Global Pillars of Prosperity are Getting Increasingly Shaky

interesting time to be doing this in this region. You've got them so many different summits happening, including quite prominently obviously the g twenty summit happening right this week, um, and that important meeting between the US and Chinese presidents

which has now happened. And I wanted to kick us off with a quick chat with our chief economist, Tom Orlick, who, along with me and a cast of fellow economists, contributed to a book Thinking about the Risks and Opportunities for the Year ahead in the Global Economy for this forum, and there was a particularly striking kind of overview that you had. You speak to how the fundamental drivers of the global economy might have changed and what that could

mean in the future. But talk us through your view, um so um. The big thesis that we set out in the book, Stephanie, is that in past decades, rising global prosperity was underpinned by three pillars. UM. You had low inflation and so you also had low central bank rates and low borrowing costs. You had supercharge demand from China which spent much of the last four decades averaging, and your great rate of ten UM. And after the fall of the Berlin Wall in the collapse of the

Soviet Union, you had very limited geopolitical tensions UM. Russia UM sort of being welcomed into the fold as a you know, potential your democratic market economy by Europe and China being welcomed into the fold by the United States. And of course what we've seen in the last few months is all of those pillars being kicked away. Global borrowing costs are going to the roof, Chinese growth is going to the floor UM, and geopolitical tensions have reached

nosebleed inducing levels UM. So sort of the concern which we articulate in this New Economy Foreign Report is that these have already sort of started to hit home in two but they're also going to be problems that play out in the years ahead. And just to take each of those in turn, the one that we've often talked about is inflation. We had that recent news unexpected softening in US inflation. Do you think we are in a better place when it comes to the US inflation problem

or are people overstating how far we might come so? Um, the latest print for US inflation came in a bit below expectations. So we've got the consumer price index now running at an annual rate of seven point seven P seven is still really really high UM. And the view of our US economics team is that if you look at what's happening in the labor market, if you look at what's happening with wages, they're really rising at a

pretty rapid pace UM. And so the expectation is that even when we get to the middle of three, we're still going to be looking at a CPI of around four percent. That's way outside the Federal reserves comfort zone. So our view is that interest rates still have a bit further to rise, and they're probably going to stay at an elevated level for a pretty prolonged period. A lot of people make this about whether or not inflation

is going to fall next year. I don't think there's any we have any doubt that inflation is going to fall significantly in the u US next year. It's a question of whether the feeders succeeded in getting it fully out of the system. And we compare it to that time in the seventies. Obviously, Arthur Burns kind of carries the can for having made the mistakes in the US

running the US Federal Reserve at that time. And if you look at what his own analysis of that after the fact, it was interesting because they often did have inflation Forum for a year or so and then the East on the tightening, and that was always a bit too soon because inflation came back. Do you think that

is a risk this time? So Arthur Burns sort of shows up as the villain of recent monetary policy history, right Arthur Burns was the guy who let inflation get under control, and then Paul Vulcar is the hero who comes in at the beginning of the nineteen eighties UM and sorts everything out. But actually, if you sort of look at the situation which confronted Arthur Burns in the seventies, it's kind of easy to see how he made the

kind of mistakes that he did. Um, the FED was setting policy based on forecasts for the inflation outlook, and those forecasts turned out to be too optimistic. They thought inflation was going to come down faster than it did. Well, guess what the Federal Reserve under Jerome Powell made exactly that mistake, forecasting transitory inflation when it turned out to

be sticky. Arthur Burns cut interest rates in a recession, but it was a really deep and painful recession with a lot of unemployment, and it's difficult to be the guy raising interest rates when millions of people are losing their jobs. Powell has said, I'm not going to be that guy. I'm not going to make that mistake. We'll see. It's easy to say that ahead of the recession, harder to act on it when markets are falling and unemployment

is rising. And it is interesting when you look at this later period of that inflation fighting period that the Fed was often aturally overestimating its inflation. Inflation would come in below its forecast for a period, but it would then creep back up, and it was that judgment call of how long was it going to stay down? That was that was the problem. I guess we're all going back to the seventies and learning more and more things about it. Um. Your second driver was supercharge demand coming

from China. Um, We're clearly not expecting this time around China to come to the rescue of the global economy as it did with the slowdown after the global financial crisis. But we have had just in the last week or so, some somewhat kind of mixed picture, but some suggestion that the authorities are potentially moving out of the zero COVID policy a little bit faster than we might have anticipated. How do you read it, given your Chinese expertise. So, I think we've had three bits of good news out

of China in the last couple of weeks. We've had signals that She Jimping is thinking about an exit from COVID zero a bit earlier than most people expected. We've had a significant package of support for the property sector. And just this week we've had She and Biden sitting down in Bali and the mood music was positive, They smiled, they shook hands. UM indications of a bit of a

thought in that crucial bilateral relationship. So I think there's scope for a bit more optimism about the immediate future for China than there was a couple of weeks ago. At the same time, it's important to remember that China faces some really really significant structural problems. Demographics of turned negative.

Working age population is shrinking at a pretty rapid pace. UM. Even with some additional support for the property sector, there's still a massive problem of oversupply, which is going to take years to work through. There is really high UM and even as the mood music on U S. China relations improves a little bit, the substance is still pretty troubling.

Let's not forget that the US has just moved to cut China off from leading edge semiconductors UM, a policy which kind of seems to aim at turning China into a kind of amish community with their technology development frozen in place. UM So, if you put those pieces together, if you look at the average of the last four decades, China was growing at close to ten percent a year ahead of the COVID crisis, that had already slowed to

araune six percent. On an optimistic scenario coming out of COVID, I think we're looking at a run rate of perhaps four percent a year, and if things go badly, even four percent could well turn out to be too optimistic. We were hearing from Mark Williams the China Economistic Capital Economics a few days ago. He puts China's growth at the end of this decade closer to two percent, and the world which China is growing at four percent or two percent, it's very different to a world where China

is growing at ten percent. Big negative implications for a big commodity export as the Brazil's, Australia's and Chiles of the world, Big negative implications for the rest of Asia. Here we are in Singapore, a city state which has flourished partly because of really good governance and really industrious population, but also because they've been swept up by the rising tide of China's economy, and if that tide is now going to recede, it's going to be tougher for Singapore

and other countries in the region to outperform. We've already touched on the geopolitics, which is obviously the third driver that you highlighted in thinking about the different kind of regime that we're now in. We actually did have the the US Trade Representative speaking in an interview at the first day of the New Economy Forum, echoing some of the positivity that you heard, the sort of muted positivity out of the g twenty meeting between President Biden and

President she. How do how do you read that, tom Um? I think it seems like Biden's sort of domestic strength was stood by out performance by Democrats at the mid terms. She jimping, of course, is coming out of a party congress where he managed to stack all of the major jobs in the Communist Party in the Chinese government with

his own supporters. And perhaps it's that strength at home for both Biden and she which has enabled them to sort, I guess, move towards what looks like more like a sort of a well managed rivalry rather than a rivalry where things seemed to where there was seemed to be a risk that things could just spiral out of control. Tom, more like, thank you so much, But we are going to hear more about this ongoing question of US China

relations over the next few days. At this forum, we not only heard already from the U s Trade Representative Catherine Tie, but I chaired a session with the Japanese Minister of Trade Yestshi Nishimura and the Senior Minister for Singapore tam And Shammuga Atnam, and I didn't get anything out of the Japanese minister when it came to the US controls on semi conductor is very important for that US policy, whether or not the Japanese go along with

those export restrictions on on chip sales to China. But I did get this from Senior Minister Shamagaratnam. There's been a lot of talk about partnership and the importance of countries working together, but the recent US trade policies and for example, the attempts to restrain exports of of key semi conductors to China, that surely it makes it difficult for an open economy in Asia to navigate and think

about the future. When the US appears to be trying to drive drive lines across the map, I think, first, there's a week forward. We haven't reached the precipicecy yet, and there's a way of charting a new cause between the major powers as well as with the mid sized powers and smaller nations like ourselves. It requires first first and formal stabilization. Just avoid dialing up the tensions, avoid further steps, avoid escalation that then becomes self reinforcing. So

that's the first order of business. But second, there's so much common interest between the US and China and between all nations in the biggest challenges we face, climate change,

endemic preparedness, and just getting growth going. Those are the biggest challenges we face which affect the well being of our own populations, and focusing bilateral and multilateral efforts around those large challenges in the mission driven way, tackle pandemic preparedness, create multi valent vaccines, tackle carbon capture, clean steel, clean cement, the whole range of innovations that are still out there, still the boundaries of what's possible and not yet viable,

but invest in it. There's a whole range of investments that are in the mutual interests that we have to collaborate on, and that itselfs forms forms an overarching relationship between the major powers, who will otherwise be obsessed with competition and obsessed with what divides them. Thirdly, there's also scope, I think to all do some dialing down many small

moves that could reduce tension. Um. I mean, if you look at objectively speaking, if we look at much of the tariff war that has taken place, it's not been in anyone's interests. It's not an interest of American workers, not in interest American manufacturing, not in interest of China, not in the interests of Singapore, in the smaller nations, So there's an opportunity to dial down in every one

in terrists. So it requires that new understanding, and I think there's a very important new start yesterday in the meeting between the President Biden in Presdency UH. There's an opportunity for a new understanding. But it then requires actions avoid further escalation, find ways to dial down, but also start exploiting this very large terrain of mutual interests. That requires collaborative investments public and private, and using as best

as we can the multilateral institutions. They are valuable institutions, particularly the World Bank and the m DBS. We are under using them. By using them to catalyze private finance, we can actually go quite some distance to addressing that large scale investment challenge that we have. In the next ten years. We might hear a little bit potentially of the dialing down. We have an opportunity for that anyway,

because the US Trade Representative will be following. I'm tempted from what you've said to get you to do the interview. You might you might get get some some global progress out of it. But as you said, President Biden had did have some some warmer words after his meeting, and he suggested that there wasn't a new Cold War. And yet it has become quite common for Biden administration officials to talk about wanting to prevent China from developing technologically

in various areas. Do you think that's unhelpful? Well, I think first we have to recognize that China is not the Soviet Union during the Cold War. China will continue to be a growing and emerging economy and it will develop capabilities. You can slow the developmental or capabilities, particular advanced semiconductors and a few other areas, but you can't prevent China from emerging as a major player in the

global economy and in the global technology space. The question is whether you eventually want China as a formidable economy to be distrustful of you, to be in a relationship of antagonism al whether you want interdependence, and that requires drawing careful lines around what is really required to protect national security. What is something you can allow to have continued exchange and dependence on. But you watch and you verify some element of trust and verify and what you

have open competition on. It requires some clear lines and a clear framework that Rosal's lines. I believe it is possible. I don't think the US is set on the cause of collision with China despite some of the noise you make here. I believe it is possible to formulate this framework, and it is possible to then incorporate on the much larger challenges that both China and the US and the

rest of the martinnational economy, the globally the community of thesis. Well, that's it from this mini episode of Stephanomics, and we'll be back tomorrow. This episode is produced by Summer Sadi, Young Yang and Magnus Hendrickson. Mike Sasso is the executive producer of Stephanomics. M