Global economy January 2023-

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Five trends to watch in 2023 as the global economy tries a dangerous reboot
By Josh Lipsky
(Atlantic Council) If you’ve listened closely to financial leaders over the past few months, one theme comes across clearly: They just want to get back to where they were before the pandemic.
If we could just get back to 2 percent inflation, if we could rewind the clock to before Russian President Vladimir Putin invaded Ukraine, if we could only get China to open up and manufacture for the world, then things would be fine.
This desire for normalcy is misguided. Europe’s over-reliance on Russian energy was a vulnerability waiting to be exploited. Low inflation vexed the US Federal Reserve in 2019 because it signaled weakness in the labor market. As for China, if you think things were running smoothly in 2019, you probably forgot about the trade war.
As we enter 2023, here are five underappreciated trends to watch in geoeconomics. With each trend, policymakers can focus on a return to the status quo or build something different, and better, this year.
3 January
Trends That Will Define the Coming Years
They include deglobalization, stagflation and the bursting of the tech bubble.
By Antonia Colibasanu
(Geopolitical Futures) In addition to the global economic slowdown, for the first time since the 1970s the world is simultaneously facing high inflation. The drivers of this bout of inflation include excessively loose monetary and fiscal policies that were kept in place for too long, the restructuring of global trade caused by the pandemic, and the sharp spike in the cost of energy, industrial metals, fertilizers and food as a result of Russia’s invasion of Ukraine. Angered by the unequal distribution of the gains of globalization, voters demanded more government support for workers and those left behind. However well-intentioned, such policies risk an inflationary spiral as wages and prices struggle to keep pace with one another. Rising protectionism also restricts trade and impedes the movement of capital, limiting improvements on the supply side.
What Comes After Globalization? A Conversation With Rana Foroohar
“all the things that made conventional neoliberal globalization possible—cheap capital, cheap energy, cheap labor—all those things are breaking apart.” (Foreign Affairs 29 December 2022)

10 May
Winners and Losers in the AI Arms Race
Barry Eichengreen, Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund.
Generative artificial-intelligence models like ChatGPT will revolutionize the economy, though no one can say when. Equally important, no one can say where, though there is no reason why AI, like previous general-purpose technologies, shouldn’t produce widely shared net benefits.
(Project Syndicate) Developing countries would seem to be at a significant disadvantage in this AI arms race and are at risk of losing their competitive advantage: abundant low-cost labor. Yet AI also holds out the promise of benefits for these countries. Companies like Apollo Agriculture use agronomic machine learning and satellite imaging to provide customized advice to smallholder farmers in Kenya. AI can also be used to reduce technological and financial impediments to economic development. For example, using AI to gauge credit risk in the absence of bank branches and loan officers would enable the operation of peer-to-peer lending platforms and a loosening of financial constraints on budding entrepreneurs. More than anything, however, economic development depends on human development – that is, on the accumulation of human capital. Where developing countries lack the resources, financial and otherwise, to increase significantly their spending on traditional modes of education, AI holds out hope for providing what is missing. It can be used to design individualized learning assistants capable of providing personalized instruction to students in settings where teachers are in short supply. When it comes to economic development, a bit of additional literacy and numeracy can go a long way. Throughout history, technological change has created both winners and losers. There is no reason why AI, like previous technologies, shouldn’t produce more of the former than the latter.

17-18 April
1 big thing: The global economy’s fractured new normal
European Central Bank president Christine Lagarde came to New York yesterday with a warning: A more fragmented world economy is here to stay.
(Axios) If the geopolitical instability and supply disruptions of the last three years amount to a new normal, it will make it hard — maybe impossible — for policymakers to keep their economies on an even keel.
Lagarde told the Council on Foreign Relations yesterday that “we are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values.”
It is a contrast, she argued, with a U.S.-led international order that prevailed in the immediate aftermath of the Cold War, in which “global supply became more elastic to changes in domestic demand,” keeping inflation down.
“But that period of relative stability may now be giving way to one of lasting instability resulting in lower growth, higher costs and more uncertain trade partnerships,” she said.
The pandemic and war in Ukraine already created massive disruptions to global supply. Climate concerns and deepening tensions between the U.S. and China could make those kinds of problems more routine.
Lagarde argued this new era demands that policymakers focus their energy on such areas as securing resilient supply chains with allies and diversifying energy production.
She contrasted that approach with simply using fiscal policy to supplement peoples’ incomes, which she argued is inflationary.
Central banks in a fragmenting world
Speech by Christine Lagarde, President of the ECB
(ECB) The global economy has been undergoing a period of transformative change. Following the pandemic, Russia’s unjustified war against Ukraine, the weaponisation of energy, the sudden acceleration of inflation, as well as a growing rivalry between the United States and China, the tectonic plates of geopolitics are shifting faster.
We are witnessing a fragmentation of the global economy into competing blocs, with each bloc trying to pull as much of the rest of the world closer to its respective strategic interests and shared values. And this fragmentation may well coalesce around two blocs led respectively by the two largest economies in the world.
All this could have far-reaching implications across many domains of policymaking. And today in my remarks, I would like to explore what the implications might be for central banks.

10-14 April
IMF-World Bank Spring Meetings
World’s fractured financial leaders grasp for unity
Financial officials have conveyed dire warnings about growing dislocations in trade and cooperation.
(Politico) One big theme has hung over this week’s meetings in Washington of the International Monetary Fund and the World Bank: The global economy is coming apart at the seams and needs to be sewn back up.
Financial officials have conveyed dire warnings about growing dislocations in trade and cooperation. Russia’s war in Ukraine has caused a huge disruption in global commerce. U.S.-China tensions are on the rise, as are U.S.-EU squabbles over clean energy industries.
Fragmented world’s rival blocs may risk new cold war, says IMF head
Warning from Kristalina Georgieva after G7 explores economic resilience, secure global supply chains and less reliance on China
“What we have learned from Covid-19 and the war is that security of supply and the reliable functioning of global supply chains are taking a higher priority in economic discussions and decision making,” she said.
Georgieva was speaking after fears of fragmentation were heightened by the G7 group of leading industrial countries, which wants to reduce dependency on China by building alternative supply chains.

WEO April 2023 Overview: The outlook is uncertain again amid financial sector turmoil, high inflation, ongoing effects of Russia’s invasion of Ukraine, and three years of COVID
What the World Economic Outlook didn’t say
The WEO is published twice a year and presents the IMF’s analysis of global economic developments over the near and medium term. This year, the report comes in the midst of tightening financial conditions in most regions and the aftermath of a banking crisis. The IMF forecasted that global growth will slow from 6 percent in 2021 to 2.7 percent in 2023.
…experts generally agreed that the report was missing important discussions in several areas: the US debt ceiling, artificial intelligence, structural reforms to address aging populations and declining productivity, and the normal analysis of specific countries or regions. The group talked about the report’s increased attention toward economic fragmentation despite the political sensitivity of this issue. In addition, they discussed the potential for stagnation versus stagflation and the complexity of debt relief with China and private creditors. The experts also gave a defense of the WEO and why it matters in an economically divided world.
Highlights from the sidelines of the IMF and World Bank Spring Meetings
(Atlantic Council) Central bankers, finance ministers, executives, and civil-society leaders are meeting at the International Monetary Fund (IMF) and World Bank Spring Meetings this week with an ambitious economic-reform and fiscal agenda. The talks come six months after IMF Managing Director Kristalina Georgieva told the world’s economic leaders to “buckle up and keep going” in the face of multiple financial crises stemming from the pandemic, Russia’s invasion of Ukraine, global debt distress, high inflation, and more.

22 March
The Economist: Central banks face an excruciating trade-off
Just now they have to choose between financial instability and high inflation. It wasn’t meant to be that way
he job of central bankers is to keep banks stable and inflation low. Today they face an enormous battle on both fronts. The inflation monster is still untamed, and the financial system looks precarious.
Stubbornly high inflation led the Federal Reserve to increase interest rates by a quarter of a percentage point on March 22nd, less than a week after the European Central Bank raised rates, too. The Fed acted days after three mid-sized American banks had collapsed and Credit Suisse, a grand old Swiss bank with more than SFr500bn ($545bn) in assets, suffered a wounding run that ended in a shotgun wedding with its rival, UBS.
Jeffrey Sachs: The Global Banking Crisis and World Economy
The banking crisis that hit Silicon Valley Bank (SVB) last week has spread. We recall with a shudder two recent financial contagions: the 1997 Asian Financial Crisis, which led to a deep Asian recession, and the 2008 Great Recession, which led to a global downturn. The new banking crisis hits a world economy already disrupted by pandemic, war, sanctions, geopolitical tensions, and climate shocks.
At the root of the current banking crisis is the tightening of monetary conditions by the Fed and the European Central Bank (ECB) after years of expansionary monetary policy. In recent years, both the Fed and ECB held interest rates near zero and flooded the economy with liquidity, especially in response to the pandemic. Easy money resulted in inflation in 2022, and both central banks are now tightening monetary policy and raising interest rates to staunch inflation.

20 March
Bloomberg: The market turmoil has faded after the run of banking woes in the US and in Europe. Even Swiss stocks have bounced back from the lows hit after the rescue of financial giant Credit Suisse.
But as the squall retreats for now, it leaves in its path a series of difficult questions for governments. None more so than the Swiss.
Most poignantly, the whole unravelling of one of Switzerland’s most vaunted financial institutions runs counter to the country’s image for probity and stability, a fundamental of its banking sector.
In truth, it’s been challenged on banking secrecy for years, most notably after the Lehman crisis of 2008 and during the Barack Obama administration’s confrontation with the authorities in Bern over the country’s status as a tax haven.
Swiss Look On in Dismay as Once-Mighty Credit Suisse Craters
UBS to buy rival bank in government-brokered rescue deal
Collapse is a stain on Switzerland’s reputation for stability

16 March
It’s not 2008: Keep calm as central banks carry on
The data show that there is much more money in the system right now than there was in 2008, and there’s a huge market available for banks that are trying to resolve problematic parts of their balance sheets. It’s night and day from the abyss that confronted bankers and regulators in the fall of 2008.
(Atlantic Council) For anyone who lived through the global financial crisis, the past week is feeling hauntingly familiar. A bank collapse followed by a weekend scramble in Washington to figure out a rescue plan. The public is told that this bank’s issues are unique, and the problem has been isolated. Soon after a bank in Europe is close to failing and needs its own government to save it.
But if you look past the surface, it’s clear that 2023 bears little similarity to 2008. The international financial system is much stronger today thanks to the lessons learned over the past decade—and that’s why this time policymakers stand a much better chance of containing the fallout.

10 March
Will Geopolitics or Technology Reshape the Global Monetary Order?
Barry Eichengreen, Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund.
China was supposed to be the main beneficiary of a shift away from the dollar by countries fearing its “weaponization” by US authorities. So why isn’t diversification toward the renminbi visible in data on foreign reserves and international payments?
(Project Syndicate) … China’s government has repeatedly changed its posture toward the private sector. This points to the possibility that it may change terms of access for foreign central banks holding reserves in Shanghai and for commercial banks seeking to transfer funds through its cross-border payment system. China’s capital controls provide levers with which to make such changes, and Xi’s centralization of power means that there are few countervailing forces to prevent him from taking such steps were he so inclined. Rather than putting their eggs in China’s basket, other countries, in Asia and elsewhere, have been seeking to use their own currencies for cross-border payments. Singapore and Thailand have connected their real-time fast payment systems, PayNow and PromptPay, enabling customers of participating banks to transfer funds between the two countries using just a mobile number. Similarly, Bank Negara Malaysia and the Bank of Thailand have expanded their ringgit-baht direct settlement framework to enable Malaysians and Thais to make direct payments through qualified commercial banks. Five Southeast Asian central banks have signed an agreement to link their fast payment systems, bypassing the need to use either the dollar or the renminbi for cross-border transfers. And Indonesia, during its G20 presidency, established a Local Currency Settlement Task Force to identify regulatory reforms to encourage the practice. Similarly, on the foreign-reserves front, diversification away from the dollar has not meant diversification toward the renminbi, in the main, but rather toward the Korean won, Singapore dollar, Swedish krona, Norwegian krone, and other nontraditional reserve currencies. These trends reflect not so much geopolitics as developments in technology. Because payment systems like PayNow and PromptPay are digital natives, they are readily linked, removing the need to use the dollar or renminbi when transferring funds. The currencies of these smaller countries have also become easier to hold and cheaper to trade with the rise of digital foreign-currency platforms featuring automated market-making and liquidity-provision algorithms. This, in turn, makes such currencies more attractive for payments and as a form of international reserves. The presumption has been that geopolitics will reshape the global monetary and financial order in China’s favor. But technology may have the final say. And, if it does, it may alter that order in a very different way.

9 March
The Inflation Picture Gets Murkier
Despite signs that inflation in most major economies has peaked and is trending back down, recent data releases have renewed fears that central banks will have to tighten monetary policy still further. In the face of maddeningly mixed signals, much will depend on a few key factors.
(Project Syndicate) …several new sources of uncertainty have presented themselves. First, the evidence for a sustained downward trend in inflation has weakened both in the US and Europe, leading central bankers to warn that they may need to resume rapid monetary-policy tightening. US Federal Reserve Chair Jerome Powell has just told Congress that, after having reduced the size of its last interest-rate increase from 50 basis points to 25, the Fed may need to return to larger hikes. Given US monetary policy’s central importance in the global economy, such changes are no small matter.

26 February
Bitter harvest for some in a global economy changed by Russia’s war
Richard Partington and Damian Carrington
(The Guardian) A year of conflict has brought soaring prices and faltering trade, but also a step change in the switch to renewables
Russia’s invasion of Ukraine sent shockwaves through the global economy and now, a year on from the start of the attack, the world is fundamentally changed.
Trends that were already in motion have accelerated, as the need to move away from fossil fuels to greener, renewable energy supplies became more urgent. Food prices have soared, increasing hunger in the developing world, and forcing governments, businesses and people to adapt to lasting shifts. …
International trade was already fragmenting before the Russian invasion, but the trend has been accelerated in the past year amid rising geopolitical tensions and concern over supply chain security. After the disruption caused by Covid, and with an eye on the conflict and shifting global relations, companies have pushed to reshore or “friendshore” production, bringing it closer to home.
Russia itself had relatively few export links with the rest of the world – it deals mainly in commodities – but has found itself further isolated as a result of sanctions. However, these were applied mainly by western countries; Russia’s trade with Asia, the Middle East, Africa and Latin America has grown. …
End of the oligarch?
Russia’s oligarchs lost almost $95bn last year as the result of sanctions: they have been shedding $330m a day ever since the Kremlin launched its invasion. Questions have been raised over whether the influence of the country’s politically connected business elite has been permanently diminished, after years of accumulating luxurious London properties, superyachts and football clubs.

23 February
Biden administration nominates Ajay Banga to lead World Bank
The White House is touting Banga’s experience with financial inclusion and climate change
(WaPo) The Biden administration has nominated Ajay Banga, a former Mastercard executive now serving as vice chairman at the private equity firm General Atlantic, to become the next president of the World Bank.
Banga is still subject to a months-long confirmation process before the bank’s board reaches its final decision.
The announcement puts an end to intense speculation about who would take over the bank, which has tremendous sway over international development projects and policy worldwide. The bank’s current leader, David Malpass, has been under fire recently over his views on climate change. He announced his resignation last week.
16 February
World Bank chief resigns after climate stance misstep
David Malpass was criticised when he dodged question about fossil fuels’ link to climate crisis

22 February
Nouriel Roubini: India is a big global player – but there are problems it must tackle
Make in India was intended to strengthen the economy’s tradable side by fostering the production of goods for export, not just for the Indian market. Instead, India is moving toward more protectionist import-substitution and domestic production subsidisation (with nationalistic overtones), both of which insulate domestic industries and conglomerates from global competition. Its tariff policies are preventing it from becoming more competitive in goods exports, and its resistance to joining regional trade agreements is hampering its full integration into global value and supply chains.

16 February
Debt in focus as G20 finance chiefs meet in India
(Reuters) – G20 finance and central bank chiefs meet in India next week at the first-year anniversary of Russia’s invasion of Ukraine to discuss rising debt troubles among developing countries, the regulation of cryptocurrencies and the global slowdown.
The Feb. 22-25 meeting is the first major event of India’s G20 presidency and will be followed by a March 1-2 meeting of foreign ministers in New Delhi.
The Economist writes: The global economy is still grappling with the effects of the war, with the West still trying to tamp down inflation as interest rates continue to climb. The rising costs of finance, energy and food have pushed some countries to the edge of bankruptcy. This will be in the news this week as finance ministers from members of the G20 gather in India, with the plight of heavily indebted countries high on the agenda. On this issue, as on so much else, America and China find themselves pulling in opposite directions. China is refusing to play by the old rules of international financial diplomacy. . Sri Lanka, in urgent need of a bail-out, and deeply in hock to China, may test the willingness of the West and the IMF to go it alone—i.e., to provide the money and restructure the debt without China’s taking part in the process.

15 February
Invisible Trillions review: global capitalism operates beyond the rule of law and threatens democracy
John J Stremlau, Honorary Professor of International Relations, University of the Witwatersrand
(The Conversation) Secrecy has become as important for corporations as transparent and taxable profits used to be, according to Raymond W. Baker in his new book Invisible Trillions: How Financial Secrecy Is Imperiling Capitalism and Democracy and the Way to Renew Our Broken System. Global capitalism, he argues, operates beyond the rule of law. This contributes to extreme inequality that threatens liberal democracy.
Deals in the financial secrecy system account for half of global economic operations. This is far beyond illicit transfers of funds through corporate under-pricing and overpricing of exports and imports, or the drug and other criminal networks 50 years ago. Tax havens, “shell companies”, anonymous trust accounts, fake foundations and new digitised money laundering technologies have proliferated. Add to that falsified trade. All of this is facilitated by international lawyers, accountants and financial strategists based mostly in rich countries.
The book’s timely contribution is how financial secrecy threatens both free enterprise and political freedoms.

10 January
World Bank walking tightrope as it mulls increased lending to poorest
Phillip Inman
Campaigners say bank should rush to rescue countries facing recession – but can it do so without resulting in mass debt write-offs?
(The Guardian) Ahead of its annual meeting in April, held with the International Monetary Fund, the World Bank is seeking support for proposals that include a deeper pool of capital to draw on and new lending tools.
This “evolution roadmap” is designed to give the bank more flexibility to meet a series of overlapping crises that the New York university economist Nouriel Roubini*, among others, has argued is the new normal.
Wars, famines and the climate emergency will continue to trigger food shortages and energy price spikes that fuel inflation. Interest rates, for so long at near zero, will remain above long-term trends, they say.
The Bank president, David Malpass, hopes to prevent countries that have made huge strides in the last 30 years towards food security and stable public debts from going backwards.
One of the biggest headwinds faced by developing world governments is the increase in debt costs. When most debts are denominated in dollars or euros, the aggressive rate rises by the US Federal Reserve and the European Central Bank matter.
*Nouriel Roubini: The Age of Megathreats
For four decades after World War II, climate change and job-displacing artificial intelligence were not on anyone’s mind, and terms like “deglobalization” and “trade war” had no purchase. But now we are entering a new era that will more closely resemble the tumultuous and dark decades between 1914 and 1945. (4 November 2022)

5 January
The Economist: One of our cover stories this week is about how China’s great reopening will shake the world. For nearly three years China has been closed: hardly anyone has entered or left it. From January 8th it will reopen its borders, thus scrapping the last remnant of Xi Jinping’s zero-covid policy. Because the government has failed to prepare properly by vaccinating the elderly, the coming months will see widespread infection and death within China. But eventually something resembling normality will return. The revival of commercial, intellectual and cultural contact with China should be welcomed. But its post-covid economic recovery will be hugely disruptive for the global economy, pushing up the price of oil, gas and other commodities, stoking inflation and forcing central banks to keep monetary policy tighter for longer.

4 January
The G20 and G Minor
To confront the looming global crisis, G20 countries must, first and foremost, coordinate macroeconomic policies.
Kaushik Basu
(Project Syndicate) Amid rising geopolitical tensions and economic uncertainty, the G20 can play a central role in preventing a much worse crisis by facilitating the coordination of fiscal and monetary policies. It could also advance a more inclusive international order by allowing smaller countries to make their voices heard.
In December, India began its year-long G20 presidency, taking over from Indonesia amid rising geopolitical tensions and economic uncertainty. Surging inflation has raised the specter of a global recession. Supply chains, made more efficient but also more vulnerable by globalization and the digital revolution, are crumbling under the weight of COVID-related disruptions and the war in Ukraine, both of which have revealed and deepened the fault lines of the international order.
… emerging and developing economies, particularly in Africa and the Pacific, often find themselves at the mercy of major powers, their prosperity contingent upon election outcomes in developed countries. This year, the G20 could take a giant step forward by enabling several smaller countries to participate in its deliberations and make their voices heard. We could call this proposed group G Minor. While the G20 represents the world’s largest economies, the G Minor would represent the needs of emerging and developing countries that lack the diplomatic and military clout required to protect their interests on their own. Forming such a group would be an admirable gesture of inclusion, enabling India to make its mark on the G20 and achieve a more just international order.

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