Surveillance: The U.S. Cannot Escape Global Slowdown, Mann Says

She's the head of City Group, the former chief Economists for the o e c D and now joining us from Dubai. The Secretary General of the o e c D. And Helguria with us as well. Dr Guria, this is wonderful to have you and Dr Man with us as well. I know Guria. I want to start with the state of the global economy. We see dissent platition here there

in everywhere. Give us the measurement that the o e c D has right now of a move to economic slowdown, to recession or maybe even the Lawrence Summer's secular stagnation. I am not predicting that there's gonna be a recession. What I am predicting and what we are seeing and living is that we're slowing down the growth. We thought we were going to be closer to four percent growth in and our latest projection is of three and the

hot percent. What happened in the meantime the trade tensions and why is it that we are having the trade tensions affect the prospects for world economy so much? Well, basically because when you invest to produce and you produced to sell, but if you don't know whether you can sell, or you don't know what price you can sell, what tariff is going to be applied to your sales, then what happens is you don't invest. And if you don't invest,

then you do not have growth. This is what is happening now and this is the size of the impact, and this is why this is so serious. Um, Mr Guria, Good morning from London. Paul Krugman was talking to us a little bit earlier on about interest rates and you know the recession. He basically, you know, put it bluntly in saying the world it's worse off now than in two thousand and seven if there were to be a crisis.

Do you agree with that statement? No, I don't. We've learned a lot and the banking system is much more strongly capitalized, it's better regulated, it's also a better supervised. But it is true that some of the capital that we had, some of the ammunition that we had before the crisis, has been used precisely to deal with the crisis. And therefore, in many cases, for example, the fiscal tool,

the degrees of freedom are less. The monetary policy tool, well, we've used it to the hilt for practically ten years, and therefore you have less flexibility on that score. Does it? But does it? Is it likely that we see a US recession this year? And if the FED doesn't have the tools, what does that mean to where we end up? I do not see a recession in the United States. In fact, the United States is one of the economies

that are doing better. And at the same time, what the FED has done is to be evidence based, which they said they were doing. They're doing it, and that is, if you see a slowdown in the economy, uh, then of course you go slower in terms of the increases in the interest rates. So already they said instead of three, maybe we'll be doing two. And that's in time. You're

having this very very healthy, well and very vigorous job creation. Well, I know Guria with us in Dubaian in London, Katherine Man and Katherine I'm pleased to say, joining us in the conversation as well is muhammadl Area is watching and sends it an immediate email for Dr Mann Katherine Man very simply, here, can any kind of global slow down, global disinflation, the sluggishness in Europe and on and on. Is that enough to stall or even drag down the

US economy? How does that reaction function work? Well? The U. S. Economy is a much more closed economy than virtually any other one UH in the globe, and right now the domestic source of growth coming on the tight labor market and rising wages is providing momentum for the U. S. Economy. There is still also in place government spending associated with the fiscal program that has not faded completely yet UH. And so if you look at the U. S economy,

it has a very strong domestic sources of growth. That doesn't mean it's immune from the rest of the world. It doesn't mean it's immune from the trade tensions and the consequences of the trade tensions. It just means that in the waiting between the two of them, the US economy is growing more robustly because the domestic side is

much more resilient. Uh, it won't you know. I think what we we we recognize is is that, you know, if there is a exacerbation of the trade tensions, if we get to a much broader array of trade tensions, not just China, but also potentially with Europe um Section two three two issue coming up here later in the month, potentially a report issued about that. Um, you know, you start to layer on top of each other, these issues on the trade side, and it feeds back to domestic investment.

Domestic investment pauses, uh, domestic investment pauses. Justice on Huldgreya said, Um, we were a team you know, back there when I was Chief of commiss O E c D. And and that's exactly the point. You weigh on uncertainty, you weigh on investment, and ultimately that drags down the economy. But this is really important, Dr Guria, with Lawrence Spoon in your team at O E c D in Paris, what is the state of the fat tail right now? What

is our financial stability? What is our ability to withstand a set of shocks or even one shock that could be out there. As they said before, today the banks are much more strongly capitalized, and they've been capitalized and they were from seven to ten times more than they were before the crisis, and they're better regulated, they're better supervisor, all these stress tests that are constantly being made, and at the same time, the world is uh, you know,

better prepared to deal with the bad news. What we're very bad at is dealing with surprises. And what I see here is that some bad news in the offing. I do not see very many you know, out of the blue surprises happening in the world economy that could really, you know, cause a negative growth recession as has been suggested. I do not see a recession in the horizon. And Mr Grea, how much do you worry about this, this war of words between France and it Is it going

to hurt investment? And is it really a kind of you know, difficult moment for Europe that's crystallized just with this listen. Wars uh, unless they are the war against hunger or the war against the ignorance or you know that the wars are bad and even wars of words are bad. But I have to say, if there's gonna be a war. Better be of words rather than of the alternatives. So I would say at this stage there are issues that have to be addressed between Italy and

uh France. There's a new government in Italy, it's installing itself, is trying to find its place, it's space, it's dealing with the European Union and at the same time, now this confrontation with France is very unfortunate for the atmosphere around Europe. But I'm sure the wisdom of the two

countries is going to find a way out. This has been wonderful and hill Garia, thank you so much from Dubie this morning and Catherine Man in London as well, the former Chief econs for Dr Guria at the O E c D. Here, Buns, is what you and I have been watching since Davos point one zero seven point oh nine. You know it's below point one zero, I

get it. But the disinflation is out, there's tangible. Why don't you bring in doctor Man, who's who's really fabulous on this continental disinflation joining us from London, formerly the Chief economist of the O E c D and currently the City Group Global Chief Economist. Good morning to Catherine we are pricing out global growth, and we are seemingly

pricing down inflation expectations as well. Have your thoughts on that well, I mean, you know, if if growth comes in dramatically slower, then then you would expect inflation to UH to also come in slower as well. But I do think that we we have to remember that the domestic economies UH in the form of tight labor markets. This is true for the United States and Spades. It's also true in Europe. Many of those economies have tight

labor markets. They do have resilient consumption, and we are seeing wages rise both in the US and in Europe and and even in Japan, and so UH, you know what you have there, If you have nominal wages rising and you have prices not coming through with any top line inflation, then you get real wage increases and that's actually pretty good for the workers. So from a market's perspective, cancer and I'm always trying to work out where the

element of surprise might come from. Whereas the boat to stack to the one side, so to speak, do you think some people have gravitated too much that the one side of the boat calling for lower growth pricing out inflation in an economy here in America where things still

look pretty good. Yeah, well, I think you know the issue is is that we've got, as I say, this domestic resilience that comes from very strong labor markets, but we have there's undeniable trade trade headwinds UM and the real question is can those trade headwinds be be uh dampened, be resolved before there's permanent damage to UM investor psyche and and following through that to to consumers as well.

I mean, I think that there's still time, there's still time to get resolution UH, to revive trade UH and to to to support global growth. But but you know the time it's running out for that. What you're saying, what Richard Clarida is saying, John Ferrey had mentioned Steve Stanley Damer's Pierre Put among others, is there's a two part GDP calculation. One is a domestic resiliency and the others all this international noise. What's our history of escaping

the international noise too? Is Clarata would say a solid outcome. Well, the US has more is a is a larger economy, it's a more closed economy, and so it is UH less buffeted by the external environment, but as compared to

for example, the European economies or or Japan. Um. But you know, it's it's not a good idea to be complacent and to say that there's no feedback loop from a slowing global economy back to the U S. That's that's a complacency to say that the US is a closed economy and can whether the weather, the trade storms. It can't because, um, a lot of US companies are outwardly uh, you know, they're out little outwardly engaged. Uh. They get a lot of profits and sales from the

foreign marketplace. And so if the global economy is not doing well, those companies in the U S will not do well. Those are the companies that are part of the S and P and part of the uh, you know, the Dow. And so you'll have financial markets reacting to a slowdown in the global markets, even if part of the US is still very strong. So you get a financial market situation where that turbulence on Wall Street reflecting global slowdown in the trade war that feeds into the

domestic economy. You can't say you can't complete we escape that even in a closed economy, like the US. So, Catherine, to your point, the mechanism for the feedback loop is

financial markets. How important is the f X channel with the dollars showing some renewed strength of the last week or so, well, so the you know, when we think about the challenges of the dollar strength, the the issue there becomes, um, how are emerging markets in particular, but markets in general going to be able to handle debt service debt, service of dollar denominated debt, because of course he gets more expensive to service that dollar denominated debt.

And if they're servicing the debt, then then they're not going to be able to be supporting their own growth. And uh so that is a further headwind for a number of the economies around the world, doctor Man. If we could move over to the domestic economy and something you know, we mentioned this on television really this morning, which is scale. Every time a corporate officer brings up the phrase scale, I think of Katherine Man, folks, and you're you don't mince any words, doctor Man. You say,

it's not the more the monopoly. Are we heading towards monopolistic tendencies? I think it's it's a little premature to say that we're headed towards monopolists in tendencies. But but I do think that there's been a lot of mergers and acquisitions UM in the over the last ten years, when when funding was cheap and stock market was high, and you know that. And it's not just an Amazon effect.

It's also think about it in in the intermediate space, whether it be chemicals, whether it be um you know, uh, agricultural space, but also in some top line spaces for example, you know hotels news. You've correctly state this is about scale, which always ends up being a lower labor a lower labor component. Well, so, yeah, because what happened is, I say, the research we used to worry about scale, and we used to worry about monopolies because we thought, well, you'd

become a monopolist and then you raise your prices. But these days the research is much more clear that rather than raise prices, the the consequence of of of scale, consequence of of not maybe not scale, but the consequences of of less competition, uh is the burden is on workers because they can't change jobs to get to get higher wages. So the wage compression is the consequence of

less competition. Catherine Grant to catch on with you. You You want to us from London today, formerly the Chief Economist of the O E C D and now the City Group Global Chief Economist. Joining us now the Panada. Gary Shilling joins us of Ammer's College or he does the physics of economics, Dr Shilling, I want to look back at your great call of lower interest rates, persistent interest rates and the chorus quarter to quarter, he's wrong, he's wrong,

he's wrong, He's wrong. What are the inflation East? Does most get wrong in their call? How did they don't give me Paul Krugman one on one, get me Gary Shilling one oh one on what the inflation East has got wrong? They simply failed to recognize that the world has got too much supply relative to demand. When you have excess to supply relative to demand, prices go down. And the problem was that in the sixties you had the opposite with Vietnam and great society on top of

a fully employed economy. Excess demand prices went up, and a lot of people thought that that's the way God made the world and didn't realize that things really changed or remarkably in the early eighties. I mentioned day Will bernanke on Friday, chapter seven or whatever, is the one little talk on anset prices within the comparison of now versus the sixties. Back then we had a credit expansion coming out of World War Two that boosted that demand. Now we've got a debt expand in our spy side,

lower prices. What does that large debt end up doing to the responsiveness of our listeners to the times that it's deflation? Are you think about it when when debt was of course, you know, this is the time folks to mention Gary Shilling's classic book, Deflation. John, it's the paperback with two blue collars. That Bill we literally paid vet Bill's vet bill for a year with the royalties off.

You're my agent there, top. No. No, The reality is that that you have an entirely different, different situation and and uh, you know, I think people have simply failed to realize. Said that again, a globalized economy is very, very different. And and when you have a big debt load, it obviously running up a debt means you've got more demand. I mean even even you know, we've had disinflation, even with the huge run up in debt globally and now you're getting the point you say, how far can this go?

Now there's you know, nobody put in a number and said this as far as that can go. And then it's got to collapse where you certainly feel that you're closer to the top and you are of the bottom. And when you start to when you start to see the debt contraction, obviously, that's very deflationary. A number of years ago, Gary, we talked about the concept of the Japanification of the German bond market. I've heard that phrase

increasingly over the last week. Once again, is that what we face here, the Japanification of core government bond markets in places like Germany. Well, you certainly would think so. I mean, Germany obviously is a has a very strong export economy. They have a very u show say, restrained view of the world. You look at the average German investor, they got more bonds and stocks. You know, stocks are for speculators as far as they're concerned. So you have

a you have a very different attitude there. But but with their with all these self reinforcing deflationary forces in in germ me, I mean very you know, they're running a government surplus. Uh, the huge exports. Uh, they're now getting squeeze obviously with a slowing global economy. But you have the same kind of and this is this is true globally. I mean when you look at the you look at the demographics. Uh yeah, I think productivity is going to come back. I think that that you do.

What's what's the countless for that? Garty? Well, new technologies. The thing is that they have to get big enough to really move the needle. You look at the Indultal Revolution. It started in your country, England and New England in the late seventeen hundreds, but it wasn't big enough until after the Civil War the second half of nineteenth century in this country to move a needle. The same with true of railroads. And I think now you have you know, biotech, robotics.

Uh okay, but Gary, let's go let's go physics here. The idea of mainline economists is the distribution of that productivity, the distribution of that better economy is evenly divided across some form of Gaussian or Bell of Space Bologny. It's a bimodal America. John Edwards is right, it's two Americas. What portion of all these good gains are driving to the halves in this guilded age. Well are obviously they're obviously going to the topic. But but when you have

strong economic growth, you always get income polarization. That's that's simply here. I don't disagree, but we're looking for some of the people. Look at this. Where are some of the richest people in the world. They're in China, they're in India. I mean except for Jeff Bezos. I mean, I mean that's what when you when you get growth, you get huge disparity. And obviously, uh, you know in the country like this where we're not happy with that. You gotta wait for things to give me a legit calm,

a thirty year bond, how low can that you'll go to? Oh, come on one? One hundred basis points and I think ten years going to go to one point? Why? Why? Because I think I think we're gonna I think we're entering a recession. We're gonna have a recession, and that's going to be the final leg down in what recession? You are so gloomy on a Monday and take a note only book showing on Wednesday, okay, Gary showing thank you?

And John I put out his book on Twitter, just you know, to keep that it's it's a very nice blue. We still have a selected copies we can paint for this. We product the copyright of all of our guests. You want High Tongue Research. It's out of Shanghai in London and it is absolutely lights up brilliant. Why don't you bring in our next guests because everybody's flying around on

airplanes posturing and I don't buy for a minute. Un On Miranda car joining us now High Tongue International China macro strategist Miranda, what can we achieve this week as Ambassador light Hiser and Secretary Manuchin head over to Beijing, Well, the best that can be hoped for is that the talks continue um. I don't think anyone's expecting a final deal and hence why the from she Um summit was postponed.

But if we can get the best it can be hoped for is the negotiations can continue m The new tariffs aren't imposed on the first of March, and basically they then continue over the next few months to get some kind of deal in place, which can you know, Trump and She can sign off on. But no big announcements this week. We think it's still going to be talking, Miranda. We keep talking about the clock is ticking. The clock

is ticking down to the March first deadline. Do you consider that deadline a hard deadline, a line in the sand? What is it? Well, if they can just in some ways, it is a hard deadline. But the thing is they can just push, they can keep the talks going. They can say we'll have another stay of execution. Well we'll talk for another three months. There's been significant progress on the Chinese side, um in terms of trying to trying

to address some of the US concerns. But you know, you still don't have verification, you still don't have the systems of guarantees. You need a long term framework, and that's gonna that's not gonna happen by the first of March. UM. So as long as they don't agree not to raise taffs further, that's probably the best outcome we can hope for. Well, it's the best outcome we can hope for. What's the best outcome China can hope for. It to be clear here, Miranda,

China really wants to get a deal done. Let's start with first principles. Why does China need a deal, Well,

it's the one that's being hurt. I mean that you're you're seeing the slowdown now coming through the Q four exports were still strong, but now we're getting um signs of the weakness in the trade actually coming through into the figures, and you're you're you're getting the even the state media guiding down to six percent growth for Q one as a whole, so one of the worst performances since since in the last ten years, um so so.

So they need the trade to pick up again, um and and and to get investment back in the country because it's it's it's going to be the Chinese economy which will suffer. And at the moment, most of the companies are saying, no, we can. We can cope with the tariffs at the current levels temperature, it's not too bad. We can sweep up a lot a lot of the Q fours results. Comments have been saying we can cope with this level. But if it gets to twenty five,

that's when that's when the pain would start. If you put a g DP extrapolation on a move from ten to twenty five, do they go from six point four six point six down to x percent. Can you gauge that? Well? Yeah, I mean but basically, if you had this on the full UM two hundred and fifty and then you went up to another you're talking about a GDP hit of between one one percentage points to about one point one

point three at one point four. So it would take China's GDP below below the target level for a two thousand and two thousand and nineteen. And I think you know this is why the China side is being very accommodative in terms of trying to get trying to get

the deal sorted. But you know a lot of this is long term structural change and you can't suddenly magic that out and magic the trust of that out, you know, just in just in a few weeks of negotiations and anything that is a grade the American side of the negotiations, Miranda wants some kind of enforcement mechanism. How accepting will the Chinese be of what could be pushed forward as

an initiative from the U S side. Well, the thing is is is you get a international framework potentially being introduced, then that could be um that could be maybe agreed on. But the trouble is if you if you're wanting to get sort of US inspectors coming into the Chinese market, Then it may seem as aference by you know, why should the US interfere in the in the Chinese domestic markets? Quite so so, anything which smacks of of you know, having US rule in China, I think would be would

be very strongly resisted. I mean, China still trying to international framework. Then it may, it may, it may work better. Well, how does presidents she fit right now? Does he if he if he goes to mar Lago, does he travel to mar Lago the same president she is the first time around? Or is the domestic calculus in China changed? Well? I think yes, I mean the the idea of China and the US going from you know, cooperation defining the relationship much more competition UM. And yes, she's much more

about nervous about a lot of the UM. You know, China needs to progress on on on the technology side, but it's now getting into with the Fuawei and the UM, the sort of I P and the national Okay, well that let me let me interrupt this is critical. Do you actually believe, Miranda car that the Huawei debate will

fold into the trade discussions. Is that just understood. Well, it's difficult to separate the two because you part of the pressure which the US is is highlighting is China as a national security risk UM and that that's been pushed forward in several reports in the US China Committee and also in in in the Defense Review where it's saying that manufacturing in China presents a national security threat

to the to the US. And so if you're in a situation where you're you're trying to limit um exports of Chinese goods, then of course on a national security ground, then then that's going to form a part of the dialogue as well. Inescapable, Miranda, how many how many? How long have you been going to China? How long have you been traveled into China since two thousand and seven for two thous so you've enjoyed twelve years in China

as well. I got a problem, Miranda. I watched the most wonderful movie in the world this weekend, My Favorite Year with Peter O'Toole. It's a spectacular movie about nineteen fifty four in New York City, and there's a scene in the movie where the young kid goes all out dim sum to to to uh to woo the girl if you would, I mean, I mean, because Miranda is an expert on dim sum? How many things do I need to order when I ordered dim Sum? Do you gotta go like he does in the movie? Like twenty things?

That many for for sheet to order from? Yeah, like take out? If I do Chinese takeout dim sum in China, they order like twenty things. Yes, what does that means? You get nice sty um? I'm just getting hungry. I just I gotta do this like tonight at a moment, you know, when you're really talented, at at the end of the interview, when you asked this really incisive question with this massive build up, and then the guest takes you seriously great and they pause, but they think, what

on earth do I say? Surely there's something that I need A high tongue essay out of Shanghai and out of Hong Kong, Cantonese and dim some food that would be a huge value right now? Yeah, that would be well, we'll try and do that PDF for Thank you so much, greatly greatly. I will give you a dim someplace. Do you have a town? I have one down to have if you want it. I was in one once and there was an animal on the wall. Animal was it was fury? What animal was it? It was furry? What

does that mean? It was furry and it was just you go downtown for dim some Yeah, I'll give you, I'll give you a place. Yeah, it's a good one. M Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio