Surveillance: Soft Global Economy with Sheets

global chief economist at City Group. Also is public service to the United States Treasury, and Nathan Sheets joins us right now, Nathan, there's that single line of global g d P in two thousand twenty three. It is well below the typical three percent level. How bad is the

global recession of next year? The global economy, as you say, Thoma's looking very slot at the moment and aggregat our projection is two percent global growth if you take out our relatively bullish expectation for China, we see global growth at less than one percent next year, which is right on the border of what's been traditionally associated with the

with the global recession. Now, looking at a little bit more at the details, we see early next year fairly severe downturn in Europe clean both the year AWARE in the UK, and then as the year progresses, the monetoring tightening UH in the United States leads to a recession during the second half of the year here as well. So pretty pretty tough outlook, challenging in a lot of different respects, and UH and that's coupled with an inflation

outlook remains very concerning Nathan. Financial conditions of East with the bactrop they're talking about, financial conditions have started two weights, and that's because a lot of people are thinking about the Federal Reserve back in a way from the pace of hikes from seventy five maybe down to fift day the size down to Nathan, what do you make of that conversation. I think the Fed has struggled in its communication.

It has set up, at least implicitly, a syllogism that if we're serious about inflation, then we go seventy five basis points, and when rates are low, it makes sense to have that syllogism. But once you move to three percent, and in November there will be at three seventy five. As you move higher, you've got to start casting your determination and framing your determination to fight inflation in in in in different ways. Specifically, the FED can say we've

moved substantially and that reflects ourn't commitment. And if you don't uh believe that we're committed, just watch what we're gonna do. So I do think they're in a tough situation where they've got to pivot. They can't take rates off at seventy five basic points rate indefinitely, and the markets are interpreting that as the fat kind of pivoting off inflation determination, which I think is a misinterpretation of where they are. I'm looking right now at some of

the GDP components. Michael McKee is breaking them down, and we saw housing. He mentioned housing, and he just clarified that residential investments attracted one point three seven percent from GDP. This is a quickly moving story under the hood, how much or other inflationary components off setting some of these disinflationary moves that we're seeing in the housing market, that we're seeing in retail that we're seeing and used at car prices that you could see on the margins around

the economy. Very clearly, we are now in a dynamic of disinflation in terms of goods prices that is clearly happening. We expect that it's going to come off quite sharply in coming months. Similarly, the shelter prices are persistent the way they're calculated in the indexes. But when we're getting these monster declines and residential investment, that's point of a

very soft housing market. But where the heart of inflationary pressures remains is in the non shelter services and that is tied to the hot labor market, rising wages and rising services inflation. That is what the fans worried about. And uh, that's what the FED is targeting here effectively, is they've got to see a more contained numbers in terms of non shelter services price inflation. And then mean yet, take a while, I look, Nathan, at how we're going

to recalibrate. We're gonna recalibrate off this press conference, John one in four minutes something. We're gonna recalibrate November two, frame the City Group look for next year. I'm going back to your stunning global GDP call of two percent next year? What is your year opening report gonna look like? Give us a heads up, so what we're what we're seeing at the moment. Uh, and it's looking pretty durable in my mind. We're calling next year rolling recessions in

the global economy. Uh. We're gonna see various countries turned down. Uh, the vast majority of GDP will see a downturn. That would particularly be accentuating, exacerbated if the Chinese economy ends up being uh somewhat softer and instead of the five and a half percent we're forecasting, if it's more like

this year at at three and a half. As you've got this on the growth side, and then you also have central banks they're gonna have to early in the year continue to hide and as the year rolls on, our expectation is hold those those rates and high levels. So uh, next year is gonna be a challenging year. I'm kind of already turning the page to that's so much like that's that's what we need from a former government official, Dr Sheath. That was brilliant night in Jessus City, Knithan,

thank you. This is a joint. Now we're gonna wrap this into international economics. We do this with Christine Lagarde an extended press conference mat managing the Master of the e c B. Carl Weinberg joins US now high frequency economics. Carl, I've got to go to e M. I looked at a Columbia the Nation bond the other day and has enjoyed going from night to sixty three. How big is the tention right now in e M due to FED

policy and a strong dollar? In good morning, Tom Well, Historically this would be a classic squeeze, with the FED hiking rates and raising borrowing costs with commodity prices for comfort countries that import commodities first going up and pairing their balance of payments and their flow of dollars coming in, and then now with prices going down for countries that

export them, facing the same kind of squeeze. The bottom line is that most of the debt that's out there is other at the World Bank with very fixed rates, or with China, where the rates are in yuan and not in U S dollars. China is now the largest lender to emerging markets after the World Bank, more than the United States, more than Europe, so to the extent that most of the debt is locked into loans to China, and the lenders in China our national banks, China Development Bank,

and China Export of Developed Export Development Bank. UM. I don't really think that we're looking at the crisis as we saw back in the nineteen seventies coming out of all this some stress, yes, but crisis, no, Carl. We had a raft of economic data out this morning. I'm looking at e C o ECO go on the Bloomberg terminal. Let's just start with the top line, the g P two point six. You know, it's better than expected. It's obviously better to the first two quarters of the year.

How do I think about that number in context of the drumbeat of recession calls out there. How should we think about that? Well, you know, the overshoot from expectations was only two tenses cent, which, if not exactly a big surprise, it was a team we need a little surprise. And looking at the components, there are signs of weakness within the components. But you know, just because we're not in recession now doesn't mean we're not going into a recession.

That would be the first observation to make. And all the INDO haters are on the table, all the factors are on the table. That suggests that the U. S economy will at least slow if not contract in the quarters ahead from where we are right now. For the markets, what matters is how this influence is central bank policy, and our view at high frequency economics would be not

at all. The FED is going to be looking at the inflation numbers and it's going to be a turn in inflation that's going to bring about a turn in FED policy. And we're not quite there yet. Okay, we're not quite there, but you know, I can play off the Chris Low note of put published moments ago. We are seeing a little bit of a turn. Do we see quite there yet with the November CPI report or does it even wait distant out from there? Well, it's a it's a tough call for economists, as you know,

aren't very good at all of this. But we do see is that prices of some things are actually going down, in particular industrial commodities. Oil now ninety dollars a barrel as compared to a high thirty dollars about all six months ago, like aluminum, copper, nickel, All these industrial commodities are headed down in price. Used car prices headed down in price. You know, the things that were starting to adjust the other way. Housing going down, thank you, for

reminding me. Down in price as goes down in volume. You know, these are the signs of weakening demand. So we're gonna be looking to see. You know, what we learned in in two thousand and seven two thousand and eight is that prices can turned very quickly. In six months, inflation went from four percent to negative in the US based on So how does the Fed carl that's brilliant? How does the Fed filter that in? You know, they put their their paul, they put their left pants on

one leg time, thank you. But but how do they filter what you just said about our collective study of the fifties and two thousand seven into this parlor game of what the Fed's gonna do with rates? Well, Tom, you once gave a exture to my class at n y U where you discussed the difference between type one and type two errors in the market and at the

central bank. And what you pointed out, very very precidently, is that the central banks job is to avoid the worst possible outcome at all costs, and the worst possible outcome will be run away inflation. So they're going to act keeping things tight and maybe even tightening in some wady see that the worst possible outcome has been avoided. The market's job is to avoid missing the best possible outcome, and that gives them a different sense set of parameters

to work on. And that's maybe why receive a divergence between market expectations and what the said is actually telling us. Dr Weinberg speaks of their folks is massive jargon but foundational to not losing money, which is an understanding of statistical type one. It's Roman numeral one type two, Roman numeral two lies do and it's used differently, Paul, across economics, finance, investment, and also across social policy, and so you've gotta be

very careful about the interpretation of it. But basically, as Dr Weinberg says, there, it's a FED riveted on avoiding the worst outcome, which in their case is name the history of FED screwing up, central banks screwing up. That's that's their number one focal point. Yeah, absolutely, speaking of

losing money, Meta stock is exactly fifty two week low. So, Carl, I mean you take you take a look at some of these companies that are talking about slowing advertising demand, like Meta, like Google, um, there are so many as you point out there are so many signs out there that this economy is in fact cooling. Does that not give the Fed an opportunity to say, we're done, are pretty close to being done here? Well, are they sure

that they're done? That's the question. And by the way, Paul, don't forget to mention all the companies that have said they've stopped hiring or that they're actively reducing headcount. The writings on the wall. Now. Households may still have some cash left over from pandemic, little subsidies and so forth, but their savings are going down. They're turning more and more to credit card debt that can't go on forever, and their real incomes are falling, and that means eventually

their spending is going to have to come down. I can't tell you whether that's going to be this quarter or next quarter or the quarter after, but the writing is on the wall. Or a year from now, the U. S economy almost certainly will have contracted by one or maybe even two quarters, and price increases will be lower than they are today. That's our forecast at high frequency Economics. But which quart that's going to be, we don't really have a confident forecast on where that's going to happen.

Carl Weinberg, thank you so much, greatly appreciate it. There with high frequency economic right now. Also behind us is Greg Valier with the mustarid note from a g F Investments and he joins us this morning. Greg, I said to them, I said, get somebody who remembers driving by the ge factory and schennected they knew you ARC on your way past Utica. There's only one guy we know that remembers Jack walch is s connected in New York. It's gone, Greg, Maybe it's the UTICAUS of America. They're

gonna go to Syracuse today. Dr Biden went to Providences as well. Can the Democrats garner votes in the many Utica New York's of America? Well, ironically it looks like Democrats who have been entrenched in New England are in trouble. So no, I think we're seeing a total reversal. We're seeing Hispanic voters leave the Democratic Party going to Republicans. We're seeing a lot of changes from the old the

old rules. At least. What I think is so important here is is this just simple idea of the Panic two weeks into the election and what was the day

to day year is going to be extraordinary. Well, and if you look at some of the betting odds, you can see that the Democrats are just dramatically losing seats, and there's a question of how bad of a whopping they're going to take in both the House and the Senate greg from with respect to which ray As you're watching, what's going to be most telling to you in terms of not just whether the Democrats lease power, but by how much. Yeah, I'm at seventeen in the House and

I'm probably on the low side. I might have to revise my final forecast and put it up into the twenties. So many, so many interesting dynamics in this election. Polls show that crime has surged as a big issue. Polls show that abortion is not as big an issue as we thought it might be. Poll's also show hispanic voters are moving to the Republicans. Really interesting stuff, And I do think there's going to be a wicked, wicked post mortem among the Democrats trying to figure out just what happened.

And not to be conspiracy theorist, but I have to go to this because there have been some rumblings around the edges. How concerned are you about election security at a time when it's clear that there are a number of international actors as well as domestic ones that want to raise doubts about the institution of the United States. It's a legitimate fear there was a break in. Yet today we don't know the details, so we can't really speculate.

But I have a hunch that's probably not the only incident will have in the next two weeks, Like that charges of that ballot box stuffing, you know, all of that stuff, Gregor, real focus on the Democrats here, Let's focus on the GOP right now. How Grand Old Party is the GOP two weeks out. Well, they've got an internal debate to resolve, and that is how much money do we give Ukraine. Kevin McCarthy has had to walk back what he said. I think most Republicans want to

continue the funding. I wouldn't think please go ahead, I'm sorry, please, I'd make this point time. I think this one of the sleeper issues, and it involves China, it involves Ukraine, involves Iran. Is a dramatic increase in defense spending. I think we go to eight hundred billion in this new fiscal year. Our Democrats and Republicans on board with that jointly, as we see them both jointly with a view on China, one of the rare issues where you could see a compromise.

I think there's unified antipathy in Washington towards China for all all of the things that they've done with whether it's COVID or treatment of dissidents. Greg Let's say that the Republicans do win both the House and the Senate, what are they gonna do with the FED when they are hiking rates? How much are they going to start pushing back against a pretty aggressive tightening in some of the monetary policy is simply because it's going to create

some real problems for this economy. Fearless Forecast, Lisa. I think we're going to start to see the FED really come under intense criticism. We saw yesterday Shared Brown, the Democrat from Ohio, with a pretty harsh letter, and we see people in the markets, whether it's Jeremy Siegel or Jim Paulson, there are a lot of highly regarded people who feel the FED is overdone it. I think that criticism is going to increase right to catch up Greg just awesome. No doubt we'll speak to you touch bikes

again before the midsum of I g F Investments. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live week days from seven to ten a m. Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg