The Stephanomics Guide to the Global Economy in 2023

participant on this show, Tom Orlig. Here in London we have the glittering star of Bloomberg Television, Francine Lakoix, and a newcomer to Stephanomics who is not new to the European corridors of power, as views are taken extremely seriously by senior policymakers across Europe and beyond, Charles Grant, director and founder the award winning think tank the Center for

European Reform. Welcome to all of you, and thank you very much for doing this, especially people who are doing it for the second time, because you know what you're in for. Um we are all about looking ahead on

this program, not looking back. But I think it makes sense, just very briefly to ask you all what your most memorable moment of twenty two was, Peggy, you know, stepanitiely one of the most memorable moments of two that I think will reverberate in actually came in July when surprisingly, after a lot of resistance, Senator Mansion did a U turn um and struck a deal that was a surprise in Washington, which is pretty hard to do um with Senator Chuck Schumer, and they passed what is known now

as the Inflation Reduction Act. But it was actually a turned around in the sense that a lot of people had thought that the Biden administration would not be able to get that comprehensive climate you know, energy tech bill through in this before the midterm elections came up. So I think that was one of the surprises for us in the news room of and we're going to get into some of that the changing politics in the US in a minute. Tom Aulick, what was your big surprise?

So there were so many huge surprises in Stephanie, and I'm sure the other wise people on the panel, they're gonna going to hit the big ones. A kind of a small acquired a surprise which stuck with me was a moment in June when Treasury Secretary Janet Yelling put her hand in the air and admitted that she had

been wrong on inflation. Yelling, in common with the vast majority of the economics profession, had dismissed inflation as a transitory phenomenon, nothing we needed to be really worried about. Of course, that proved to be a hundred and eighty degrees wrong. Inflation was a very serious problem. Central banks had to respond with the most aggressive tightening since we've seen since the nineteen eighties. And as we look ahead into three and recall that not many people anticipated the coronavirus.

Not many people anticipated Russia's invasion of Ukraine. Perhaps Charles will help me, that's wrong, um, not people anticipated inflation. I think it's useful to remember that if Janet Yellen can get it wrong on something as big and important as that, we can all get it wrong as well. Oh and we have Charles Grant. What what stuck out for you in the thing that sticks in my memory from is was Olaf Schaltz's speech to the bunders Tag, the so called zeigen Vendor speech. It was two or

three days after the Russian invasion. He basically rejected mercles many of the principles of Merkel's foreign policy. So they're gonna be much tougher on Russia. They're going to free themselves from dependency on Russian energy supplies, and we're going to spend two percent of GDP on defense. And meanwhile, a hundred billion euros are going to a special fund so that German forces could catch up with those of their peers. And this was a revolution in German foreign

and security policy. Subsequently, one can be a bit frustrated with the slow pace of implementation. One could be a bit annoyed that the revolution didn't extend to China policy, where Germany still seems stuck on the old economic model of using China is a very important export market and almost dependent on China. Nevertheless, it was a revolution in German foreign policy, and I think that that sticks in my memory. Francia, I mean, first of all, time stretches.

I feel like the last twelf months were a decade all in one, partly because we wan't used to traveling anymore, but also the news cycle has just been absolutely relentless. So the most memorable moment for me it has to be the lettuce righte the list Trust letters which brought us like, you know, it made us laugh, but it also made us cry at the same time. What a

week of absolute mayhem in the UK. That was. I was in Rome covering the Italian elections, Stephanie, and they had to call me back in London because the markets in the UK was so crazy. I've been covering you know, news for twenty years. They never pulled me out of a time story to cover UK one because it was crazier. And you know, we had the Jubilee celebrations, we had Boris Jranson resigning, we had the Queen dying for funeral

of the market meldown and then list Trust resigning. So it was quite a year for the UK and the sheer absurdity being symbolized by this Iceberg lettuce, which was judged to be more like more likely to last the month than Liz trusts and and so and so it proved um thanks to everyone for that. I look back at my look Ahead column, which I'm writing again this

year for Business Week. I started with what I suspect was not a very bold prediction at the time, that coronavirus was not going to be enemy number one for the global economy. The biggest changes we're going to stem from inflation and the risk that policymakers called the post COVID recovery wrong. I mean, Tom even as I wrote that central banks worst scrambling to reassess how long inflation was going to stick around, what kind of policy action it might require to put it back in its box.

I mean, we have now had almost a year and maybe nine months of record breaking monetary tightening around the world, many central banks going up in three quarter of a percentage point increases for the first time. Are we there yet or will three bring more of the same. So the story of two was the story of how far and how fast inflation rose and what central banks have to do to respond. The story of three is going to be the story of how far and how fast

inflation recedes um. So our view is that we're going to see a pretty rapid drop from the extremely elevated levels that we've seen in the back end of two. We're not going to see inflation sticking around at for very long. Even so, especially in the United States, where wage games are pretty astronomical, we're going to see inflation sticky at an uncomfortably high level for the FED, the

European Central Bank, the Bank of England and others. What that means, we think is that the pace of rate hikes is going to slow and then stop um But we're not quite there yet in terms of central bank tightening. A couple of other wild cards to throw in there

in terms of global monetary policy. The first one is Turkey. Now, Turkey, of course has been marching to its own drumma on monetary policy, cutting interest rates despite inflation running at and that's very much been a political decision driven by President Hurdan. Now there's an election coming up in Turkey in June.

The view from our Turkey economists, who, by the way, he joined us from the central bank over there, is that the current policy settings just aren't sustainable and after that general election, after that presidential election, no matter who wins, we're going to have to see a significant shift with a big rate hike to stave off a currency and

financial crisis. The other wild card, of course is Japan, where Harahiko Coroda, the architect of extreme easing, is now poised to step back from the front lines of policy making, retiring in the first half, that's going to be an opportunity for a reset there as well. And of course, apart from the very modest but significant change at the end of this year, UM that's the one central bank that has just not moved as the world has moved

around them. Tom, there's much talk about whether or not we will dodge a recession in the US or indeed globally. What's your take. So it's funny. I think a lot of people look at the strength in the US labor market right now, the strength of UM wage gains, the very low unemployment, and say, you know what, all this talk about recession we had over the last few months, it must have been overdone. The economy is still looking

pretty healthy. I think you actually need to flip it around and look at it in the other in the other direction. And it's the fact that the labor market remains very hot, with unemployment low and wages rising quickly, which means the Fed's job is still far from done. And it's the fact that the FED has to carry on layering on rate hikes, which means that a recession, we think in the back end of remains more likely than not. Did they dodge that yeah, they could dodge it.

Inflation could disappear more quickly than we expect, the FED could get away with less rate hikes than we expect. Other unexpected stuff could happen. But if you look at the history books, there aren't many examples of this pace of monetary tightening occurring without a downturn following if few months later. And of course, of you're the west of

the world, which we'll get onto in a minute. That is, the fact that the US is looking relatively strong now is actually in some sense bad news, because it does mean, as you've suggested, that there will be further interest rate rises that in a sense, the rest of the world may not may not need Peggy just staying in the

US for a minute. I mean, if we had spoken six months ago, or even just before the US mid term congressional elections in early November, we would have expected the inflation and the economy to dominate the results of those But it didn't work out like that, did it. Well.

It's interesting, Stephanie, because it did in some ways. The economy was certainly a priority on voters minds, but it turned out that the job market that Tom was just talking about, the strength of that, the fact that most Americans had a job, or if they were looking for a job, they could find one, seemed to put them in a better state when they went to the ballot box, and that some of the social and cultural issues that we're really bubbling up with the roev Wade decision um

and other things seemed to be one of the most important things for voters when they ultimately pressed the button.

So the economy was certainly there. But as Tom is saying, if next year, Ine, we do actually see some of the feds jacking up of interest rates actually hurting people when it comes to whether or not they can hold onto their job or get another job, then you might see voters have more of a reaction at the ballot box against the Bidet administration, if that makes sense, Stephanie, Yeah,

And of course we do have there. There was a time when we thought we were going to have a sweep across the boarder for the for the Republicans, which often, of course happens in mid term elections against the incumbent president. We ended up with in a more mixed picture. But we do have a different Congress coming back in January. How is that going to feed through to pull to seeing what Congress does well. It certainly will make a difference.

As you said, Stephanie, Democrats did better than many people were expecting, both on the federal level and in many of the governor's races across the country. But it will still mean that Republicans have the House coming into three. That may mean a couple of things, that the White House may have to turn to more executive orders to get things done, and also that they will get fewer

things done through Congress. I do think there's some issues that they might still be able to find some common ground on, but we may see, as I mentioned, some more executive orders ruling the day when the Biden administration really wants to get something done. And very briefly, I'm gonna put you on the spot, and of course we've got a countdown now now we've got through the mid terms. Of course we're going to have a gradual crescendo up to the presidential elections in is Trump going to be

on the ballot? You have to guess right now, we'll give you the nominee. He says he's going to be on the ballot. So I think we have to Visian ourselves, and and you know, I expect that he will be certainly candidates like Ron de Santa's who hasn't declared a candidacy for the race, but a lot of people expect him to. We expect others will certainly UM surface in the Republican Party. But Trump is still, in many people's minds, the biggest threat to widen and winning a second term

if he declares. We're also waiting for that UM decision to come in early January. So to answer you directly, Stephanie, because Trump has said he will run UM, I think we expect him to, but a lot can happen in two years. Okay, we're going to cross the Atlantic now. And Charles Grant Tom mentioned, I mean, we've had many

things kind of overturned our predictions in this session. Last year, it would have been the Russia's invasion of Ukraine, which the Russian Experts Center European Reform had definitely put on the radar, but not everyone was predicting. What what surprised you about the way the Russia's invasion of Ukraine has played out? And where do you see it going in twenty three? Two things surprised me Stephanie. I'll say more

about the second. The first one. I think everybody was surprised by the Ukrainian's ability to resist the invasion, by the shearing competence of the Russian military leaders. Having said that the war is not over. Ukraine is not one and most of the military experts I talked, I think we're going to face a stalemate of several years, with neither side probably able to greatly pushed back the other

side to a huge degree. So I think the war is going to go on, which leads to my second thing that surprised me was the degree of Western unity really surprising given how badly the trans atlantic relationship was at the time that Biden pulled out of Afghanistan, given the arguments within the European Union and how to handle Russia. The fact is the Europeans have been more or less united, with the possible exception of Hungary and and the U S and the EU have worked pretty well together on

most disused most of the times. Having said that the caveat is of course, will the unity whole looking forward? I think if if we face a stagflation in the coming years and people see that it's caused by the war in Ukraine leaving very high energy prices and inflation in the lower standard of living. Then you know the public opinion and may be whipped up by populace to oppose the war. It's not really happening to a very

great deal at the moment. But perhaps more worrying is that it is just the difference of analysis between two groups of governments. In the EU. You have the the Baltic countries in Poland and to some degree the Nordics and Romania in the Czech Republic, who want to be very tough on Russia. They don't want to talk to poosting. They say regime change in Russia. The warmest go on to Ukraine has reconquered all its territory and isolate Russia.

When you have then you have the French and their towns, and the Germans and indeed President Biden, and this isn't the same groups saying, actually, don't humiliate Russia. We're going to have to deal with Russian the longer. At some point that will have to be a negotiation and we have to find a way of working out a relationship with Russia in the long term, which sort of implies that at a certain point they'll put pressure on Ukraine to to compromise some of its territory and return for peace.

That nobody's at he's saying that at the moment. That is the implicit I think in the French, German, Italian, American position. So there is this tension between the two schools of thoughts in the European with the British somewhere in the middle, but perhaps on the bit of the tougher end of the spectrum. And the longer the war goes on, the more these tensions will will grow, and the harder it will be to keep the West united.

And you mentioned at the start that very striking speech that the Chancellor that Schultz gave, and but you also mentioned that there had been a bit disappointing when it comes to the follow up on that. I mean, when you're someone who's been quite frustrated over the years sometimes that the Europeans were not more muscular in their approach to defense. Is this going to fundamentally change the way Europe sees itself geo politically. Is it going to change

its commitment to defense in a lasting way? I think that the war has been good for European defense. Both the sort of manifestations of European defense. What one is NATO, which includes the Americans, one is the EU which doesn't

include the Amans. They both actually move forward. NATO is clearly been a very very important organization protecting European countries from the Russian threat, and although Native hasn't has made a point of not being directly involved in the war of course and staying out of it, it is behind the scenes strengthening its eastern flanks, sending more troops to

its eastern member states to to protect them. So that's good for Native but also the EU itself outside the spotlight, behind the scenes that he's doing a lot on defense. It's got something called the European Peace Facility which is funding the purchase of arms for Ukraine. It's never done that before and it's spent most of the first seven or eight billion euros has been spent in the Ukraine already. They're replenishing it with another top up of a similar amount.

Because the European Defense Fund, which is being spent on European industries that use played a huge rule in pushing through sanctions against against Russia. Because of Ukraine this sounds funny to say it's been good for European defense. I guess in the same way that World War Two is good for Europe's sense of its need for defense. Yes, it's worth actually saying just one number, because bloom Bird

likes numbers. European defense budgets have gone up about two hundred billion euros this this year, which is a huge amount. Half of that is the German budget going up by a hundred billion. You're the extra hundred billion for the Germany. So Europe, Europe are actually putting the money where their mouth is when it comes to defense for the first time ever really in many years. And when I was in Japan and not not long ago, that was the week that the Prime minister announced a big increase in

defense spending there. So the world has been been shaken shaken up. Francine, you've been very patient. As you mentioned, you were often DoD gadding around Europe for Bloomberg Television and interviewing some of the great and good. I mean, it has not been great for Europe this winter, and we are probably looking at a recession thanks to high

energy prices. But what you might have called the real downside scenarios for Europe that we might have had a few months ago as a result of the Ukraine War, they haven't materialized. Is the hard part still to come? Well, I think it could get harder from here, stephanitely partly because of the fairly mild winter I guess that we had in you know, the Euros are and in the UK in October and November, so oddly, and I have checked this with the news room because I couldn't quite

believe what I was reading. Europe is ending one of the toughest years for energy in a stronger position than it started the year. And this is partly because of the high energy prices attracting cargoes for example of L and G liquified natural gas over the autumn, which then continued to be discharged. So you're right, you know, we've had a pretty difficulty or inflation climbing to the hystin decades, household builds increasing multi fold, but a lot and everything

probably will depend on energy. Um it's a bit counterintuitive that, you know, our storage sites are now at the brim, so we do have quite a few months of being able to cope December that freeze, and we're still in its energy prices soaring, So I guess it's it's whether we have power shortages, whether the situation in Europe will

get much worse. Um there are other major risks, example that that gas price cap from the EU, which is seen as a positive, could also send some of the cargoes elsewhere, So you know, as you know, watch out for energy prices which could get a lot higher. And if that touches un employment, then I guess all bets are off. And I mean you spend a lot of

time in Italy. It's usually safe to put decent odds on an Italian crisis when the cost of money is going up, and obviously the European Central Bank is raising interest rates. But the new government has been quite timid so far, the government that came in as a as a new populist government. Um, so is it possible that Italy is gonna miss that great moment of reckoning in three They've kind of been our best behavior, haven't there Now.

I don't think it will be smooth sailing, but I do think the trend will be it will be trying to stick to the reforms that Mario Druggi had promised in exchange for money. There has been huge opposition, and this is something sometimes that's missed if you're not in Italy. There's been huge opposition to the ECB and to Christine mcgarden, but Georgia Maloney has scrapped one of the controversial measures aimed at promoting cash payments, and that was to please

the European Union. And for the moment, she's also stuck to her you know, staunch support for Ukraine following the Russian invasion, which to some could be seen as a surprise. Um so she's been more vocal in questioning that you stands on immigration and energy, but actually, so far it looks like you know, plane sailing for now step famous plane sailing? Can we ever use that phrase for Italy? Charles?

Do you share Francine's view? And is there anywhere else that we should be looking for potential trouble in twenty three or not trouble for them? Slightly more right than Francine, I mean, Maloney is a close friend of Mr Kachinsky who runs Poland, and Mr Auburn, who runs Hungry, and they are embarked on a sort of permanent warfare against the EU of a so called rule of laws us that you being upset that they denied the damage the

independence of the judicies. And so I think Maloney has, as Francine says, has been a very good good behavior so far. But I'm not sure it's gonna gonna last. I think that the pressures on her from her base to sort of through a few stones at the glass houses suscles may rise. But that's one thing I'm looking at it for. And other things I said is is there going to be a resolution of this endless argument between Poland and Hungry on the one hand and the E and the other over the rule of law. I'm

not very optimistic. Two final questions I pose are is that you're going to become more protectionists, more focused on industrial policy, more focused on securing supply chains, which has been the tendency of recent years, and suspending rules on state aid so it can build up huge hydrogen industries, battery industries and so on, and microchip industries. So I think, you know, the use under French leadership is becoming far more protections than it used to be. Is that going

to persist in? Finally, We'll come back to this later, I guess Stephanie is will there be a repress more between the UK and the EU. That is an interesting question. Well, we may part the UK briefly because people will feel they've had an excess of Europe already. But Tom, one thing that we've mentioned briefly on this program before that's helped Europe have those overflowing gas supplies that Francine talked about it was the slowdown in China because it made

more energy available thought for Europe to snap up. And the part was partly because the Chinese authorities have continued to put control of COVID ahead of economic growth and we had sort of expected that to continue for a large part of three only a grad or move away from the COVID zero policies, but but everything seemed to change very quickly in the last few weeks of the year. Um I guess I'm interested. You spent eleven years in Beijing. How do you read what happened to COVID policies in

China and how that affects the outlook for next year? Um, So, before you're getting onto China stuff, and I just wanted to pick up on one comment from Charles, just from a British negotiating position. I suggest we hold back on using French words like reproach, more con sessions from from across across the channel, um so, um so on China, um now. I gave Beijing a lot of credit for

the way they manage edged COVID. Yes, COVID zero placed enormous strain on the economy and enormous strain on society, and we saw that social strain bubbling up in those extraordinary protests in the last few weeks. But COVID zero saved a lot of lives until a few weeks ago, just a few thousand people dead from COVID in China compared to vastly larger numbers for much smaller populations in other parts of the world. So I gave them a

lot of credit. The last few weeks have sort of really shaken my confidence that they've got a plan for an exit. Um now. There is a way out of COVID zero whilst minimizing public health costs, and that requires a gradual approach to allow time for vaccines to go into arms and for health facilities to be moved into place. Clearly, that is not the approach which China has taken. Reopening has happened really really quickly UM And I'm not an epidemiologist.

I don't know how things are going to play out in the next few weeks and months. But the experience in other countries around the world, and what I read from people who are experts in the way diseases spread through populations suggests there's a risk of a really serious public health catastrophe in China in the start of UM.

So that's really important. Hasn't happened yet. We don't know how Chinese society, how China's policymakers are going to react to it, and that means there's still a huge amount of uncertainty as we look into China in the year ahead. That said, from an economic perspective, the rapid exit from COVID zero is pretty clearly a positive for China's growth numbers looking forward. Yes, right now, people are pretty cautious. They don't want to get infected in this first wave.

They're staying at home. We're going to see some pretty brutal growth numbers from China in the fourth quarter of two and perhaps right at the start of but by the time we get through the winter and into the second quarter of three, I think we're going to start looking at some pretty strong growth numbers out of China. Our base case for the year ahead is that we get five point one percent growth. That base case assumed a gradual reopening. We've now got a more rapid reopening.

So I think risks to that five point one percent number. And now to the upside for the rest of the world. Of course, there's a positive there China is going to be buying more stuff, but there's also a negative. Because China is going to be buying more stuff, the prices of stuff are going to start going up, and we'll look especially at prices for commodities like energy and think about how they're going to be playing into the inflation

story in the US, in Europe and elsewhere. Yeah, so that if you do have good economic news in China, that will be making the job of central banks everywhere harder and increasing, as you say, the sort of stickiness of inflation. I mean, Charles, obviously, the shifting relations with China is the stuff of years, not months. But we do seem to be in a new era of geoeconomics, and actually I spoke about it at length in the last week's episode with with support Tucker, economic tools increasingly

being used for geopolitical objectives. Is Europe inevitably going to be pulled into this what we would call the new Cold War? Or do you think there's a desire to really resist this weaponization of the global economy. I think Europe is going to be pulled into a new Cold War,

but rather reluctantly dragging its feet. I mean, Europe's in a very difficult place when it comes to the growing conflict between China and the US because economically it depends more on China than the US does, a greater pertentage of its trade is with China. It also has a very different sort of geopolitical attitude to China. Europeans worried about Chinese behavior, the abuse of human rights, the threats to its neighbors, the theft of intellectual property, and so on.

But I think many people in Washington worry about Chinese power per se, and I think many people in Washington, even if China started behaving better, would still see China as a threat to American America's role in in Asian securities. Biden, to his credit, has made an effort to reach out to the Europeans to consult them on what he does on China. But I think that the tensions will will grow because the Europeans just don't want to be as

tough as as the Americans. However, the more we get into a sort of new Cold War, and the more inevitably the Europeans, whoever reluctantly, are forced to take sides and will take sides on on the American side as far as I can see. And Peggy, I mean, we talked about the new Congress. The one thing that there is bipartisan agreement on is that the U s should

continue to be playing tough with China. Do you sense from the administration and appetite for opening up more sort of wars along the lines of the chip chip wars and more weaponization of trade rules from the US? I do think there's appetite, there's Stephanie. I think the Bion administry and has tried to position itself very tough on

China particularly. We saw President Biden himself be very forthright about his feelings about Taiwan, for example, and we've seen Secretary of State Blink in this fall say that the US sees the timetable for China potentially invading Taiwan moving up.

So I do think there's quite a um a hawkish viewpoint from the Biden administration towards China while they are still trying to keep a dialogue open, and the Republicans certainly are coming out of the gate in with control of the House in a similar position that they want to look strong on China. So I do think you will continue to see legislator legislators try and policymakers try to show that they're being tough on China while keeping the door open between the two countries because we are

still so interconnected. I think that's one thing to watch, certainly. And then the other is the chips bill that you mentioned that is really really just starting to get off the ground, passed in two but a lot of money and energy is going into trying to onshore or near shore the making of semiconductor chips that those all important

semiconductor chips. So I do think the Biden administration is hoping that some of that will actually get off the ground in three and potentially offset some of the job losses that we may see from the FED ratcheting up

the interest rates. So they are hoping that as the FED tries to strike this soft landing that Tom talk talked about before, that there will be some new jobs coming into the economy from the infrastructure bill that they passed in their first couple of years, and then from this semiconductor bill that passed as well in two Although it's funny because one of our colleagues, Sean donnand has been going has been going down to where the new one of the new semiconductive factories is going to be,

and they're struggling to find construction workers. Said that the issue of of tight labor markets as what's turning to bite them. This is the time of year, Peggy, where you as bureau chief of sort of thinking about reallocating people as we see kind of the political mood shifting and activity moving to different areas. And I was struck by you mentioning antitrust sort of competition moves being an area that you saw being a more active next year.

Is that is that one of the areas where President Biden can continue to make news and do things even with a divided Congress. Yes, I do think so. I do think there is some appetite in Congress on both sides of the Aisle on this issue of antitrust and particularly related to the consolidation of power amongst the big tech companies. But even without that, the Biden administration has

two key allies and potential forces behind it. One is Lena Kahn heading up the FDC, and then also the at the Justice Department there's Assistant Attorney General Jonathan Cantor. Both of them are very aggressive on this anti TUCH issue and they see it as the kind of the new frontier for helping consumers and workers that this consolidation of industries and business has really at many junctures hurt workers, especially given that fewer and fewer of them are protected

by unions. And so I do think there's a three pronged effort between the Biden and administration push on the hill as well as um Lena con and Jonathan Canters pushes on antitrust where you could see more moves or cases coming down that could change the landscape. Okay, so I feel like since at least some of us are sitting in UK, we probably have to linger a little bit on the sad, sorry state of the UK economy and politics front scene. You started with the lettuce I

was struck by a pole. I just saw of just under half of the UK population is thinking we might get yes, another prime minister in three despite the fact there's no election on the eies and and the government in theory has quite a big majority. There are strikes up and down the country as we speak, including an unprecedented nurses strike ambulance workers. Can it Can it only get better from here? Or do you think actually things

are going to get worse? First well, I thought stephanitiely that things could only get better, mainly come an optimism. I spoke to John Stepic of course from Boomburgh Wealth and he thoroughly depressed me on house prices and frankly everything else. So he you know, he argues that house prices could fall over house price fall that's a crash. I mean that's a lot. So frankly, everything depends, as you know now, on the labor market whether that stays strong.

I think the lesson from history is that when a recession hits an employment takes about a quarter or so to respond. Once it does, it tends to rise rapidly. So it depends really on the rise and whether the bank in England can manage it whether we get through this. The Bank of England officials that we speak to, and you know them better than me, Stephanie, they're you know, they worry or they think there's a gradual riseing job is right next year. The big risk is that there's

a huge increase all of a sudden. If it's a lot more rather than we think, then I guess all better off. And I noticed that our achieved europe economists had done a few sort of back of the envelope calculations that just in terms of where incomes were now and where the affordability of mortgages relative to a year or two ago, house prices look about twenty overvalued in the UK. So it does feel like they're heading for a for one way or another. Charles, that whole mini

budget fiasco in the autumn. The optimistic take on that was it was it meant the death of cake is um in the UK. It meant the death of this idea that was associated particularly with Boris Johnson, that you could dodge tough choices, have your cake and eat it. Is that a sort of positive spin on what's happened that now Britain's going to get serious, is going to be forced to go on a better path because it's

tried all the other ones. I think Cakism has been defeated and the the establishment and the grown ups are in control of the leavers on the British economy now for now. But let's not forget that the Tory Party has many members of Parliament in it who are who are Cakiss, who like Boris Johnson and his trust, sort of believe you can have tax cuts and spending increases and growth all all at the same time without worrying

too much about the consequences. Some of them are still in that of that school, and they are particularly the ones who really hate the European Union. So they may prevent Richie Sunac from, if I may use a French word, engineering a repression of the European Union in the over the coming months, which which it's all about the Northern

Ireland Protocol. It's far too boring to explain, but essentially the British Government has to compromise on this protocol and agree to allow some checks on goods passing between Great Britain and Northern Ireland to preserve the fact that there isn't a barrier between the North of Ireland and the South of Ireland because Northern Irelands and the civil market, that's what it's about. The British government is reluctant to

do so, we'll have to do so. Richie Sunach is strong enough if he wishes to see down his own right wing Brexiteers and the DUP than leading unionist part and all down if he wishes to, but I'm not

sure he's tough enough to do so. And if he doesn't do so, then but President Biden won't come to Northern Island for the for thenversity of the Good Friday Agreement in April, and the Americans to be quite annoyed, and he won't get a better relationship with the European Union, which is really bad in very many respects at the moment. That he does have to take on the cakes, take on the extremist, take on the Brexiteers and defeat them. I hope he does, but I'm not sure that he's

going to be able to do something. And probably the single most effective thing you could do to support the economy is to have a stronger trade relationship with the EU. But as you suggest, it's it's it's politically extremely difficult

to handle well. I think when we're heaving, probably for a labor government in a couple of years time, that even a labor gunner which will want a stronger relationship with the EU, a close relationship will not reverse the essentials of the Brexity deal, namely out of the Single Market, out of the Customs Union, no freedom of movement. So even a better relationship will still lead to a lot

of economic damage. As you may have noticed, Stephanie, the Center for European Reform just published a report today on how much Brexit has damaged the British economy. We've constructed a Doppleganger model of an economy similar to the British economy which didn't undergo Brexit, and the gap between the growth of the Doppelgan economy and the British coconomy is

about five and a half percent. That's led to put lead to the income for the treasury being cut by about forty billion pounds a year, which is roughly the same as the tax increases Writchily Sooner recently known. So the cost of the British economy under the exchequer of

Brexit is quite large, and it's going to remain. Sadly, Tom, it has been a tough year in Europe, the US still potentially looking at a recession, and China, but it should be said there's a lot of the rest of the world that has not necessarily been as hard hit. I mean, I noticed India's growth is now going to outpace China's for at least a couple of years in a row, and of course the Gulf is booming thanks to high energy prices. Were looking, as a global economist does,

at the entire world economy. Who are the relative winners from the shocks of two? Who's coming to this better? First of all, definitely, let me say that I was poised to forgive Charles for the repeat appearance of reproach more, but then he had to follow up with Doppelgang, which is different country but the same, the same, same, same,

wrong side of the linguistic divide. Um. So um, So look, I think until quite recently, UM, we could tell a story about a global economy which was supported by three pillars, really low borrowing costs, reliably supercharged demand from China and ever increasing tip trade and financing ties. Um. And what's happened in the last few years is all of those pillars have been kicked away, Borrowing costs have gone to

the roof. China, as we've just discussed, has gone from being a reliable growth driver to a real wild card for the global economy next year. And of course, Frank should us China ties and even more rushes invasion of Ukraine are really replaced kind of optimistic hopes for globalization with a new reality of kind of tariffs and embargoes and sanctions and geopolitical state craft. So for the global economy written large, all of these things are negative. Right.

Growth is going to be weaker, inflation is going to be higher. But as you mentioned, Stephanie Um, there is also at a kind of micro level going to be a pattern of winners and losers, right, And if we think about some of the potential winners in this new and more chaotic and more disorderly and more fragmented world, I think we can point to companies and countries that

control access to crucial resources. Right. So if you're controlling access to a crucial piece of the semiconductor supply chain, or if or pumping a lot of the petrochemicals which the world relies on, potentially the new world looks better for you, more opportunities than the old world. If you're a country that could potentially step into supply chains and give countries and companies a bit of a hedge against

their China exposure. If you're in Mexico or a Vietnam or an India, it's definitely you mentioned India now outpacing China. Then this shift to a more broken, more fragmented world could also mean significant opportunities as well as new risks.

So I think we tend to think about emerging markets as as a as a pack, right, and certainly investors often treat them as a kind of a pack and don't differentiate in between them and the reality though, of course, is that within the emerging market universe, you've got lots of different qualities of institutions. So you've got Brazil's central Bank, for example, which hikes aggressively to get inflation under control.

And you've got turkeys central Bank, which is dominated by politics and which bizarrely cuts interest rates and gives a further leg to already supercharged inflation. You've got emerging markets that are massive commodity exporters, Like many of the emerging markets in the Middle East and which are kind of just counting the money flow into their treasuries as Russia's invasion of Ukraine drives global energy prices through the roof.

And then you've got lots of other emerging in frontier economies like Sri Lanka, for example, which defaulted on its debt last year because it couldn't afford to pay for food and pay for energy imports and repay its lenders at the same time. Um So, I think this sort of more fragmented world, the world of higher borrowing costs, the world of broken supply chains. I think it's going to reinforce the sort of the need to differentiate within

the emerging market universe. Who's got what technologies, who's got what commodities, who's got good institutions, who's got bad institutions. He's going to be some of the important questions going forward. Okay, So I think we have had our tour of the world. I'm very briefly before you escape. Traditionally I now ask for everyone's wild cards, things to watch, unexpected, things to

look out for. In twenty twenty three, Francine, So the one thing I'm watching out force definitely is probably that you could get potentially better data. I don't know whether Tom and you think that we could get inflation, you know, suddenly disappearing quicker than expected. But if that helps the market, then we're in very different economy in two thousand and twenty three, with households, you know, willing to spend and everything looking much rosier. I'm not sure about my own conviction,

but that's what I'm watching out for. Child. I think I my sort of wild card would be actually an unexpected represh more in the relationship between China and the West. She's been getting worse and worse for ten years because of Chinese behavior has been unacceptable to the West. It's been bullying its neighbors, stealing intellectual property, abusing human rights and song. But actually, although as Tom said, the economy is probably going to pick up in China, they've got

a lot of internal problems. There was unrest we haven't talked about, of demonstrations all across China, which forced es and paying to abandon a zero COVID policy, which is

quite a quite a thing. They're tied tied geo politically to Russia, which has turned out to be rather a Dodgy an unsuccessful ally in the West is very united, and I think that the Russian War has made the Chinese scared of invading taime One because they can see the West would back Taiwan probably, and so I think I would predict that the Chinese leadership will be so focused on sorting out domestic problems are actually be a bit nicer to the West and looked looked for some

represh more. M's interesting, Peggy, what's your wild card? So, Stephanie in the US, I think the wild card to watch would be the debate over the debt ceiling or debt limit. We are expected to hit that sometime and I think the Republicans are really going to come to the bargaining table to talk about the entitlement programs for the first time in several years. Entitlement programs meetings, social Security, Medicare,

and Medicaid. Some changes potentially there to cut costs, and I do think that's one area where Congress likes to go up to the deadline like journalists do, and that could cause some real rattling in markets, not only in the US, around the world. Thanks Peggy, until all like your wild club? So after after after a number of years which have been marked by my plague, by war, by talk of recession, is really easy to focus on what could go wrong, UM, And our base case for

the global economy next year is pretty blue. Me We're forecasting two point four percent global growth into any twenty three, and if you leave aside the COVID crisis year of and the global financial crisis year of two thousand and nine, two point four percent growth is actually the lowest going all the way back to so pretty gloomy baseline projection.

I think it's also important to keep in mind, though, UM, coming back to sort of Janet Yellen's acknowledgement of forecasting failure, that we could just be wrong right and this time

we could end up being too pessimistic. If you ask, inflation disappears more quickly than we expect, if Europe has a warmer winter, more gas and so less of a problem with inflation than we expect, if China manages to exit from COVID zero a bit more smoothly than we expect, and perhaps even as Charles mentions adopts a bit of a warmer relation between Beijing and Washington, d C and Brussels, then we could be looking at a world in three with stronger growth, last inflation and a bit more positive

tone to this conversation, and hopefully we get back together on Stephano Mix at the end of the year. Well, that is a very fine thing to hope for now. The other tradition is I lower the tone with my wild card. Last year I had a sporting prediction that England would win the Football World Cup and everyone would judge Cats the best World Cup ever. I didn't quite work out that way, but it was a pretty good final, i would say, and maybe a better World Cup than

many thought. I'm going to try my luck and make the same prediction this year that England are going to win the Football World Cup. But I think I have a much better chance of being right this time because it's the women who'll be playing at the finals next summer in Australia. Thanks for listening to Stephanomics. We'll be back next week next year. In the meantime, you can find us on the bloom Book Terminal website or wherever you get your podcasts, and please do rate and review

our show so it can reach more listeners. You can also get news and analysis from Bloomberg Economics all the time by following at Economics on Twitter. This episode, as ever, was produced by Magnus Herrickson, Summer Sadi, and Yang Yang, with special thanks to Francine Laquid, Charles Grant, Peggy Collins, and Tom Porlock. Mike Sasso is our executive producer. Thank you to all of you, and a very happy New Year.