Hello, I'm Adrian Finnegan, and this is Counting the Cost on Al Jazeera. A slowdown in international trade, soaring debt levels, high inflation and high interest rates. What lies ahead for the global economy in 2024?
But China is grappling with deflation as prices continue to fall. How will slowing growth and demand there affect the rest of the world? And the economic impact of Israel's war on Gaza, even as oil prices haven't been affected, concerns are mounting about shipping costs.
A global recession was widely predicted in 2023, but major economies have mostly held firm, raising interest rates to control inflation. The US economy expanded by 5.2% in the third quarter, the quickest pace in nearly two years. Food and fuel prices have come down.
But inflation and high interest rates remain a major issue in many parts of the world. We have a panel to discuss the global economic outlook for 2024 in a moment. But first, a report from Priyanka Gupta. Holding interest rates steady, the U.S. Federal Reserve signals it's done with hikes at its last meeting of the year in December.
Since March 2022, it's raised rates 11 times to ease inflation, which is now slowing after hitting a 40-year high in January 2022. At its final meeting, the European Central Bank followed the Fed's lead, leaving rates unchanged. But central bankers are warning it would be premature to declare victory over inflation. We are seeing strong growth that appears to be moderating. We're seeing a labor market that is coming back into balance by so many measures, and we're seeing inflation making real progress.
These are the things we've been wanting to see. We can't know. We still have a ways to go. While large parts of the world are worried about inflation, China has the opposite problem, deflation.
Prices are falling, with domestic demand weakened by high youth unemployment and a property crisis. And there's the rhetoric from Washington about decoupling its economy from Beijing. The International Monetary Fund is warning of fragmentation into power blocks centered around the US, and China risks wiping trillions of dollars from global output. China is no longer the largest trading partner to the U.S. and its share of U.S. imports have fallen by almost 10 percentage points in five years, from 22% in 2018 to 13% in the first half of this year.
The trade restrictions imposed since the onset of the U.S.-China trade tensions in 2018 have effectively curbed Chinese imports of tariffed products. Faltering demand from China has prevented oil prices from rising, despite concerns about a broader conflict in the Middle East. And U.S. oil production is at a record high, limiting the impact of production cuts by OPEC Plus exporters.
2023 has been a year of economic surprises, defying predictions of a global recession. While central banks explore interest rate cuts in the months ahead, geopolitical conflicts and elections in key economies bring additional uncertainty to 2024. Priyanka Gupta, Al Jazeera. Well, let's break down the main economic trends for 2024 now with our three guests.
From London, we're joined by Charlie Robertson. Charlie is the head of macro strategy at FIM Partners, as well as the author of The Time Travelling Economist. From Miami, Florida, we're joined by Shirley Yu.
Shirley is a senior practitioner fellow at the Harvard Kennedy School and from Doha. We're joined by Ahmed Halal. Ahmed is Practice Director for the Middle East and North Africa region at Global Council. Welcome to you all.
Charlie, let's start with you. A worldwide recession had been widely predicted by economists in 2023, and as we were hearing a few minutes ago, the US economy grew at its fastest pace in nearly two years. What happened?
Well... I mean, as a time traveling economist, perhaps I was paying too much attention to history. We hadn't seen rate hikes like this for decades, not since the early 90s. And it was just the assumption was that had to break things.
And when we saw Silicon Valley Bank blow up in March, you know, people began to think that that was exactly what was happening. But I think we underestimated two or three things. Firstly.
The Biden fiscal package, Biden's fiscal boost to the economy helped. Secondly, Americans were all on 30-year fixed rate mortgages, which they've remortgaged or got those mortgages at the lowest ever rates in 40 years in their careers. And very few have had to take on new mortgages. Even as rates went up, they stuck with those fixes.
That really helped. And then thirdly, all those COVID payments and that cash support in 2020 and 2021. just lasted longer than I think most people expected. Shirley, what lessons then can be drawn for 2024 from, I mean, I think it's fairly safe to say, the surprise economic developments of 2023? I like the way you frame it. Just now, the gentleman mentioned about fiscal stimulus in the United States, and I think that is the lesson that can be transpired to the Chinese economy in 2024 as well.
And both fiscal policy stimulus has been put in place to advance China's infrastructure developments in 2024. And I think it's very likely that the fiscal deficit for 24 is going to break the 3 percent threshold. And so 2024 is likely to be an infrastructure boom year for China, not only in public infrastructure, but also. in affordable housing development projects in China's urban areas. Meanwhile, the Chinese government will continue to pump billions of dollars into the strategic technological sectors from semiconductors to AI to EVs, etc. So in looking at China's fiscal stimulus, I think that over time is going to create jobs and jobs will boost the market confidence and when confidence restores somewhat, that'll help.
to support consumer spending and therefore the economy will pick up from there. Ahmed, what about emerging economies, the BRICS nations? Will countries like Brazil and India play a much bigger role in the global economy going forward?
Well, both are increasing in geopolitical significance. India just hosted the G20 and Brazil will now host the presidency of the G20. Brazil and India are both top 10 global economies.
Brazil is an emerging energy power as well, and will be trying to benefit from the next round of the super commodity cycle and increase in energy prices, as when De Silva was in power earlier, when he benefited from high oil prices. India, particularly geopolitically, is becoming a counterweight to China, and you find Western powers, the US, Europe, trying their hardest to... strengthen ties with India as a counterweight to China.
We saw this in the feud with Canada over the murder of a Sikh activist in Canada, and the West didn't have a very vocal response to that incident. On climate action as well, you see Brazil wanting to be a more responsible environmental steward and wanting to use the BRICS and the expansion of the BRICS to forward that agenda. Charlie, what's going to happen with inflation this year? Gaze into your crystal ball for us. Is it going to continue to fall?
Are central banks going to be able to ease rates? My base case is that it is going to fall and the market's very much on track with that. But I think China and what your previous speaker was mentioning is a part of that story.
China's real estate problems are so acute and so likely to be so prolonged that I think China is going to try and export its way out of. its recession. And that means it's going to be exporting deflation. So we've already seen it going out and buying iron ore in a big way to overproduce steel, which is now getting dumped on the global markets. It's become the world's biggest car exporter in the world.
That's giving us lower prices for electric vehicles. So I think they're going to be exporting deflation to the rest of the world. And that's going to help get inflation down. All right. Well, we'll talk more about China specifically in just a few moments.
But what's the outlook for Europe, where economic growth has been pretty stagnant, hasn't it, over the last year? Yeah, and I think the markets, I think what we're all having to recognise is the Europeans have made a trade-off and they said, we have to cut our energy dependence on Putin. We can no longer trust a man.
And that has carried a cost. And that cost has been borne largely by German industry and German manufacturing, which doesn't have the cheap energy supply from Russia it used to have. And we're seeing terrible IFO numbers. There will be an adjustment. And the fact that energy prices have fallen so much in the last just in the last month or two tells us that that actually this could almost be self-correcting.
The globally lower energy prices therefore help German manufacturing start to get. back on track through 2024. But yeah, Europe is looking weak as we enter 2024. Shirley, you heard Charlie there saying that China is going to export deflation. What can it do to stem this trend of falling prices?
Well, China has been exporting deflation to particularly the Western market and the rest of the world pretty much for the past four decades. So there is nothing new there. But one thing that was highlighted, which is interesting, is actually the lingering uncertainty surrounding China's real estate market. And of course, the banks have been trying to offer even on some occasions and collateralize the loans to Chinese real estate developers in order to arrest the real estate market decline. However, in the central government economic work conference that happened recently.
Real estate was not even mentioned. So we are still looking at a fairly painful year ahead for the Chinese real estate market. What specifically is going wrong with China's real estate market?
We've been talking about this for quite some time now on counting the cost. And the government doesn't seem to be able to do anything to revive it. Well, if you were to look at the global experiences in the recent decades, it's hard.
The real estate cyclicality happened both in Japan in the 1990s and also in the United States in the early 21st century. So you're looking at from peak to trough for the real estate cycle. It took Japan 13 years to reach the bottom of the real estate cycle.
And it took the U.S. about five years from 2007 to 2012, in Japan's case, from 1990 all the way to 2003. So it does take a long time. once the real estate bubble burst for the market and particularly the market confidence to recover. So in the Chinese instance, if you were to look at the real estate market trend, the Chinese real estate crisis happened on a more severe scale, both in terms of scale and the size in comparison to the Japanese real estate bubble burst in 1990. However, what made the difference between the Japanese situation versus the United States is the government response, because in 2007, the U.S. government resorted to this all what it can do attitude, including four rounds of quantitative easing so that the real estate recession were able to recover fairly quickly.
And by comparison, the Japanese central bank's stance was rather. I would say hesitant at the point in time. So really how long it's going to take for the Chinese real estate market to recover to a large extent also depends on the Chinese central government's monetary and the fiscal policy support.
Ahmed, what's your view on how China's economic woes will affect the rest of us in 2024? Well, it's the second largest economy in the world. So if you look at the Middle East, China gets most of its oil. and gas, at least oil, from the region. So that's a clear negative for countries that depend overwhelmingly on oil revenue to power their economies.
So the market fundamentals now, with supply outstripping demand, is a clear negative for the Middle East, and that will depress investment domestically and lead to greater voluntary cuts from OPEC producers. Charlie, there's been a lot of talk in the US about decoupling the economy. from China's.
Is that happening in practice now? No, I know it's really not. And despite all of the efforts, the trade deficit with China remains massive.
And I think it's going to be an increasing issue, both with Europe and with the States. But I just would like to touch on that last question also about the Gulf. What's interesting about what we're seeing out of Saudi and UAE is, like India, we're seeing this big boost into infrastructure. And that.
infrastructure investment boom, also talked about in China, is part of Saudi trying to diversify its economy. It's a trillion-dollar economy. It's actually playing, it's one of the growth stories at the moment.
And they can afford to leverage up their balance sheet through the 2020s to help that diversification, even if oil prices are a bit lower. We'll come on to oil prices in just a minute, but first I want to finish with China. Shirley, what's the future for China's Belt and Road Initiative, given that the only major Western member, Italy, has pulled out? More precisely, the G7 member. Indeed, that is a pivotal change.
However, the Belt and Road Conference that happened recently announced an additional $100 trillion of incremental lending facilities to the developing countries. I think the Bowdoin Road initiative will continue, but it will fundamentally change its characterization going forward. One, the Bowdoin Road initiative will become more nimble and more selective in terms of projects. I think renewable energy development in the developing world, particularly in Asia and Africa and the Middle East will continue to.
play a dominant role in its future policy framework. China has initiated this small and beautiful, essentially nimble, solar energy development projects in Africa. And if you were to look at China's access capacity in solar, wind, hydro, EVs, et cetera, it has a global dominant position. China owns roughly about 70 percent of the global solar supply chain, over 50 percent of the global wind supply chain. And so the global renewable energy transition will not be able to be achieved without China's supply chain support.
And two I think that China will continue to focus on a lot of strategic projects that are that are central to its national security. So for example China recently expressed the support for a new land bridge project in Thailand that essentially created a pathway. as an alternative to oil shipping routes across the Strait of Malacca. So the Strait of Malacca has traditionally been considered a strategic vulnerability for China.
And Ahmed, what's your view on the growing relationship, the strategic partnerships we're seeing between China and Middle Eastern states? Well, it's increasingly a technological partnership. It was mainly a relationship of importing and exporting oil.
But... They want to move up the technology value chain. They want to diversify their economies.
And China has been investing in infrastructure as part of the Belt and Road Initiative in the Gulf and the Middle East, broadly in Egypt as well. But increasingly, they want to cooperate on things like AI, semiconductors, automotive, the renewable energy industry. So there is a greater integration on areas other than hydrocarbon. So you will be seeing China.
We have high-level visits. from Xi Jinping earlier this year and reciprocated by MBS. So there is a greater engagement between the two countries in areas outside of energy. OK, let's talk further about oil.
Prices had risen in the initial days of Israel's war on Gaza out of fears that it could spark a wider Middle East conflict. Since then, prices have fallen. What does that mean for the global economy?
Well, it's about market fundamentals. It's about increasing supply and record-smashing supply from the United States in the shale patches, Permian Basin, from non-cartel, non-OPEC members increasing their production, Brazil, Guyana. And you have weakened demand, so waning demand at the same time from China and Europe.
Lower oil prices are... good for the manufacturing sector, for energy intensive sectors in Europe, but there are other drags on global growth. As my colleague earlier was saying, high interest rates and higher costs are weighing on growth generally.
And of course, China's private property sector and its own economic woes are weighing on oil demand. So that's why we haven't seen the Gaza war have a real impact on oil prices. And it's also that...
market participants have assumed that it's going to continue to be a localized conflict, a contained conflict that will not be widening and will not be affecting the global trade flows and global energy flows. And Ahmed, can OPEC Plus do anything to stem the fall in the price of oil or at least the stagnation of it? It doesn't seem to be working. I mean, they keep increasing their cuts, their voluntary cuts. In September, Saudi and Russia, as part of the OPEC Plus group, reduced their production by a million barrels per day.
At least Saudi did. Russia followed suit. But it doesn't seem to be working because the cuts are being offset by this massive increase. And this goes as a testament to the resilience of the U.S. shale industry and U.S. oil and gas production. that whenever they've been written off, they come back and they're now producing.
The U.S. is the preeminent oil producer, around 20 million barrels a day, compared to Saudi, which is on average 11 or 12 million barrels a day. And these cuts, in an attempt to prop up the price, are actually reducing the market share of Saudi and its OPEC peers. So it's not looking good in terms of oil prices and fiscal receipts for...
the Gulf oil producers and their market share. Charlie, is high U.S. oil production now the new normal? It took a little while to come through.
I think the shale guys were particularly cautious after COVID not to overproduce and create a slump. But, yeah, it looks like this is sustainable and it's going to carry on for some time. But what will change is global demand.
So global demand, as interest rates come down, because lower oil will bring down inflation... Central banks can then deliver rate cuts. That will help on the demand side. And it's going to save a lot of countries, countries like Pakistan, Kenya, that have been facing acute debt issues, are now going to find life an awful lot easier with lower oil prices. So I think this is coming at a fantastic time for the world economy, actually.
Shirley, to what extent is China's slowdown impacting upon those falling oil prices? China is the world's largest energy importer. So China's slowing economy obviously will cast uncertainty and future shocks not only to global oil prices, but also to the other commodities, including iron ore, etc. And if you have noticed that recently, because of the lack of consumer confidence in China, Chinese have been buying a lot of gold, pushing the Chinese domestic gold prices.
at 10% to 15% premium to the global market price. So obviously China is going to have a huge impact to the global commodity supply chain. But as previously mentioned, it would be unrealistic to think of a full economic decoupling between the United States and China. However, that's not to say that it's not going to be a painful process as the U.S.-China decoupling happens. primarily in the technology supply chain and including increasing in the investment sectors.
So say for example in semiconductors U.S. semiconductor companies from NVIDIA to Qualcomm Intel etc. They all have a huge market share in China. In NVIDIA's case possibly around 25 percent of its global revenue comes from China. So now you have U.S. semiconductor companies that are looking for a comparable market.
the size of China's and there is just simply none out there. Meanwhile, Chinese companies have the money. But there are just simply things out there that Chinese cannot buy.
So you are looking at both the buyers and sellers and every other, you know, essentially operators along the supply chain are going to go going through a rather painful process for quite a long time. All right. Finally, I want to touch on shipping costs. What's the impact of Of the Houthi attacks on ships passing through the Red Sea that we've seen on shipping costs and how concerned is the industry about the the Bab el-Mandab Strait?
Of course, it's increasing insurance costs, increasing the geopolitical risk premium for charters and freight industry. The bubble mandem and Strait of Hormuz, actually Strait of Hormuz is even more important as an oil choke point. 25% of global seaborne oil trade transits the Strait of Hormuz, and the bubble mandem is a little less, about 10% of global oil trade. So they're key global oil. And the Houthi attacks, a spate of them have been happening since the outbreak of hostilities between Hamas and Israel, but they were happening before that.
And they haven't really been moving the oil price. If you believe the oil price today at $73 a barrel, you see that the market has priced in these incidents and the market believes that the conflict will remain contained, will not be widening, and that these incidents will not really be moving the dial. Of course, if there is escalation, if there are If there are retaliatory strikes from Israel on Iranian infrastructure, Iranian oil refineries, and the Strait of Hormuz is blocked or disrupted for any reason, then we could see some very extreme scenarios with the price of oil. The World Bank anticipated perhaps going up to $157 a barrel, which would be a huge oil shock and would be a dual oil price shock with Russia and Ukraine still happening. OK.
The. I'm afraid we must end it. Many thanks indeed to you all, Charlie Robertson, Shelley Yu and Ahmed Halal. And that is our show for this week.
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I'm Adrian Fenigan from the whole team here. Thanks for being with us. The news on Al Jazeera is next.