Reconnaissance Research explores the challenges facing the global economy, with Dr. Hani K. Findakly, who serves on several corporate boards, including the Clinton Group, Inc. (NY) and Sedco Capital (Jeddah, Saudi Arabia). He is also on the US Department of State Advisory Committee on International Economic Policy; International Board, Peking University and a trustee of Sichuan University in China. He received his PhD and MS from the Massachusetts Institute of Technology (MIT). Here, Dr. Findakly explains the impact on global trade from short term shocks, such as COVID-19 and Russia’s war in the Ukraine, as well as the long-term imbalances of US excessive debt and a major shift in US-China relations.
The World Economy: The world economy faces multiple problems that are the most challenging in decades. They are challenging because they have no easy solutions. Not only is global policy coordination now difficult because of fractious geopolitics, it is more difficult because the problems of one country differ from another, and the solutions for different countries may in some cases increase the problem for others.
The forces that have propelled economic growth in the past few decades are now absent, replaced by geopolitical conflicts, lackluster policy decisions, frustrated economic remedies, and uncertainty that delay investment decisions and increase global financial instability. Against this backdrop are four distinct forces that have brought the world economy to its present stage.
China: China’s growth, which lifted 800 million people out of poverty in the past three decades, nearly 75 percent of global poverty in the past three decades, helped raise global growth at an unprecedented pace in history.
Moreover, by training 600 million rural workers (nearly 19% of the entire global workforce) in manufacturing, China transformed global manufacturing into a more efficient, productive, and lower cost industry. In the process, these low-paid, highly trained workers substantially increased corporate profits and growth for Western companies that outsourced production to China.
By benefitting from this China-driven non-inflationary growth, the world economy, particularly the US, enjoyed low interest rates, while subsidizing consumption, borrowing, and printing money without suffering the cost of such profligacy.
Meanwhile, China, which has benefited from cheap Russian energy and over $100 billion in Russian investments seeking shelter from US sanctions, has some scope for stabilizing its economy at a lower growth rate, but will have a limited impact in the absence of global growth. Meanwhile, as the largest creditor to developing countries faces the potential for debt default by these countries that will limit its capacity to extend more assistance to them.
The US: From August 2008 to August 2022, the US Federal Reserve increased its balance sheet from $900 billion to $8.9 trillion in ‘printed money’, of which $5.2 trillion was added in only 3 years.
Having registered two consecutive negative quarterly growth this year, the US is teetering on the edge of recession, while the confluence of Covid-related supply chain disruptions and the rising cost of energy and food emanating from the Ukraine conflict, with the forces of excessive public spending and loose money have raised inflation to a 40-years high. A remedy for taming inflation will necessarily involve higher interest rates and reduced spending, hence slower growth.
Beyond that, the seemingly irreversible breach in US-China political and economic relationship not only clouds the outlook for the future but makes coordination on a wide range of issues from trade to climate change nearly impossible. Finally, the prospects for the US economy are unfavorable for the near term because:
The Fed’s policy of quantitative easing of zero interest rates which has pumped $95 billion of cash per month into the economy is over as the Fed will start draining money instead and raise interest rates.
The dysfunctional political system creates uncertainty that will constrain business planning and investments.
Rising housing prices and higher mortgage rates have reduced housing affordability to most buyers.
Rising cost of capital to start-up and unprofitable companies will knock down the prices of speculative stocks and bring down the broad market indices.
Lower growth prospects, chronic dual fiscal and trade deficits, coupled with the US penchant for application of economic sanctions could accelerate the trend of diversification away from the Dollar.
Collectively, these issues signal ominous systemic problems that can impact the global economy for the foreseeable future. For emerging countries, high energy, and food prices, along with higher cost of debt could lead to social and political stress. The recent crisis in Sri Lanka may be replicated elsewhere with increasing frequency. For Europe, the energy crisis has impacted growth as policy makers attempt to find a sweet spot between fighting inflation and stimulating the economy, likely through currency devaluation as the Euro reached parity against the Dollar. Similarly, the UK faces even a larger problem as its struggles with the self-inflicted Brexit consequences, while Italy struggles to even have a government.
The GCC: For the GCC countries, the prospects are mixed overall. In the near term, the outlook is generally positive but uncertain in the longer term. Higher revenues will be partially offset by higher import prices and declining value of international investments. It will not be surprising that some of the GCC countries could face overall deficits. Properly directed, the higher revenues will support growth.
In the longer term, persistently high oil prices will slow down demand and accelerate the shift to renewables. More importantly, should the influx of money from higher oil prices persist, it will drive a massive transfer of $1-$2 trillion of wealth from oil consuming countries to GCC producers, eliciting a potentially adverse response. Also, the GCC needs to steer a delicate course in the US-China dispute and take a position of tactical ambiguity that serves its interests.
Conclusion: a higher prospect for stagflation. Caution should be the order of the day.
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