1>we're going to bring you some sort of mini episodes

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<v Speaker 1>with snippets from the speakers and thinking that we're hearing

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<v Speaker 1>at this forum. It's turned out to be a pretty

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<v Speaker 1>interesting time to be doing this in this region. You've

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<v Speaker 1>got them so many different summits happening, including quite prominently

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<v Speaker 1>obviously the g twenty summit happening right this week, um,

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<v Speaker 1>and that important meeting between the US and Chinese presidents

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<v Speaker 1>which has now happened. And I wanted to kick us

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<v Speaker 1>off with a quick chat with our chief economist, Tom Orlick, who,

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<v Speaker 1>along with me and a cast of fellow economists, contributed

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<v Speaker 1>to a book Thinking about the Risks and Opportunities for

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<v Speaker 1>the Year ahead in the Global Economy for this forum,

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<v Speaker 1>and there was a particularly striking kind of overview that

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<v Speaker 1>you had. You speak to how the fundamental drivers of

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<v Speaker 1>the global economy might have changed and what that could

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<v Speaker 1>mean in the future. But talk us through your view,

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<v Speaker 1>um so um. The big thesis that we set out

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<v Speaker 1>in the book, Stephanie, is that in past decades, rising

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<v Speaker 1>global prosperity was underpinned by three pillars. UM. You had

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<v Speaker 1>low inflation and so you also had low central bank

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<v Speaker 1>rates and low borrowing costs. You had supercharge demand from

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<v Speaker 1>China which spent much of the last four decades averaging,

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<v Speaker 1>and your great rate of ten UM. And after the

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<v Speaker 1>fall of the Berlin Wall in the collapse of the

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<v Speaker 1>Soviet Union, you had very limited geopolitical tensions UM. Russia

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<v Speaker 1>UM sort of being welcomed into the fold as a

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<v Speaker 1>you know, potential your democratic market economy by Europe and

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<v Speaker 1>China being welcomed into the fold by the United States.

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<v Speaker 1>And of course what we've seen in the last few

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<v Speaker 1>months is all of those pillars being kicked away. Global

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<v Speaker 1>borrowing costs are going to the roof, Chinese growth is

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<v Speaker 1>going to the floor UM, and geopolitical tensions have reached

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<v Speaker 1>nosebleed inducing levels UM. So sort of the concern which

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<v Speaker 1>we articulate in this New Economy Foreign Report is that

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<v Speaker 1>these have already sort of started to hit home in

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<v Speaker 1>two but they're also going to be problems that play

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<v Speaker 1>out in the years ahead. And just to take each

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<v Speaker 1>of those in turn, the one that we've often talked

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<v Speaker 1>about is inflation. We had that recent news unexpected softening

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<v Speaker 1>in US inflation. Do you think we are in a

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<v Speaker 1>better place when it comes to the US inflation problem

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<v Speaker 1>or are people overstating how far we might come so? Um,

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<v Speaker 1>the latest print for US inflation came in a bit

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<v Speaker 1>below expectations. So we've got the consumer price index now

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<v Speaker 1>running at an annual rate of seven point seven P

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<v Speaker 1>seven is still really really high UM. And the view

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<v Speaker 1>of our US economics team is that if you look

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<v Speaker 1>at what's happening in the labor market, if you look

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<v Speaker 1>at what's happening with wages, they're really rising at a

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<v Speaker 1>pretty rapid pace UM. And so the expectation is that

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<v Speaker 1>even when we get to the middle of three, we're

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<v Speaker 1>still going to be looking at a CPI of around

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<v Speaker 1>four percent. That's way outside the Federal reserves comfort zone.

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<v Speaker 1>So our view is that interest rates still have a

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<v Speaker 1>bit further to rise, and they're probably going to stay

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<v Speaker 1>at an elevated level for a pretty prolonged period. A

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<v Speaker 1>lot of people make this about whether or not inflation

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<v Speaker 1>is going to fall next year. I don't think there's

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<v Speaker 1>any we have any doubt that inflation is going to

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<v Speaker 1>fall significantly in the u US next year. It's a

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<v Speaker 1>question of whether the feeders succeeded in getting it fully

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<v Speaker 1>out of the system. And we compare it to that

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<v Speaker 1>time in the seventies. Obviously, Arthur Burns kind of carries

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<v Speaker 1>the can for having made the mistakes in the US

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<v Speaker 1>running the US Federal Reserve at that time. And if

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<v Speaker 1>you look at what his own analysis of that after

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<v Speaker 1>the fact, it was interesting because they often did have

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<v Speaker 1>inflation Forum for a year or so and then the

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<v Speaker 1>East on the tightening, and that was always a bit

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<v Speaker 1>too soon because inflation came back. Do you think that

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<v Speaker 1>is a risk this time? So Arthur Burns sort of

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<v Speaker 1>shows up as the villain of recent monetary policy history,

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<v Speaker 1>right Arthur Burns was the guy who let inflation get

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<v Speaker 1>under control, and then Paul Vulcar is the hero who

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<v Speaker 1>comes in at the beginning of the nineteen eighties UM

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<v Speaker 1>and sorts everything out. But actually, if you sort of

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<v Speaker 1>look at the situation which confronted Arthur Burns in the seventies,

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<v Speaker 1>it's kind of easy to see how he made the

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<v Speaker 1>kind of mistakes that he did. Um, the FED was

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<v Speaker 1>setting policy based on forecasts for the inflation outlook, and

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<v Speaker 1>those forecasts turned out to be too optimistic. They thought

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<v Speaker 1>inflation was going to come down faster than it did. Well,

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<v Speaker 1>guess what the Federal Reserve under Jerome Powell made exactly

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<v Speaker 1>that mistake, forecasting transitory inflation when it turned out to

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<v Speaker 1>be sticky. Arthur Burns cut interest rates in a recession,

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<v Speaker 1>but it was a really deep and painful recession with

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<v Speaker 1>a lot of unemployment, and it's difficult to be the

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<v Speaker 1>guy raising interest rates when millions of people are losing

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<v Speaker 1>their jobs. Powell has said, I'm not going to be

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<v Speaker 1>that guy. I'm not going to make that mistake. We'll see.

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<v Speaker 1>It's easy to say that ahead of the recession, harder

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<v Speaker 1>to act on it when markets are falling and unemployment

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<v Speaker 1>is rising. And it is interesting when you look at

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<v Speaker 1>this later period of that inflation fighting period that the

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<v Speaker 1>Fed was often aturally overestimating its inflation. Inflation would come

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<v Speaker 1>in below its forecast for a period, but it would

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<v Speaker 1>then creep back up, and it was that judgment call

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<v Speaker 1>of how long was it going to stay down? That

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<v Speaker 1>was that was the problem. I guess we're all going

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<v Speaker 1>back to the seventies and learning more and more things

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<v Speaker 1>about it. Um. Your second driver was supercharge demand coming

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<v Speaker 1>from China. Um, We're clearly not expecting this time around

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<v Speaker 1>China to come to the rescue of the global economy

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<v Speaker 1>as it did with the slowdown after the global financial crisis.

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<v Speaker 1>But we have had just in the last week or so,

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<v Speaker 1>some somewhat kind of mixed picture, but some suggestion that

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<v Speaker 1>the authorities are potentially moving out of the zero COVID

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<v Speaker 1>policy a little bit faster than we might have anticipated.

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<v Speaker 1>How do you read it, given your Chinese expertise. So,

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<v Speaker 1>I think we've had three bits of good news out

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<v Speaker 1>of China in the last couple of weeks. We've had

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<v Speaker 1>signals that She Jimping is thinking about an exit from

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<v Speaker 1>COVID zero a bit earlier than most people expected. We've

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<v Speaker 1>had a significant package of support for the property sector.

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<v Speaker 1>And just this week we've had She and Biden sitting

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<v Speaker 1>down in Bali and the mood music was positive, They smiled,

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<v Speaker 1>they shook hands. UM indications of a bit of a

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<v Speaker 1>thought in that crucial bilateral relationship. So I think there's

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<v Speaker 1>scope for a bit more optimism about the immediate future

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<v Speaker 1>for China than there was a couple of weeks ago.

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<v Speaker 1>At the same time, it's important to remember that China

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<v Speaker 1>faces some really really significant structural problems. Demographics of turned negative.

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<v Speaker 1>Working age population is shrinking at a pretty rapid pace. UM.

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<v Speaker 1>Even with some additional support for the property sector, there's

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<v Speaker 1>still a massive problem of oversupply, which is going to

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<v Speaker 1>take years to work through. There is really high UM

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<v Speaker 1>and even as the mood music on U S. China

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<v Speaker 1>relations improves a little bit, the substance is still pretty troubling.

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<v Speaker 1>Let's not forget that the US has just moved to

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<v Speaker 1>cut China off from leading edge semiconductors UM, a policy

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<v Speaker 1>which kind of seems to aim at turning China into

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<v Speaker 1>a kind of amish community with their technology development frozen

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<v Speaker 1>in place. UM So, if you put those pieces together,

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<v Speaker 1>if you look at the average of the last four decades,

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<v Speaker 1>China was growing at close to ten percent a year

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<v Speaker 1>ahead of the COVID crisis, that had already slowed to

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<v Speaker 1>araune six percent. On an optimistic scenario coming out of COVID,

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<v Speaker 1>I think we're looking at a run rate of perhaps

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<v Speaker 1>four percent a year, and if things go badly, even

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<v Speaker 1>four percent could well turn out to be too optimistic.

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<v Speaker 1>We were hearing from Mark Williams the China Economistic Capital

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<v Speaker 1>Economics a few days ago. He puts China's growth at

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<v Speaker 1>the end of this decade closer to two percent, and

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<v Speaker 1>the world which China is growing at four percent or

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<v Speaker 1>two percent, it's very different to a world where China

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<v Speaker 1>is growing at ten percent. Big negative implications for a

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<v Speaker 1>big commodity export as the Brazil's, Australia's and Chiles of

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<v Speaker 1>the world, Big negative implications for the rest of Asia.

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<v Speaker 1>Here we are in Singapore, a city state which has

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<v Speaker 1>flourished partly because of really good governance and really industrious population,

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<v Speaker 1>but also because they've been swept up by the rising

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<v Speaker 1>tide of China's economy, and if that tide is now

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<v Speaker 1>going to recede, it's going to be tougher for Singapore

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<v Speaker 1>and other countries in the region to outperform. We've already

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<v Speaker 1>touched on the geopolitics, which is obviously the third driver

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<v Speaker 1>that you highlighted in thinking about the different kind of

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<v Speaker 1>regime that we're now in. We actually did have the

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<v Speaker 1>the US Trade Representative speaking in an interview at the

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<v Speaker 1>first day of the New Economy Forum, echoing some of

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<v Speaker 1>the positivity that you heard, the sort of muted positivity

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<v Speaker 1>out of the g twenty meeting between President Biden and

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<v Speaker 1>President she. How do how do you read that, tom Um?

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<v Speaker 1>I think it seems like Biden's sort of domestic strength

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<v Speaker 1>was stood by out performance by Democrats at the mid terms.

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<v Speaker 1>She jimping, of course, is coming out of a party

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<v Speaker 1>congress where he managed to stack all of the major

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<v Speaker 1>jobs in the Communist Party in the Chinese government with

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<v Speaker 1>his own supporters. And perhaps it's that strength at home

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<v Speaker 1>for both Biden and she which has enabled them to sort,

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<v Speaker 1>I guess, move towards what looks like more like a

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<v Speaker 1>sort of a well managed rivalry rather than a rivalry

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<v Speaker 1>where things seemed to where there was seemed to be

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<v Speaker 1>a risk that things could just spiral out of control. Tom,

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<v Speaker 1>more like, thank you so much, But we are going

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<v Speaker 1>to hear more about this ongoing question of US China

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<v Speaker 1>relations over the next few days. At this forum, we

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<v Speaker 1>not only heard already from the U s Trade Representative

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<v Speaker 1>Catherine Tie, but I chaired a session with the Japanese

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<v Speaker 1>Minister of Trade Yestshi Nishimura and the Senior Minister for

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<v Speaker 1>Singapore tam And Shammuga Atnam, and I didn't get anything

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<v Speaker 1>out of the Japanese minister when it came to the

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<v Speaker 1>US controls on semi conductor is very important for that

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<v Speaker 1>US policy, whether or not the Japanese go along with

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<v Speaker 1>those export restrictions on on chip sales to China. But

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<v Speaker 1>I did get this from Senior Minister Shamagaratnam. There's been

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<v Speaker 1>a lot of talk about partnership and the importance of

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<v Speaker 1>countries working together, but the recent US trade policies and

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<v Speaker 1>for example, the attempts to restrain exports of of key

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<v Speaker 1>semi conductors to China, that surely it makes it difficult

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<v Speaker 1>for an open economy in Asia to navigate and think

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<v Speaker 1>about the future. When the US appears to be trying

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<v Speaker 1>to drive drive lines across the map, I think, first,

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<v Speaker 1>there's a week forward. We haven't reached the precipicecy yet,

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<v Speaker 1>and there's a way of charting a new cause between

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<v Speaker 1>the major powers as well as with the mid sized

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<v Speaker 1>powers and smaller nations like ourselves. It requires first first

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<v Speaker 1>and formal stabilization. Just avoid dialing up the tensions, avoid

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<v Speaker 1>further steps, avoid escalation that then becomes self reinforcing. So

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<v Speaker 1>that's the first order of business. But second, there's so

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<v Speaker 1>much common interest between the US and China and between

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<v Speaker 1>all nations in the biggest challenges we face, climate change,

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<v Speaker 1>endemic preparedness, and just getting growth going. Those are the

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<v Speaker 1>biggest challenges we face which affect the well being of

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<v Speaker 1>our own populations, and focusing bilateral and multilateral efforts around

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<v Speaker 1>those large challenges in the mission driven way, tackle pandemic preparedness,

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<v Speaker 1>create multi valent vaccines, tackle carbon capture, clean steel, clean cement,

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<v Speaker 1>the whole range of innovations that are still out there,

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<v Speaker 1>still the boundaries of what's possible and not yet viable,

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<v Speaker 1>but invest in it. There's a whole range of investments

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<v Speaker 1>that are in the mutual interests that we have to

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<v Speaker 1>collaborate on, and that itselfs forms forms an overarching relationship

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<v Speaker 1>between the major powers, who will otherwise be obsessed with

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<v Speaker 1>competition and obsessed with what divides them. Thirdly, there's also scope,

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<v Speaker 1>I think to all do some dialing down many small

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<v Speaker 1>moves that could reduce tension. Um. I mean, if you

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<v Speaker 1>look at objectively speaking, if we look at much of

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<v Speaker 1>the tariff war that has taken place, it's not been

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<v Speaker 1>in anyone's interests. It's not an interest of American workers,

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<v Speaker 1>not in interest American manufacturing, not in interest of China,

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<v Speaker 1>not in the interests of Singapore, in the smaller nations,

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<v Speaker 1>So there's an opportunity to dial down in every one

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<v Speaker 1>in terrists. So it requires that new understanding, and I

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<v Speaker 1>think there's a very important new start yesterday in the

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<v Speaker 1>meeting between the President Biden in Presdency UH. There's an

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<v Speaker 1>opportunity for a new understanding. But it then requires actions

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<v Speaker 1>avoid further escalation, find ways to dial down, but also

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<v Speaker 1>start exploiting this very large terrain of mutual interests. That

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<v Speaker 1>requires collaborative investments public and private, and using as best

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<v Speaker 1>as we can the multilateral institutions. They are valuable institutions,

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<v Speaker 1>particularly the World Bank and the m DBS. We are

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<v Speaker 1>under using them. By using them to catalyze private finance,

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<v Speaker 1>we can actually go quite some distance to addressing that

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<v Speaker 1>large scale investment challenge that we have. In the next

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<v Speaker 1>ten years. We might hear a little bit potentially of

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<v Speaker 1>the dialing down. We have an opportunity for that anyway,

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<v Speaker 1>because the US Trade Representative will be following. I'm tempted

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<v Speaker 1>from what you've said to get you to do the interview.

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<v Speaker 1>You might you might get get some some global progress

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<v Speaker 1>out of it. But as you said, President Biden had

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<v Speaker 1>did have some some warmer words after his meeting, and

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<v Speaker 1>he suggested that there wasn't a new Cold War. And

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<v Speaker 1>yet it has become quite common for Biden administration officials

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<v Speaker 1>to talk about wanting to prevent China from developing technologically

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<v Speaker 1>in various areas. Do you think that's unhelpful? Well, I

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<v Speaker 1>think first we have to recognize that China is not

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<v Speaker 1>the Soviet Union during the Cold War. China will continue

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<v Speaker 1>to be a growing and emerging economy and it will

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<v Speaker 1>develop capabilities. You can slow the developmental or capabilities, particular

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<v Speaker 1>advanced semiconductors and a few other areas, but you can't

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<v Speaker 1>prevent China from emerging as a major player in the

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<v Speaker 1>global economy and in the global technology space. The question

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<v Speaker 1>is whether you eventually want China as a formidable economy

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<v Speaker 1>to be distrustful of you, to be in a relationship

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<v Speaker 1>of antagonism al whether you want interdependence, and that requires

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<v Speaker 1>drawing careful lines around what is really required to protect

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<v Speaker 1>national security. What is something you can allow to have

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<v Speaker 1>continued exchange and dependence on. But you watch and you

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<v Speaker 1>verify some element of trust and verify and what you

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<v Speaker 1>have open competition on. It requires some clear lines and

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<v Speaker 1>a clear framework that Rosal's lines. I believe it is possible.

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<v Speaker 1>I don't think the US is set on the cause

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<v Speaker 1>of collision with China despite some of the noise you

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<v Speaker 1>make here. I believe it is possible to formulate this framework,

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<v Speaker 1>and it is possible to then incorporate on the much

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<v Speaker 1>larger challenges that both China and the US and the

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<v Speaker 1>rest of the martinnational economy, the globally the community of thesis. Well,

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<v Speaker 1>that's it from this mini episode of Stephanomics, and we'll

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<v Speaker 1>be back tomorrow. This episode is produced by Summer Sadi,

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<v Speaker 1>Young Yang and Magnus Hendrickson. Mike Sasso is the executive

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<v Speaker 1>producer of Stephanomics. M