On May 12, Dr. Mathilde Lemoine, Chief Economist of the Edmond de Rothschild Group, spoke in Monaco at the annual conference on the maritime industry organized by PwC: "Shipping in Monaco - Sustainability and efficiency". Here is his macro-economic vision of the world today.
Asia is a region of the world convinced of the usefulness of international trade. The free trade agreement implemented on January 1, 2022 (Regional Comprehensive Economic Partnership) will accelerate the economic development of this zone, and therefore increase the GDP per capita, which will make trade bear fruit, a source of development and a means of positively considering exchanges between the different continents.
The current good economic situation is surprising and is the result of several factors:
- an extremely good economic situation in the United States. Growth in the USA is very strong, beyond the imagined perspectives.
- we are still experiencing the effects of covid, which has changed consumption patterns. Thanks to the consumer vouchers allocated to households, households in the USA have been over-consuming, their purchases being mainly for goods. The macroeconomic figures still reflect the consequences of this situation, since it is now services that are the object of a consumption catch-up.
Slowdown, but not recession
The world economy is slowing down, mainly in the developed countries. On the other hand, in China, growth is expected to accelerate to 5.5% this year. In the US and in the Eurozone, the outlook for services activity is on the rise. We are therefore in a process of adjustment and catching up, with a slowdown in the consumption of goods, but we are not entering a recession. Activity is good. Households are consuming thanks to the accumulation of their savings. The good news is that inflation is decelerating, especially in commodity prices. This is due to the fall in energy prices but also to the same catch-up phenomenon. Demand for goods is normalizing in the US: goods consumption now accounts for about 36% of total household consumption, a proportion close to that of 2019.
Sustainable inflation?
Hourly wage growth in the US is decelerating across all sectors of activity, with wage catch-up occurring almost exclusively in the leisures-hospitalities sector. I am therefore dubious about the prospect of inflation driven by a price-wage loop, as this dynamic is linked to post-pandemic effects. Businesses have had strong pricing power in recent quarters (thanks to government subsidies for households related to energy prices, and to the catch-up effect of the pandemic) but governments are going to subsidize energy prices less and less, and businesses no longer expect to increase the prices of their products. 1,000 billion dollars of energy price subsidies have been distributed worldwide, of which 480 billion in the Eurozone. This explains why growth is better than expected.
Good news about inflation expectations. In the US, the trend growth is 2.5%. In Europe, 1.5% for the most optimistic, 1.1% for the others. In the long run, inflation should be about the same as trend growth. This is the case in the US, not in the Eurozone where inflation expectations are 2.3% (this shows how credible the Federal Reserve is and how much the ECB is not!) Beyond the fiscal policy implemented, they were determined to preserve the credibility of their central bank with policies of rate hikes and balance sheet reduction. And it worked. This is great news for financial stability, but it also means that the Federal Reserve has never had more impact on global financial markets, despite the emergence of Asia.
Other elements of support: the prospect of the end of the rate hike cycle, and therefore of the destabilization of the financial markets, especially the banking markets. The acceleration of growth and the depreciation of the dollar is rather positive for emerging countries.
2024: what prospects?
The phenomenon of catching up in demand for services in 2023 will inevitably be less pronounced in 2024. At the same time, the reduced support for energy prices is creating political risks. The election in Taiwan in 2024 may create tensions and uncertainties, as will the US elections.
Another concern is the tightening of credit conditions. Financing will be more difficult to obtain, as will liquidity lines for companies. Costs are higher, and there is a wait-and-see attitude to real estate. Business leaders and consumers alike believe that inflation will slow down, that interest rates will stop rising, and they say to themselves "I might as well wait to have a real estate project or to develop my business. This "wait and see" attitude is causing demand to fall, particularly in commercial real estate.
The situation is rather better than expected. The prospect of geopolitical/economic instability will weigh on growth prospects, but economic policy decisions by U.S. governments (decisions shared by Republicans and Democrats) have restructured the global landscape.
Three reasons to be optimistic.
Trade between the US and Asia has exploded. The US's "technological declaration of war on China" has been very...adjusted. Despite the increase in tariffs (around 20% on trade between China and the US since D. Trump, on both sides) the US has managed to stabilize its trade with China. At the same time, its imports with Asia excluding China have also exploded by +64% and this is remarkable. In value, these purchases exceed those with China.There is no historical example of a cold war with exploding trade in partner countries. At some point, there may be crisis scenarios, where China blocks maritime passages because of strong tension with the United States. But the great strength of the Americans is that they have developed other sources of imports from other Asian countries (particularly with developing Asia: Vietnam, Thailand, Malaysia, India).
The application of the free trade agreement in this area (excluding China and India, the only major Asian country that is not part of this trade area). This free trade agreement for the first time in history, includes both China and Japan, the countries of Southeast Asia, Australia, New Zealand and Korea. It will accelerate the economic development of this area with a GDP per capita that will also generate an increase in exports from the USA to Asia.
The USA has an extremely strong growth (much more than in Asia). The GDP per capita has increased since 2010 by 42% while it remains stable in the Eurozone. Beyond all the geopolitical issues, significant trade flows will develop.
The USA: a proactive policy that works!
We can summarize the 2 pillars of President Biden's policy
- For domestic policy: to ensure that the pandemic does not generate a GDP lower than it should have been after the financial crisis, and especially that the unemployment rate of African-Americans returns to its pre-pandemic level very quickly. On this point, it is a success.
- For the outside world: avoid being left behind by China again. After the great financial crisis of 2010, China undertook a massive stimulus package, which reached almost 10% of its GDP. It contributed to global growth, which is a tool of power. The Biden administration therefore wanted to diversify the sources of supply for the US, to ensure its commercial development.
For the first time in a long time, the U.S. share of world growth has exceeded 20%. The Federal Reserve has never had so much influence on the financial markets, the dollar is powerful, with a tendency to appreciate.
Brazil, Russia and certain Asian countries are willing to diversify, but the American dynamic reinforces the appearance of two blocks: the USA and Asia. However, we are in a multipolar bloc logic with a continued acceleration of intra-Asian trade, US-Canada-Mexico trade, and trans-Pacific trade. This reconfiguration is already underway.
Energy transition: a solution for Europe?
Europe continues to de-industrialize despite the stimulus packages put in place. In the automotive sector, for example, the desire of Asian countries to make Indonesia a leader in automotive batteries in order to have a regional Asian automotive value chain will increase the inflow of goods to Europe, which has not yet sufficiently developed this sector of activity.
Ageing is Europe's main problem: an average population growth of 0.1%, while the USA is at 0.6%, and Asia 0.3% (notably because of Vietnam, which is ageing very rapidly and will experience a decline in its population). For the time being, Europe is not dealing with the problem of aging, the new organization of the economy is a real challenge that is not being addressed.
To finish on a positive note, the European game changer has chosen the energy transition, which can lead to trade flows in environmental goods. But plurilateral agreements at the WTO will be necessary to develop this trade. This European gamble must take into account two elements: the element of global growth, and how Europe could participate more in this growth, a factor of economic power.
In conclusion
The United States is back in the spotlight, which is positive, because relations with Europe are good. The real issue is to find a balance between a technological war with China, military tensions in a given geographical area and the development of trade with the other Asian countries next door. This is essential for understanding the macroeconomic developments of the next decade. But there is less uncertainty than 3 years ago: as central banks have raised their rates, securities purchases are slowing down, which leads to less volatility and distortions in asset prices.
