Hello, Stephanomics. Here the podcast that brings you the global economy. There are plenty of people in the Bloomberg newsroom who would tell you that one number matters more than any other in the global economy in three and that's US inflation. We got the latest print this week, and for at least a few hours, the conversation was of little else what it meant for interest rates, global markets, unemployment. But guess what, US inflation is not the only thing that matters.
In fact, the event which might have the greatest impact on the global economy this year may already have happened, and that's Chinese President Seijingping's decision to reopen the Chinese economy almost overnight short term that has sent COVID infection rates soaring. It might even weaken the president's position, given how much he has invested in protecting the population from
the virus. But if it leads to markedly faster Chinese growth in the second part of this year, we also know it will push up the price of raw materials and energy again and really complicate the job of cutting inflation in Europe and the US. Our chief global economist, Tom Marlick, has run the numbers on what exactly that might mean for the rest of us, So stick around to hear the results. We're also going to hear from the land of upside down Economics with a report and
conversation about Turkey. But first, a quick postcard from Argentina, which had an inflation rate over the course of two of just under one. That's the highest rate in the G twenty group of economies, and it has plenty of awkward consequences for the economy and for Argentina's people, as our Economy and Government reporter Patrick Gillespie describes, for tourists, it's also made changing money quite an exercise. Yeah, I'm standing at the entrance of a Western Union branch and
Central Buenos Aires, Argentina. The company provides a popular currency exchange service, and at twelve pm on a regular summer Thursday, the line is out the door. Inside the queue is like United Nations of buzzing tourists speaking German, French, Portuguese and English while they're waiting to exchange cash. It might look all normal until you take a peek into people's bags, from fanny packs to backpacks and big purses. Everyone here is walking out with loads of pacil bills in cash.
The first time I did it kind of fels like I'm I'm rubbing a bank or so that was some weird When when do you have so much money in your hands? That was Stefan tavern If, twenty eight year old tourist from the Netherlands. He's fetching money to pay for his next flight with a pile of cash as thick as a brick. He's much more experienced now, but having so much cash on hand still leaves him a
little unsettled. And the other thing based having so much so many notes right, Like, it's not it's basically thousand is the highest one you can get. And I just picked up, like what a couple hundred dollars and our euros and that's it's not just I love money, um just Argentina is a complex economy, with at least a dozen different exchange rates and a labyornth of currency controls.
Those restrictions have created a growing gap between the official exchange rate and all of the other informal exchange rates. So if you go to a bank a t M in Buenos Aires, for example, one dollar would get you about a hundred and eighty paces at the official rate, but if you go to Western Union you get about three hundred and thirty five paces per dollar because the company offers a parallel exchange rate used in financial markets. That's nearly double the amount of money you get going
through the traditional banking system. So how did the paco get here? Well, the answer is threefold. First, Argentina's inflation rate is nearing one of the highest in the world. Second, the government intentionally keeps the official exchange rate low to protect its razor thin currency reserves. This helps to prevent a major currency crisis and evaluation, which is something the government wants to avoid at all costs, at least until
this year's presidential election in October. The last government that allowed a major run on the pace so got voted out after just one term in office. And finally, the largest cash bill in Argentina is only one thousand paso's worth about three dollars today. The government refuses to make larger denomination bills and says it wants to focus on
digital payments, but critics say that's just an excuse. They argued that the central Bank doesn't want to print a larger denomination bill because it would be an admission that they failed to contain inflation. The peril of this currency crisis has made Argentina both a tourist haven and a
laughing stock. At a football match last year, Brazilian fans tore up pays so cash bills to mock their Argentine opponents as their team cruise to victory, and a TikTok video went viral in which a Dutch influencer with the handle travel Tom Tom added insult to Argentina's injury. Hey, Europeans, when you think your inflation is bad, this is Argentina seventy inflation. This is the biggest bill in Argentina. It's one thousand vessels and they're worth it only three dollars.
I'm so sorry Argentina. Of course, on the ground, it's anything but funny. The number of people living in poverty and Argentina spiked to nearly from just five years ago. A consulting firm called the Agnostico Politico counted about ten thousand protests in Argentina last year. That's the highest number
in more than a decade. Inflation, galloping at such a fast pace has wiped out paychecks for middle class Argentine's Lucan Palabosino is a nurse working two jobs who had to move back in with her father so she could save money for her son. I can barely save money. It's hard. Everything is so expensive. A pair of shoes is forty paces, and those nurses the movement we make is a hundred and twenty thousand or a hundred and thirty thousand paces or a month, so a pair of
shoes is half my salary. Looming over the horizon is this year's presidential election. A new press acident could lift all the currency controls so that there's no gap between exchange rates. Still, it's not clear the official paso rate will be getting stable anytime soon. Economists surveyed by Argentina's Central Bank see one dollar being worth six hundred and twenty four pesos by the end of two thousand four. That's versus the official rate now of a hundred and
eighty pasos per dollar. Many believe a major currency devaluation is inevitable at some point, so no matter who wins the presidential race, you can still bet that cash will be king in Argentina and you will always find exchange houses shouting cambio or exchange on the streets of Buenos Aires. In Buenos Aires, I'm Patrick Gillespie for Bloomberg News. While I happen to know that quite a few economic students
listen to this podcast, God help them. In fact, my teenage son has even been encouraged to listen, though he seems to have resisted so far. And if they take monetary policy one oh one, they'll be taught that if a country has a problem with inflation, it needs to raise interest rates increase the cost of money. Now the Argentine Central Bank has done that. I mean, it's true. With the presidential election coming up in October, the authorities are a bit less keen to raise rates. But the
official interest rate is already at seventy. Now if we go to Turkey, inflations also in the high double digits there, but the official interest rate is only nine and the central bank has cut rates significantly in one and two. This reflects not the economics of textbooks, but the economics of President Argon. Central bank governors who have disagreed with this policy over the past few years haven't lasted very long in the job. Or Bloomberg's economist covering Turkey used
to work at the central bank. In a minute, I'll ask her what it's like to be tearing up the rules of economic policy on a daily basis. But first a taste of what it's like to be in Turkey from our economy and government reporter Beryl Ackman, each other graduling inflation will below from now on. Therefore minimum wage phrases a number that will easily help people get by. We have solved inflation. That was a Turkish finance minister
Nebati in an interior last week. He celebrated inflatitions downward trend and said as government had solved the fastest go out and prices in over two decades. Trouble is, inflation is still running around sixty Compare that to the U S and the EU, where consumers are grumbling about inflation
that's in the high single digits. I am Billy Lackman, an economy reporter for Bloomberk based in Turkey, where basic kitchen stables like milk or eggs have become luxuries, and where prices have become so unanchored that it's hard to tell what's expensive anymore and what the normal prices. On a recent Sunday, I want to get coffee at the nearest Starbucks to my house in a Turkish capital, Anchara. Because authorizing electricity costs, we have stopped using a refrigerator.
I will see a two thousand, three thousand bluer electors to bill every month. That is the voice of a flower shop merchant who has asked me to omit his name to avoid any trouble at his workplace or with authorities. He told me earlier that it is landlord increased. The workplace is read by almost two hundred percent. I chat a bit with him, and I comment that despite high inflation, it looks like business as usual on the outside. Cafes
and restaurants are filled, Shopping malls are crowded. For many Turkey watchers, that is a strange part that life feels normal in many ways. Pointing at the coffee cop I'm holding, he tells me that people need to socialize and have fun. Inflation or not, They say, Starbucks are always crowded. What's the guy supposed to do? One would go crazy. It's a mortal world. Inflation is a problem pretty much everywhere around the globe, but Turkey had double digit inflation even
before the war began. The situation in Ukraine just made things way worse economic orthodox He says that when inflation spikes, central banks should raise interest rates to cool the economy, reduced demand for goods and services and lower prices. But as other top bankers rushed through as their interest rates, Turkey did the opposite. From August through November last year, the Turkish Central Bank cut rates. The benchmark rate now stands at nine percent when that I stood for inflation,
which is six. This makes Turkey have one of the deepest negative real rates, meaning money is extremely cheap. President rejeb Type Ardon, the country's long serving leader, has a big hand in Turkey's policy. FI is that the indictmate. I told you we would lower the interest rates to single digits, and we did. It will continue like this from now on. They say. Inflation is like this and that don't worry that too will fall. President Ardon is
hardly alone and preferring to keep borrowing costs law. But the president argues that lower rates will bring down inflation. We have yet to see this theory validated in real life, and while most nations are trying to slow their economy is a bit too cool inflation. Ardn is boosting spending and raising pay for minimum wage earners. It's been dubbed the Turkey economy model and Who's killer will become one of the fastest glowing trees in the world. For now,
Turkey citizens are hurting. Farouk, who owns a corner store in a quiet street near Anchor a central life square, says dairy has become unaffordable. Essential food items, for example, daily products have become incredibly expensive, extremely expensive. We compromise from ourselves. Our preferences have shifted and we tried to make some of them ourselves. Because the money we are and does not compensate for our purchasing power. We try
to say more. Many economists think Turkey needs an urgent policy you turn, and that the current policy format is unsustainable. Turkey's elections are expected to take place in about five months, and that's why President Ardon is fixated on economic growth. But Ardon and his UG party are facing a serious challenge from a six party opposition alliance and growing discontent over high living costs. So it is is posed, I said to suggest Ardon has a high chance of getting
re elected, but this party may see power. Turkey's finance Minister said the nation will keep its policy of low interest rates regardless of what happens in the election. Meantime, the Turkish people are desperate for something, anything, to ease the skyrocketing prices. Arton, who works at a stationary shop in Ankara, is struggling to provide for his family. We cannot get by work with minimum wage to look after two kids and look after the household pay round. It's impossible.
What we are doing is just pretty I asked Arton what items he has the most trouble paying for. The list keeps growing. London's and said to them, first food, then clothing. Before we used to go out to dinner once or twice and long. Now it's maybe every six months, and it's even rare. I'm Berry Lackman for Bloomberg News. Yeah, so, as promised, we will dig into the upside down world of Turkish economic policies now and broaden things out to
talk about what's going to happen to inflation everywhere. With Bloomberg's Turkey economist Selva Besiki joining from Anchora, and our chief global economist Tom Marlick, who's with me here this week in New York. Welcome both of you, Silva, thank you so much. You worked for several years at the Turkish Central Bank before we helped you to escape. We like to think, just sort of from a personal note, is it difficult for officials at the central bank to
to stick with these unorthodox policies? Do you think? Yes? And no? There's still very good technocrats at the bank who produced analysis based on orthodox economic views, but the monetary policy committee caters to the demands of the political leadership. The law interest rate policy, of course comes at the cost of weeklyra and high inflation, and the bank has to resort to all these alternative tools to lessen the negative feedback on both. That only works partially and pushes
the economy into over regulation. And I guess the question that lots of people ask is why there hasn't been a bigger crisis in Turkey with them following these policies now for several years. People, you know, things are tough in Turkey. I mean, we've we've heard that, but people have been expecting that to be a tipping point, a sort of moment of truth just doesn't seem to come. Yeah, especially when we think of the very high external financing needs of the economy. I'll just give you one number
to illustrate. The external debt that is due within a year accounts for the fifth of GDP, and the resource coverage of this death is less than six So, as you said, what is stopping this crisis from coming? Two things. The central Bank has been in travening ah installed interventions into currency markets, which we calculate to be at around a hundred billion US dollars generated through October last year. This in itself, of course, as the fragilities and takes
the net reserves into even deeper negatives. There's also a second point, is this money flows, the mystery money flows into the country under net errors and emissions. Now these are flows that normally would be small statistical discrepancies under the balance of payments, but for Turkey they are at twenty two billion U S dollars. In other words, they financed about half all of the current account deficit. Um. The central Bank thinks it's currency influence from deposits accounts
held abroad. A more likely explanation, however, is offered even by the Minister of Finance. Actually, um cash flows from Russia. So just to sort of pick that a little bit, the reason why you'd expect Turkey to have a crisis is it's dependent on borrowing from the rest of the world to cover the gap in its external balance, and the central bank has been sort of propping up the currency, spending lots of foreign reserves on doing that, and despite
and it doesn't have enough of those reserves. But somehow there's some sort of secret money coming into the country which makes the numbers add up. Is that broadly what's happened. Yeah, so the secret money coming in is definitely you know, most of it is uh cash flows from Russia. There's this other factor to consider them. The central banks reserves are in negatives, so how do they even intervene? Very very valid point um. The central bank has enhanced its
sources of reserves since the beginning of last year. They are now tapping into um foreign currency revenues of exporters. You have to convert of your revenues through the central bank and give the all the effects to the bank. So the sort of creative bookkeeping and also a lot of into sort of forcing the hands of exporters and taking some of the money they're earning abroad. They're lucky in a sense that You've got quite a lot of
Russians who are looking to shelter money from sanctions. Absolutely, and there's also the other factors. For a couple of years now, the real estate market has been quite um vibrant with foreign investors coming in, and that has been one major area for the Russians to come and claim residency here um and perhaps even apply for citizenship through
property requirement. UM. It used to be that Turkey's southern neighbors, so Iran and Iraq nationals used to spare head the number one investors in the property market, but since the conflict in or the war in Ukraine, now that number one position is held by Russians. And you have a very distinguished career as an economist, and I guess we wouldn't have expected to be talking about mystery flows and the geopolitics of money coming in from Russia. I mean,
there's an economist sitting in Turkey. You know what, what do you think is going to happen? Do you think there'll be a reversal in these policies after the election this year? So, I mean, for the economic students who are listening, we know that fighting inflation, um, the interest rate is the main course, and all the other policies are just side dishes without the anchor from the policy rate.
There's only so much we can expect from these alternative tools that the central bank currently seems to be resorting too. So yeah, even that's so called Turkey economy model was supposed to boost the economy on four goals UM investments, high exports, currents to councer plus and UH strongerly round lower inflation. It has failed on all four of these goals in the year that it's been it's been applied. The central branks reserves are below standard safety levels. There
seems to be room for interventions until May this year. Um. That is probably one of the reasons why the current political leadership is considering pulling up elections from June to May. After that, policymakers could either continue on this road with capital restrictions or they will have to do a policy versal. As you say, we see the second option as a more likely outcome at the moment, regardless of the outcome
of the elections. And just briefly, I mean, what do you think the economy is going to look like in a few years time. What's the long term impact of this period of unorthodox policy going to be well, whoever is going to be in charge of the economic situation has the type time ahead. Um, it's a really tight
rope walking kind of situation. UM. As you said, Turkey, isn't that energy important usually run as a current account deficit, So getting put forward investness is really going to be critical and that requires a little bit of more long term looking rebuilding the institutional terror, which is really going to take a long time. Silva, Thank you so much, Tom Marlick. Just broadening this out, We've had two pieces from countries that have got pretty much the worst of
the global inflation problem at the moment, Argentina and Turkey. UM. Closer to home US Europe, inflation does seem to be coming down, but of course a critical question is how fast does it come down and where does that leave policies for central banks and interest rates next year. What are you currently thinking so globally, Stephanie, We think inflation peaked around ten percent in the third quarter of two, and by the end of three we think he will
have come down to around five The sun. Now, of course, that global average is being skewed up by some of the countries. You've just been discussing countries like Turkey and Argentina, which don't account for a big share of the global economy, but where inflation is just so sky high that it's
dragging up the global averages. If you take those out of the picture and focused on the big advanced economies United States, the Euro Area, you've got inflation which peaked at a slightly lower level, and it's going to come down a little bit more over the course of um. Now, why is inflation going to come down? Two big forces
of work. Firstly, goods prices. During the pandemic, we had supply chain snarls and we had stimulus driven demand, and both of those things supercharge demand for goods, pushing good prices higher. That is now unwinding. Secondly, energy, of course, the big story in Rush as invasion of Ukraine and all that meant for energy prices. Energy prices rocketed higher in now they've come a long way down from their peak.
Why is an inflation falling further? Well, the story there is really a story about labor markets which are very tight, wages which are rising very quickly, and so service prices which are sticky, and it's that combination of falling goods prices, energy prices, but service prices which are staying persistently high, which mean inflation is going to come down quite a lot over the course of but still at least in the United States, stay above the comfort zone of the
Central Bank. And I started the program by sort of giving a hint of some of the research that you've just brought out with the team about how china reopening could change this picture, because it could quite significantly change the outlook for global commodity prices. And then I guess that complicates the story for inflation more generally. Yeah, that's right.
So UM in two thousand and eight, two thousand and nine, in the global financial crisis, and the problem for the world was weak growth, and China road to the rescue with an enormous stimulus boosting global demand. In the problem for the world was high inflation, and China, in a strange sort of way, helped out again, but this time
by not running a stimulus. Indeed, China's COVID zero policies, which kept China's supply chains China's factories open but crimped Chinese demand, probably contributed to lessening global inflation in the year just past now in the year ahead, China is reopening, and that raises the risk that China's economy is going to come roaring back, good news for China's one point four billion citizens, but potentially adding an additional impetus to
global inflation. Now we've done the calculations, we've looked at the relationship between Chinese growth, commodity prices, and global inflation, and our best estimate and it really is an estimate at this point because there's just so much uncertainty about how China is reopening is going to play out. But our best estimate is that China is going to accelerate from around three percent growth in to above five growth in and that's going to add close to a percentage
point to global inflation. And if you saw even faster growth, I mean, things have been moving on the ground so much faster than anyone expected in terms of the reopening. I mean, of course, that has that means soaring infection rates in the short run and potentially some supply chain issues in the short run. As we know, we can see that factories and us sometimes are taking measures to try and get control of the virus themselves. But assuming
that infections um work their course through the economy. Could we see faster growth than the five percent you've just talked about, and what would that mean for inflation? Yeah, I think you're absolutely right, Stephanie. I mean the picture in China is not just going to be a boom right. Indeed, the end and the start of are probably going to be really weak for Chinese growth, precisely because COVID infections are sweeping the country and so people are self isolating,
They're staying at home to try and stay healthy. The rebound, we think comes towards the end of the first quarter and really picks up the pace heading into the second quarter. I could that rebound be even stronger. Could we be looking at Chinese growth not of five plus something this year, but perhaps six percent plus something this year? I think absolutely yes. The end of COVID zero is a significant
one off boost. We're also seeing Chinese as he makers reverse course on their property policy, allowing a bit more demand, a little more bit more finance to come into the all important property sector. We're seeing them ease back on their regulatory crackdown on private sector entrepreneurs. We're seeing them promised to do a bit more in terms of fiscal stimulus.
All of these things together could well add an additional impetus to China's growth, And if we see China's growth moved from that five percent handle to that six percent handle, then the impetus for global inflation will be that much higher. Now we're looking at the start of the year. We've also got the World Economic Forum coming up next week. This is the kind of the time of year where
you have endless things. Certainly if you're me coming into your inbox with forecasts about what's going to happen in the markets where you should be putting your investments. Luckily, neither of us get paid according to whether we can predict what will happen to equities or bonds, thank goodness.
But a lot of those debates about what kind of year this is going to be in financial markets come down to what kind of year it's going to be for inflation, and whether you know, at the end of three inflation is basically under control, or whether we find actually we've got at least another year of tough work against inflation still to go. Where do you stand on that?
Do you think that this is going to be a bit tougher than people are expecting this job of bringing inflation down, or do you think that, you know, broadly, by the end of this year will be done. So it's a really interesting question, Stephanie. For the last couple of years, the big mistake economists have made is in failing to predict how high and how persistently high inflation would be. I think we've got an exciting new opportunity. Um, we've got an opportunity to be wrong in both directions.
So it's entirely possible that US labor markets will stay hot and wages will continue to rise quickly, and inflation will certainly come down from that ten percent level too much lower level, but it will stay sticky, much higher than the Fed and other big central banks are comfortable with. It's also possible that the tightening which the Fed and others have injected into the system over the course of two is going to start kicking in and we're going
to see economies weakening much more quickly. We've got a recession penciled in for the United States in the second half, and if that happens, you've got the goods price deflation, you've got the energy price deflation, and you've got less pressure from wages. If that happens, perhaps inflation disappears as quickly as it appeared. Masterful fence sitting there from our chief economist, Tom Wallick. Tom, thank you so much. And
Selvaski in Anchora, thank you. That's it for Stephanomics, and we will be in Davos next week for the World Economic Forum, so look out for some special material coming from down the mountain. In the meantime, please rate us wherever you get this podcast, and check out the Bloomberg News website for more economic news and views on the global economy. You should also be following at economics on Twitter.
This episode was produced by Yang Yang, Summer Sadi and Magnus Henrickson, with special thanks to Patrick Gillespie, Carolina Milan, Beryl Ackman, Borhan Yokas, Selva Baja Baziki, and Tom Warlick. Mike Sasso is the executive producer of Stephanomics.