‘TOUGH FEW YEARS’ AHEAD FOR GLOBAL ECONOMY

Independent trade economist Rebecca Harding spoke to Breakbulk about the big factors driving economics, global trade and supply chains in the U.S. and further afield over the next 12 months.

Q: What are the main challenges facing the global economy?

A: A lot of what happened in 2022 – and what has continued in the first half of 2023 – has been a product of us not necessarily understanding how globalization really works. What we haven’t realized is that if those interdependencies that have been built between all countries across the world through international trade – if any of those pillars falls – then the whole system starts to creak. We’ve seen that particularly in supply chain issues, and today we’re looking at results from the U.S. which suggest that the trade gap has widened. More imports are coming in and less exports are going out, and a lot of that is because of supply chain shortages. That comes in the wake of the pandemic, China’s slowdown and general logistical issues around all of this. We have a series of problems, and in a sense the Russia-Ukraine crisis just acted as a catalyst to everyone thinking about what global trade meant and how the international economy was going to go. It’s not a great outlook I’m afraid. I think some parts of the world are going to avoid recession

By Simon West

where it had been accepted that recession was going to happen, but it’s going to be a tough few years ahead.

Q: Why are countries around the world struggling to rein in inflation?

A: Inflation is coming from two things. The first is massive spending by governments around the world during the pandemic. This was hugely inflationary, and there’s a lot of retrenching now in terms of interest rates and reining back expenditure to try and bring that under control. We’ve seen that recently with the U.S. debt ceiling in the last couple of weeks. The other source of inflation is supply chains. And this is where China comes in, because we don’t know how quickly the Chinese economy is going to recover – there’s a sense that maybe it’s not recovering quite as quickly, which means its production base is not quite as strong. And that creates supply chain shortages, which are still being seen in countries like the U.S. and the UK, where the economies are very dependent on imports from China. All of that creates inflationary pressures in the global economy. But we’ve also seen this big switch from Russian fuels in Europe towards renewable energies and supplies from the Middle East and America. And that has also created a lot of upward pressure on prices.

Q: Turning to the U.S., is the country in danger of tipping into recession?

A: The U.S. has narrowly rescued itself from recession by allowing the debt ceiling to be raised. And I think that was more about America’s position in the world and the power of the U.S. dollar in global trade, because obviously the dollar is the largest currency in international trade and so they had to do something – they could not let that debt ceiling be hit. There’s still some nervousness out there, but if you look at retail spending, it’s still very strong. If you look at imports coming into the U.S., it suggests the consumer market is still buoyant, and inflation is coming down quite quickly. The Federal Reserve is starting to be a little bit more bullish on outcomes, and that says to me that we’re not as worried as we were at the beginning of the year.

Q: How will the Biden administration’s Inflation Reduction Act impact the economy and trade?

A: The inflationary aspects are less important than the supply chain aspects of this. Effectively, it is a very large-scale program with huge amounts of money behind it to facilitate energy transition and more sustainable economics. If we are beginning to focus on making global trade more sustainable, that’s brilliant because local trade is worth something like US$23 trillion. And much of the global finance behind all of this doesn’t come from the companies themselves but comes from banks – about US$17 trillion. Only one dollar out of every five of that is going positively towards sustainable development goals. So, if we can start to think about how to make trade more sustainable - and the IRA is a mechanism for doing that - then that has to be a good thing. The flip side is that there is a huge amount of infrastructure that needs to be built, and technology and research and development that needs to be done, and a huge amount of around sourcing rare earth elements and critical minerals to be able to produce, for example, batteries in the West. The G7 actually has a net trade deficit on the things that we need for energy transition. And as you manage that type of transition, you’re spending money, and that creates more inflation. Global trade is just full of these paradoxes.

Q: How important is political stability for trade in the U.S.?

A: The problem the U.S. has is that politically, it’s deeply divided. That started happening from the rise of Trump in 2015, and it’s creating this huge problem for the economy. Is it going to go down this more isolationist route or is it going to go back into the global fold and start thinking about the power of the U.S. dollar and to drive a positive and more multilateral world around trade again? Is it going to be isolationist, or do we accept that we’ve got to work with China and be a bit more integrative and more outward looking in terms of trade and foreign policy – the two are very closely related.