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The Global Economy in 2019 and Beyond · Trumponomics

• 0:01
  Speaker 1: Now that the dust is clearing from America's mid term elections,
• 0:04
  Speaker 1: it's time to take a sober look at how the
• 0:06
  Speaker 1: global economy is doing. By many measures, such as growth
• 0:10
  Speaker 1: and unemployment, things are going quite well, and yet there
• 0:13
  Speaker 1: are plenty of clouds hanging over the outlook. A trade war, brexit,
• 0:18
  Speaker 1: emerging market turmoil, and federal reserve tightening, just to name
• 0:22
  Speaker 1: a few. On this week's episode, one of the world's
• 0:25
  Speaker 1: leading economists tells us what's going to be okay and
• 0:28
  Speaker 1: what we should be worried about. Welcome to Benchmark. I'm
• 0:40
  Speaker 1: Scott landman and economics editor with Bloomberg News in Washington.
• 0:44
  Speaker 1: Joining me as guest co host is my colleague Peter Koy,
• 0:48
  Speaker 1: who is the economics editor at Bloomberg Business Week magazine
• 0:51
  Speaker 1: in New York. Peter, glad to have you on. Thanks
• 0:54
  Speaker 1: for having me. Now this is a good time to
• 0:57
  Speaker 1: take a break from politics and look at the global economy.
• 1:00
  Speaker 1: We're fortunate to have someone with deep experience doing just that.
• 1:04
  Speaker 1: Katherine Man, chief Global Economist for City Group, position she's
• 1:08
  Speaker 1: held since February. Before that, she was chief economist at
• 1:12
  Speaker 1: the Organization for Economic Cooperation and Development. She has also
• 1:16
  Speaker 1: held positions at the Federal Reserve Board, Council of Economic Advisors,
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  Speaker 1: World Bank, and Peterson Institute for International Economics here in DC.
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  Speaker 1: She's in our New York studio with Peter right now. Catherine,
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  Speaker 1: thanks so much for joining us on Benchmark. I'm really
• 1:30
  Speaker 1: pleased to be here with you, Scott and Peter. All right, well,
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  Speaker 1: let's start with the US now, just to get this
• 1:36
  Speaker 1: out of the way. Did you make any adjustment to
• 1:39
  Speaker 1: your outlook after the mid term elections? We haven't done
• 1:43
  Speaker 1: that yet. Um. The schedule for our outlook actually goes
• 1:46
  Speaker 1: into a twenty nineteen review, and there are a number
• 1:50
  Speaker 1: of issues that need to be addressed that actually aren't
• 1:53
  Speaker 1: related to the outcome of the mid terms. In particular,
• 1:57
  Speaker 1: there is this question about the so called fiscal cliff
• 2:01
  Speaker 1: that is actually in the data, but it becomes an
• 2:07
  Speaker 1: issue in So what that's all about is that because
• 2:12
  Speaker 1: of the budget rules, when the budget was originally passed
• 2:16
  Speaker 1: in the early part of this year, there were some
• 2:20
  Speaker 1: rules that with a certain number of votes that were cast,
• 2:23
  Speaker 1: there had to be caps put on spending and those
• 2:27
  Speaker 1: caps bind in. Now, what that means is that, according
• 2:32
  Speaker 1: to our current projections, the US growth would be two
• 2:36
  Speaker 1: point eight percent in and then would drop to one
• 2:41
  Speaker 1: eight percent. That's why we call it a fiscal cliff.
• 2:46
  Speaker 1: Now that's predicated on these caps binding. Now, one of
• 2:51
  Speaker 1: the things that we've learned is is that on a
• 2:55
  Speaker 1: bipartisan basis, when caps like this bind, both parties agree
• 3:01
  Speaker 1: they don't think it's a good idea for them to
• 3:03
  Speaker 1: bind in a presidential election year. So we are currently
• 3:07
  Speaker 1: reevaluating the trajectory for US growth that goes for the
• 3:12
  Speaker 1: rest of this year, of course, but also into and
• 3:18
  Speaker 1: the trajectory could be different depending on whether or not
• 3:21
  Speaker 1: we see the fiscal cliff binding, or whether we think
• 3:25
  Speaker 1: the fiscal can will be kicked down the road related question,
• 3:30
  Speaker 1: would you then think that the US is likely to
• 3:33
  Speaker 1: be an engine of growth for the world economy in
• 3:36
  Speaker 1: and and what about Well, the thing that in we
• 3:41
  Speaker 1: of course still have quite a bit of the fiscal stimulus,
• 3:45
  Speaker 1: both the tax cuts and the spending those are still
• 3:49
  Speaker 1: playing a very important role in the driving US growth
• 3:53
  Speaker 1: in and whether or not that becomes an engine for
• 3:58
  Speaker 1: global growth depends a little bit on the configuration of
• 4:02
  Speaker 1: trade policy. It also depends a little bit on what
• 4:06
  Speaker 1: might be happening with financial markets and potential turbulence and
• 4:11
  Speaker 1: financial markets coming from normalization of monetary policy. In other words,
• 4:16
  Speaker 1: what the FED decides to do well. Then let me
• 4:19
  Speaker 1: jump right to a FED question. Do you think the
• 4:21
  Speaker 1: Fed will be able to keep the expansion going by
• 4:25
  Speaker 1: preventing overheating without accidentally causing a recession. So there's a
• 4:29
  Speaker 1: lot of fiscal stimulus in in the U. S. Economy
• 4:33
  Speaker 1: next year, as I as I said, and so the
• 4:36
  Speaker 1: risk of overheating is a little bit more than the
• 4:40
  Speaker 1: risk of recession. And even if the Federal Reserve keeps
• 4:43
  Speaker 1: on the path that we think that they're going to do,
• 4:47
  Speaker 1: there's still plenty of momentum in the U. S. Economy.
• 4:50
  Speaker 1: I think one of the things that's most important when
• 4:52
  Speaker 1: thinking about the challenges that the Fed faces is that,
• 4:56
  Speaker 1: on the one hand, UH, they need to move on
• 5:00
  Speaker 1: the path of moving the policy rate, that's the so
• 5:03
  Speaker 1: called Fed funds rate. It's uh, that's the thing that
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  Speaker 1: they more or less control. It's the thing that they
• 5:08
  Speaker 1: talk about at each one of their meetings, and they
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  Speaker 1: need to increase that rate sufficiently to ensure that risk
• 5:19
  Speaker 1: is properly priced in financial markets. Right now, when we
• 5:24
  Speaker 1: look at the financial markets, we can see, for example,
• 5:28
  Speaker 1: very risky investments UH that are that don't carry extra return.
• 5:33
  Speaker 1: The way it's supposed to work is that if you're
• 5:35
  Speaker 1: it's a risky investment, you get a little more return
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  Speaker 1: for it. And right now we just don't see that
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  Speaker 1: happening UM. And so the financial markets have not yet
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  Speaker 1: priced in UH the full range of policy moves that
• 5:48
  Speaker 1: the Fevrual Reserve says that they're going to do in UH.
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  Speaker 1: There may be turbulence associated with the repricing of risk.
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  Speaker 1: That's also it could be in the equity markets, it
• 6:00
  Speaker 1: could be in the high old bond markets, it could
• 6:03
  Speaker 1: be in exchange rates. There are a number of different
• 6:05
  Speaker 1: places where we might see a repricing of risk. But
• 6:09
  Speaker 1: but that could cause financial turbulence. And what matters is
• 6:14
  Speaker 1: from the standpoint of what the FED has to worry
• 6:16
  Speaker 1: about is does that financial turbulence feedback into the real
• 6:22
  Speaker 1: side of the economy. So so we've already seen some
• 6:25
  Speaker 1: of that in the last few weeks. Is that do
• 6:27
  Speaker 1: you do you think that's actually going to happen or
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  Speaker 1: do you see how much of a risk is it?
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  Speaker 1: So we've we've certainly seen some financial turbulence. That's absolutely true.
• 6:36
  Speaker 1: And one of the things that that we look at
• 6:38
  Speaker 1: very carefully is will that financial turbulence feedback into the
• 6:42
  Speaker 1: decisions on the part of businesses to continue on their
• 6:45
  Speaker 1: path of investment, and will consumers look at financial turbulence
• 6:50
  Speaker 1: and say, Wow, I'm not sure I want to open
• 6:52
  Speaker 1: my pocketbook for Christmas. So this, this response of real
• 6:57
  Speaker 1: side business investment and consumer to decisions to financial turbulence,
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  Speaker 1: is a key element of something that the FED pays
• 7:05
  Speaker 1: attention to. It's something that we're looking at, Now, what
• 7:08
  Speaker 1: do we do and what have we seen? So what
• 7:11
  Speaker 1: we've seen by looking at the data is that consumers
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  Speaker 1: by and large are ignoring what's happening on Wall Street.
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  Speaker 1: They don't most of us don't have large wealth portfolios,
• 7:26
  Speaker 1: and so when you know, the stock market goes up,
• 7:28
  Speaker 1: they don't feel richer. When the stock market falls, they
• 7:31
  Speaker 1: don't feel poorer. So what they care about mostly is
• 7:35
  Speaker 1: do they have a job. Are they getting a good wage?
• 7:38
  Speaker 1: And of course we can argue about whether or not
• 7:40
  Speaker 1: the wages are high enough, but certainly employment conditions are
• 7:43
  Speaker 1: very good, and so consumers buy and large are feeling
• 7:48
  Speaker 1: pretty good. Sentiment is pretty good, and they are spending
• 7:53
  Speaker 1: business investment. We can also make some distinctions between firms
• 7:58
  Speaker 1: that are domestically oriented and basically don't care about Wall
• 8:02
  Speaker 1: Street because maybe they borrow from a bank, but that's
• 8:05
  Speaker 1: about it. And those businesses are feeling better now than
• 8:10
  Speaker 1: they have for a decade. UH. They see the demand
• 8:13
  Speaker 1: around them, they see that they're having trouble hiring workers,
• 8:18
  Speaker 1: so they're they're investing. They're investing in capital that either
• 8:22
  Speaker 1: complements the workers that they hire or substitutes for the
• 8:26
  Speaker 1: people that they can't hire. So that group of business
• 8:29
  Speaker 1: is continuing to invest. The wild card, UH is the
• 8:34
  Speaker 1: businesses that are globally engaged and so they're very worried
• 8:38
  Speaker 1: about trade, and they're also financially market engaged, and so
• 8:42
  Speaker 1: they're very worried about turbulence. And so watching that set
• 8:46
  Speaker 1: of firms really carefully about do they pause their investment
• 8:51
  Speaker 1: decisions or do they power through what is a turbulent
• 8:55
  Speaker 1: external and financial environment. That's really the key for the
• 8:59
  Speaker 1: prospects for the US economy going forward. Catherine, let's turn
• 9:02
  Speaker 1: to the trade war. You mentioned it briefly. What's it
• 9:05
  Speaker 1: doing to the U s economy and what's it doing
• 9:08
  Speaker 1: to the Chinese economy. Let's talk about China first, because
• 9:12
  Speaker 1: what we've observed is that the Chinese economy was slowing
• 9:16
  Speaker 1: before the trade war started to heat up. Uh. Now,
• 9:20
  Speaker 1: part of the slowing and the Chinese economy was expected.
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  Speaker 1: The policy makers there were undertaking a strategy of trying
• 9:27
  Speaker 1: to clean up the financial system and to consolidate the
• 9:32
  Speaker 1: state owed enterprises that consolidate them at least a little bit,
• 9:36
  Speaker 1: and so we expected and they expected that h fixed
• 9:41
  Speaker 1: investment would start to decelerate. What they had hoped was
• 9:46
  Speaker 1: that the consumer would boy up the economy, So investment
• 9:50
  Speaker 1: we decelerate, consumers would accelerate, and that that would rebalance
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  Speaker 1: the economy towards a more consumer oriented um economic growth rate,
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  Speaker 1: which is thing that they've been intending to do and
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  Speaker 1: wanting to do for a while. Unfortunately, what happened was
• 10:06
  Speaker 1: that consumers started to look at their wealth portfolio, looking
• 10:11
  Speaker 1: at real estate in particular, and they saw that real
• 10:14
  Speaker 1: estate prices were coming down, so they said, I have
• 10:17
  Speaker 1: a wealth shock. Secondly, the constraints in the monetary trying
• 10:22
  Speaker 1: to control the monetary side of the economy was hurting
• 10:26
  Speaker 1: small businesses relatively more than the state owned enterprises, and
• 10:30
  Speaker 1: those small businesses were starting to shed workers, were starting
• 10:34
  Speaker 1: to fire workers, and so consumers, rather than boiling up
• 10:37
  Speaker 1: the economy, were concerned about employment, and they were concerned
• 10:41
  Speaker 1: about their wealth, and so they decided to decelerate consumption.
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  Speaker 1: So instead of consumers buoiling up the economy, they also
• 10:50
  Speaker 1: were decelerating. So you layer on top of a decelerating
• 10:54
  Speaker 1: investment climate a decelerating consumer climate, you will are on
• 10:58
  Speaker 1: top of that a trade war. And so Chinese economy
• 11:01
  Speaker 1: has got problems. Now they have implemented a wide range
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  Speaker 1: of policies to address both the investment side as well
• 11:12
  Speaker 1: as the consumer side, and some special policies to try
• 11:16
  Speaker 1: to deal with the trade side as well. But it
• 11:20
  Speaker 1: is the case that the economy is slowing and they
• 11:23
  Speaker 1: are working hard to uh to change their trajectory to
• 11:27
  Speaker 1: resume growth. And what about the U. S. Economy on
• 11:31
  Speaker 1: the and the trade war? Right so on the on
• 11:33
  Speaker 1: the trade war for the U. S. Economy, what we've
• 11:35
  Speaker 1: seen is is that the impact on the growth rate
• 11:40
  Speaker 1: in the U. S economy is not is really almost irrelevant.
• 11:43
  Speaker 1: On the one hand, the there is some substitution. In
• 11:47
  Speaker 1: other words, instead of buying an import, you buy a
• 11:49
  Speaker 1: little bit more of on the domestic production. But on
• 11:52
  Speaker 1: the other hand, you know, there has been trade retaliation
• 11:55
  Speaker 1: as well, and so what that has done is has
• 11:57
  Speaker 1: tended to unwind any benefits that might come from the
• 12:03
  Speaker 1: from the trade war. It's also the case that frankly,
• 12:06
  Speaker 1: the U S economy is much more of a closed
• 12:08
  Speaker 1: economy buying and selling internally, and is much more services oriented,
• 12:14
  Speaker 1: which primarily is locally produced. So on the sort of
• 12:18
  Speaker 1: the GDP side of things, there's not a lot of
• 12:22
  Speaker 1: evidence that the trade war has had much of impact.
• 12:25
  Speaker 1: Now on the other hand, on the inflation side of things,
• 12:30
  Speaker 1: we are seeing an impact of the tariffs coming through UH,
• 12:36
  Speaker 1: particularly the intermediates. Remember there's a lot of tariff put
• 12:40
  Speaker 1: on steel and on aluminum. We are starting to see
• 12:43
  Speaker 1: some of the impact of some of the other tariffs
• 12:45
  Speaker 1: that it were more recently put on the ten percent tariffs.
• 12:48
  Speaker 1: With the prospects for the tariffs to be put on
• 12:52
  Speaker 1: the two fifty billion dollars worth of Chinese imports, we
• 12:55
  Speaker 1: are starting to see um some pressure coming up on inflation.
• 13:01
  Speaker 1: And the question going into is how much of that
• 13:07
  Speaker 1: bubbling up of inflation that we see coming up through
• 13:11
  Speaker 1: the costs of production. When will that start to emerge
• 13:15
  Speaker 1: on the top line in core inflation and headline inflation.
• 13:19
  Speaker 1: And we think that coming into the first of the
• 13:23
  Speaker 1: year that one of the important changes from eighteen to
• 13:28
  Speaker 1: nineteen is that in companies had a tax windfall. They
• 13:35
  Speaker 1: got this big tax cut and it wasn't expected, and
• 13:39
  Speaker 1: they're able to use that tax windfall to protect their
• 13:43
  Speaker 1: margins this year. Next year they'll have a lower tax rate,
• 13:49
  Speaker 1: but they won't have a tax windfall, and so they'll
• 13:52
  Speaker 1: have to start making a decision do I pass through
• 13:56
  Speaker 1: these tariff increases, this tightness in the labor markets? Why
• 14:00
  Speaker 1: passed that through? And they certainly have been talking about
• 14:03
  Speaker 1: it a lot. You can read the Beige Book, earnings calls,
• 14:07
  Speaker 1: UH surveys, there's a lot of talk that firms are
• 14:12
  Speaker 1: testing the waters for do I have pricing power? Really
• 14:16
  Speaker 1: tight market situation that they're facing. UH, that's one that
• 14:20
  Speaker 1: is conducive to having pricing power. Katherine China. Going back
• 14:24
  Speaker 1: to China, its currency keeps falling. Can China afford to
• 14:28
  Speaker 1: let you want to appreciate you above seven to the dollar?
• 14:31
  Speaker 1: In well, there are a couple of different ways of
• 14:35
  Speaker 1: thinking about this that that I think is important. One
• 14:37
  Speaker 1: is that a lot of the Chinese products are invoiced
• 14:44
  Speaker 1: in dollars, the trade products there and the imports and
• 14:46
  Speaker 1: the exports are both invoiced in dollars, So the red
• 14:50
  Speaker 1: men B doesn't really affect that, okay, And the red
• 14:55
  Speaker 1: men B two dollar is not the only exchange rate
• 14:59
  Speaker 1: that the China should care about, because of course a
• 15:02
  Speaker 1: major customer is the Euro area, and so when the
• 15:07
  Speaker 1: r and B depreciates against the dollar appreciates against the euro.
• 15:12
  Speaker 1: So there's a little bit of a of a wash there.
• 15:15
  Speaker 1: And as they said that the invoicing also essentially offsets
• 15:22
  Speaker 1: some of the exchange rate effect. The other thing to consider, though,
• 15:26
  Speaker 1: uh and it's certainly irrelevant and probably more relevant question
• 15:31
  Speaker 1: is how does the R and B dollar affect the
• 15:34
  Speaker 1: financial side of the economy. The Chinese enterprises have borrowed
• 15:40
  Speaker 1: a lot in dollars, and so when the RMB dollar changes,
• 15:45
  Speaker 1: that is a direct hit on the financial side of
• 15:49
  Speaker 1: the economy. And so if we think about the balance
• 15:52
  Speaker 1: of risks to the Chinese economy, the risk coming from
• 15:57
  Speaker 1: the financial side and the much more costly servicing of
• 16:03
  Speaker 1: dollar debt in the face of a depreciation of the
• 16:06
  Speaker 1: R and B that financial risk offsets whatever they might
• 16:12
  Speaker 1: get on the trade side. So a lot of people
• 16:15
  Speaker 1: think that seven you want to the dollar is sort
• 16:18
  Speaker 1: of a red line? Is that so that that sort
• 16:22
  Speaker 1: of has been put out there as an important watershed
• 16:26
  Speaker 1: for many people the view of the our our folks
• 16:33
  Speaker 1: in in in who are closest to the situation there
• 16:36
  Speaker 1: is that, uh that not that shouldn't be thought of
• 16:40
  Speaker 1: in so strong as terms. Yeah, all right, And then
• 16:43
  Speaker 1: one other question again on China. You talked about how
• 16:47
  Speaker 1: it's slowing down, but how much will it slow down?
• 16:50
  Speaker 1: Will China's Chinese leaders put de leveraging on hold next
• 16:55
  Speaker 1: year to keep growth from falling below six Well, they've
• 16:58
  Speaker 1: already started to sort of dial back some of the
• 17:03
  Speaker 1: things that they were doing directly associated with trying to
• 17:08
  Speaker 1: clean up the financial sector. So that has already um
• 17:12
  Speaker 1: kind of the trans lsstination on that one. So and
• 17:16
  Speaker 1: they're and they're definitely trying to focus credit allocation more
• 17:21
  Speaker 1: to the private owned enterprises, the ones that have been
• 17:25
  Speaker 1: constrained the most by the policies that they had in
• 17:28
  Speaker 1: place to try to again, the objective was to clean
• 17:31
  Speaker 1: up the financial sector, so there's a little bit, there's
• 17:34
  Speaker 1: definitely a dial back on that. And as I say,
• 17:36
  Speaker 1: there's also a wide range of what ends up being
• 17:40
  Speaker 1: fiscal policy. U tax cuts to promote consumption, and consumption
• 17:46
  Speaker 1: support through various other types of taxes, and then some
• 17:50
  Speaker 1: relaxation of constraints on bond issuance by local government. So
• 17:55
  Speaker 1: these are all fiscal policy measures that are also being
• 17:57
  Speaker 1: put into place. The view is is that these are
• 18:00
  Speaker 1: going to be sufficient to offset the deceleration that's coming
• 18:06
  Speaker 1: from investment and consumption. And we shall see, we shall see.
• 18:11
  Speaker 1: They have a range of policies that they've been able
• 18:14
  Speaker 1: to implement in the past. I think, I think we
• 18:16
  Speaker 1: all I'll appreciate that the effectiveness of those policies tend
• 18:22
  Speaker 1: to be less effective, as you know, as you use
• 18:25
  Speaker 1: them over and over again, and so there is some
• 18:28
  Speaker 1: concern about the effectiveness of the policies going forward. Would
• 18:32
  Speaker 1: your estimate be that China will maintain growth of six
• 18:35
  Speaker 1: percent or better in twenty nineteen, at least reported that's
• 18:38
  Speaker 1: that's we certainly have, um, we certainly have better than
• 18:41
  Speaker 1: six percent. Okay, Katherine, The US and China obviously the
• 19:03
  Speaker 1: two biggest parts of the world economy, but I did
• 19:05
  Speaker 1: want to try to hit a few other places before
• 19:08
  Speaker 1: we wrap up on our podcast today. Quickly on Japan.
• 19:12
  Speaker 1: It still is the third largest economy. Are they on
• 19:15
  Speaker 1: the road to revival or are they going to be
• 19:17
  Speaker 1: stuck in low growth, low inflation for the foreseeable future.
• 19:21
  Speaker 1: So the economy has been doing better, they have achieved
• 19:25
  Speaker 1: more positive rates of growth, they've achieved some positive inflation
• 19:30
  Speaker 1: um sort of gotten out of the deflation slump. One
• 19:34
  Speaker 1: of the important ingredients to getting to them at to
• 19:37
  Speaker 1: getting to that point is the Olympics. The Olympics have
• 19:41
  Speaker 1: been an important driver of business investment. Now we are
• 19:46
  Speaker 1: hoping and and they are having in place the policies
• 19:49
  Speaker 1: to make that catalytic, in other words, not just one
• 19:52
  Speaker 1: off shot to to do investment for the Olympics, but
• 19:56
  Speaker 1: to catalyze more generally positive rates of growth. Of course,
• 20:00
  Speaker 1: face a big challenge associated with their desire to put
• 20:05
  Speaker 1: their fiscal accounts on a sustainable trajectory. Of course, a
• 20:10
  Speaker 1: component of that is the value added attacks increase. And
• 20:15
  Speaker 1: now the plan is to put into place a variety
• 20:17
  Speaker 1: of mechanisms and other fiscal policies that would um offset
• 20:22
  Speaker 1: to some degree the consequences of the value added tax cut.
• 20:25
  Speaker 1: But of course if you do that, then the sustainability
• 20:28
  Speaker 1: of the fiscal trajectory is also put at risk or
• 20:31
  Speaker 1: or not improved so much so they definitely face some
• 20:35
  Speaker 1: problems going forward to achieve um a path out of
• 20:40
  Speaker 1: their current fiscal situation. Staying in Asia, what do you
• 20:44
  Speaker 1: make of the clash between Prime Minister Modi of India
• 20:49
  Speaker 1: and the nation's central bank. The Indian Central Bank has
• 20:53
  Speaker 1: really achieved quite a bit of independence over the years
• 20:57
  Speaker 1: and that's been an important and are to support the
• 21:02
  Speaker 1: growth in India. And the lessons that we've learned from
• 21:08
  Speaker 1: a number of different episodes over the years is is
• 21:11
  Speaker 1: that it's important to have a good relationship between the
• 21:16
  Speaker 1: government and the central bank, one that respects each other's
• 21:21
  Speaker 1: sets of policies, and that the independence of the central
• 21:25
  Speaker 1: bank is it is an underpinning of a stable macroeconomic
• 21:29
  Speaker 1: growth trajectory going forward. So you know, it's it's one
• 21:33
  Speaker 1: thing for politicians to kind of comment on on central
• 21:37
  Speaker 1: bank independence and central bank what the central bank is
• 21:40
  Speaker 1: doing there? Should you know, communication is always reasonable, But
• 21:44
  Speaker 1: but you don't want to undermine the independence of the
• 21:47
  Speaker 1: central Bank. All right, Let's go from one hot spot
• 21:50
  Speaker 1: to another, over to Europe. A couple of issues weighing
• 21:54
  Speaker 1: on the European economy, Brexit and Italy. What you see
• 22:00
  Speaker 1: as the percent chance of a Brexit that produces no deal? Uh,
• 22:06
  Speaker 1: you know what's going on right now and what what
• 22:08
  Speaker 1: kind of result do you see happening um for both
• 22:11
  Speaker 1: the UK and the broader European economies. From day to
• 22:15
  Speaker 1: day we get different pieces of information about what the
• 22:18
  Speaker 1: prospects are for for bregsit. It's it's a little bit
• 22:21
  Speaker 1: like watching glasgrow. So it might have even changed while
• 22:24
  Speaker 1: we're while we're talking right now, Yeah, exactly. It's when
• 22:28
  Speaker 1: I described the shape of the distribution of uncertainty about Brexit,
• 22:32
  Speaker 1: it's a flat distribution. In other words, it's how do
• 22:35
  Speaker 1: you make a bet because you have no idea exactly
• 22:38
  Speaker 1: how it's going to end up. So it's a slow burn.
• 22:42
  Speaker 1: It's a slow burn, and then there will be an outcome. Now,
• 22:45
  Speaker 1: of course, the outcome might be we stop the clock
• 22:48
  Speaker 1: at eleven fifty nine and allow for further consideration. And
• 22:54
  Speaker 1: I think that there is definitely that possibility because nobody,
• 22:58
  Speaker 1: I don't think anybody Frank really wants a hard Brexit
• 23:02
  Speaker 1: and they want to have some resolution of what what
• 23:05
  Speaker 1: a new relationship might look like, and that puts the
• 23:10
  Speaker 1: higher probability on Italy. Italy and the European Commission are
• 23:15
  Speaker 1: butting heads over Italy's budget deficit. Will there's two sides
• 23:20
  Speaker 1: find a safe face saving way out of their conflict. Well,
• 23:23
  Speaker 1: I think the the the avenue that provides the best
• 23:27
  Speaker 1: opportunity for both saving face but also, of course, much
• 23:31
  Speaker 1: more importantly, having Italy returned to some to return to growth,
• 23:36
  Speaker 1: which of course is critical for them to achieve any
• 23:38
  Speaker 1: kind of debt reduction. Is you have to have growth.
• 23:41
  Speaker 1: It's the denominator and all the ratios that everybody cares
• 23:44
  Speaker 1: about debt to GDP, deficit to GDP, So you have
• 23:48
  Speaker 1: to have growth. So the way you get to both growth,
• 23:51
  Speaker 1: which is the most important thing, but also saving face
• 23:54
  Speaker 1: is to have a discussion about what's below the top line.
• 23:58
  Speaker 1: In other words, the fight is about the top line,
• 24:01
  Speaker 1: meaning the deficit to GDP ratio and um that number
• 24:06
  Speaker 1: is not nearly as important as what are the policies
• 24:10
  Speaker 1: that are below the top line, because some policies are
• 24:12
  Speaker 1: going to be more effective in helping the economy grow
• 24:16
  Speaker 1: than others, and I would like to see more discussion
• 24:21
  Speaker 1: about those set of policies, the ones that will satisfy
• 24:26
  Speaker 1: both some of the political issues but also will ultimately
• 24:30
  Speaker 1: get the economy to grow, because no politicians going to
• 24:33
  Speaker 1: win on an economy in recession. Catherine, let's go back
• 24:37
  Speaker 1: across the Atlantic to Latin America. Two key economies in
• 24:42
  Speaker 1: this hemisphere, Brazil and Mexico. They've both just elected new
• 24:47
  Speaker 1: leaders in recent months. Mexico's is on the left, Brazil's
• 24:51
  Speaker 1: is more on the right. What does that mean for
• 24:55
  Speaker 1: the economic outlook in those countries. Well, I think we're
• 24:59
  Speaker 1: still seeing how things are developing UH in terms of
• 25:03
  Speaker 1: the approaches that these new leaders are taking in their economies.
• 25:08
  Speaker 1: There is um somewhat of a the Mexico side of things,
• 25:14
  Speaker 1: somewhat of positive in the in the sense that you know,
• 25:17
  Speaker 1: next door to the United States, the United States doing
• 25:19
  Speaker 1: relatively well, but there is some concern about the most
• 25:24
  Speaker 1: recent initiatives to to roll back the construction of the
• 25:28
  Speaker 1: airport UH and whether or not that might be viewed
• 25:31
  Speaker 1: as a bell weather for some of the other policies
• 25:34
  Speaker 1: that might be put into place there. So so there
• 25:36
  Speaker 1: is more concern about about what might be the pathway
• 25:40
  Speaker 1: for for growth for Mexico and in particularly how the
• 25:45
  Speaker 1: financial markets might react to that and therefore that feedback
• 25:49
  Speaker 1: into the domestic economy or GDP in the economy. UM.
• 25:53
  Speaker 1: For Brazil, even less information really just you know, the
• 25:57
  Speaker 1: government really just starting to be formed. Of course there's
• 26:00
  Speaker 1: the honeymoon period. Um. Definitely some talk about making some
• 26:05
  Speaker 1: some of the fundamental changes on the fiscal side that
• 26:08
  Speaker 1: are necessary to have the fiscal side of the things
• 26:13
  Speaker 1: being stable. I'm talking about the pension reforms or mini
• 26:16
  Speaker 1: pension reform that have been well known across very even
• 26:20
  Speaker 1: before the election that this was that was crucial for Brazil.
• 26:24
  Speaker 1: So we're getting you know, we're getting some some initial
• 26:26
  Speaker 1: thoughts about that coming from the administration, but it will
• 26:30
  Speaker 1: depend on how things work out. I think with Latin
• 26:33
  Speaker 1: America in general, not just those two countries, but also
• 26:36
  Speaker 1: more broadly, different parts of the of the region are
• 26:41
  Speaker 1: more associated with the United States, Others are more associated
• 26:45
  Speaker 1: with the dynamics in China, and because there's so much
• 26:48
  Speaker 1: of a divergence between what's happening on the top line
• 26:52
  Speaker 1: GDP range of things for the US versus China. That
• 26:55
  Speaker 1: that's going to create a divergence of growth rates in
• 26:58
  Speaker 1: Latin America as well. At something to watch emerging markets.
• 27:01
  Speaker 1: So we see falling currencies, surging interest rates, what is
• 27:07
  Speaker 1: the outlook for the next twelve months for the emerging markets.
• 27:10
  Speaker 1: I'm not a believer in aggregates. I think that's I
• 27:14
  Speaker 1: sort of talk about the top top line versus what's
• 27:17
  Speaker 1: underneath for the Italian budget. You know, divergence within the
• 27:20
  Speaker 1: Latin America. And so the emerging markets are exactly the same.
• 27:23
  Speaker 1: They cannot be bulked up into one unit. And and
• 27:27
  Speaker 1: the problem is that they have. There's the ms C
• 27:30
  Speaker 1: I M and so you know, somebody says, I want
• 27:33
  Speaker 1: to take exposure to the emerging markets in my portfolio,
• 27:36
  Speaker 1: and so they buy into the ms C I M
• 27:40
  Speaker 1: and so that means all the money goes in and
• 27:42
  Speaker 1: then all the money comes out. And what want is it?
• 27:45
  Speaker 1: Just to be very specific in terms of thinking about
• 27:49
  Speaker 1: how might the trade shock affect different countries in Asia, Well,
• 27:54
  Speaker 1: it affects the different countries very differentially depending on how
• 27:58
  Speaker 1: they are linked. Step to China through the global value chain.
• 28:02
  Speaker 1: That's sort of the first way of looking at it.
• 28:05
  Speaker 1: But then secondly, which countries might be a source of
• 28:10
  Speaker 1: supply if buyers can't buy from China anymore. So that's
• 28:15
  Speaker 1: a second round. And then a third is, of course,
• 28:18
  Speaker 1: who's most exposed to dollar appreciation? Uh, it's a financial
• 28:23
  Speaker 1: side of things. So so the emerging markets are really
• 28:26
  Speaker 1: a heterogeneous group based on trade relationships, based on their
• 28:31
  Speaker 1: exposure to principally dollars in terms of their obligations, and
• 28:38
  Speaker 1: so it really warrants a much more, much more disaggregated
• 28:42
  Speaker 1: view of countries in order to decide who's going to
• 28:47
  Speaker 1: do relatively better than others. Katherine, we've covered a lot
• 28:50
  Speaker 1: of ground here. What's the bottom line? Will be a
• 28:55
  Speaker 1: good year or a bad year for the global economy?
• 28:58
  Speaker 1: I think I know what your answer is going to be. Well,
• 29:00
  Speaker 1: I've recently wrote a piece um that was titled some
• 29:04
  Speaker 1: basis for optimism question mark. Yes, but the financial turbulence
• 29:10
  Speaker 1: and the external accounts through trade remain the dominant narrative,
• 29:15
  Speaker 1: and we do see sources of domestic resilience, particularly in
• 29:19
  Speaker 1: the United States, sources of domestic demand. Those internally oriented firms,
• 29:24
  Speaker 1: the ones that are really powered by a strong consumer,
• 29:28
  Speaker 1: that's low unemployment rates, rising wages. That source of domestic
• 29:32
  Speaker 1: demand we actually see replicated in a number of countries,
• 29:35
  Speaker 1: uh In in Europe and and even and even in Japan.
• 29:40
  Speaker 1: But you know what really matters, You know that that's
• 29:42
  Speaker 1: if that's extremely important. Those are sources of optimism. But
• 29:47
  Speaker 1: the trade turbulence and the financial turbulence do remain the
• 29:50
  Speaker 1: dominant narrative into and so the prospects are um not
• 29:56
  Speaker 1: as not as hopeful as as we might think. All right,
• 30:00
  Speaker 1: Katherine Mann, chief Global economist at City Group, Thanks so
• 30:03
  Speaker 1: much for being with us. It was a pleasure. Thanks
• 30:05
  Speaker 1: very much. Benchmark will be back next week. Until then,
• 30:12
  Speaker 1: you can find us on the Bloomberg terminal, Bloomberg dot com,
• 30:15
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• 30:18
  Speaker 1: Apple Podcasts, Spotify or wherever you listen. We'd love it
• 30:22
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• 30:24
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• 30:27
  Speaker 1: find us on Twitter, follow me at Scott Landman, Peter
• 30:31
  Speaker 1: You're at at Peter Coy, and our guest Katherine Man
• 30:35
  Speaker 1: is at c l M a n n eCOM benchmark
• 30:39
  Speaker 1: is produced by Toford Forehead. Francesca Levy is the pet
• 30:42
  Speaker 1: of Bloomberg Podcasts. Thanks for listening, See you next time.