Albanian Daily News Interview 2022

How would you estimate 2022 economic performance worldwide , and secondly, is the world economy heading towards global recession?

In a nutshell: the world economy clocked a pretty solid performance in 2022, with GDP growth likely to be in the 3.2-3.3% range. Within that healthy annual average, there has been an unhealthy loss of steam in the final months of the year: the US because of massive rate hikes, Europe because of high gas prices, China because of Covid lockdowns and now Covid casualties and a bursting real estate bubble. According to the IMF, over 50 emerging economies face a risk of default. Although many forecasters are still forecasting 2%+ GDP growth for 2023, my own view, which will be explained in more detail later in this article, is that chances for a global recession in 2023 are quite high.

In general, how would you assess 2022 in terms of progress of the economy, trade and finances in the world?

Progress in economy and trade in 2022 were all the more remarkable because GDP growth and trade figures showed a healthy recovery from the Covid years of 2020 and 2021. Despite all the talk of globalization going into reverse, according to UNCTAD, global trade in goods grew 10% from last year to $25 trillion in 2022, global trade in services grew 15% to $7 trillion over the same period, with total 2022 global trade expected to clock in at $32 trillion. So “real world” financial performance in 2022 was really excellent; once again, both GDP and trade showed strong signs of deceleration towards the end of the year.

Financial markets, however, performed in a consistently dismal fashion throughout the year. The US Fed hiked interest rates by a total of 4.25%, a record hike in a short time period, which globally tanked both bond and equity markets.

According you your assessments, which have been the potential drivers of the “polycrisis” that the world has been facing during 2022, and what could be the alternatives to overcome such a situation taking into consideration the ongoing impact of Ukrainian war and Covid pandemic?

“Polycrisis”, a word coined by historian Adam Tooze, refers to the concept that the world may face multiple crises simultaneously, like a number of forest fires joining together. The Covid pandemic and the Ukrainian war are not, in my opinion, fundamental drivers of polycrisis, but they do help to catalyze or accentuate it. In my opinion, there are three main drivers of polycrisis:

The first and most important driver of polycrisis in the short-term is the high level of global indebtedness. The higher the level of debt and leverage, the higher the financial instability. Total global debt levels (Government debt + corporate debt + individual debt) has risen dramatically over the past decade, now exceeding 350% of global GDP. If performance stumbles, whether at the national or corporate level, the result may be default.

The second driver is high inflation. In some European countries, inflation has surpassed 20%. In the EU as a whole, inflation is well into the double digits. Despite steep interest rate hikes in the US, inflation remains at 7-8%. In most countries, inflation rates remain much higher than interest on savings or most bonds, meaning we are living an era of negative real interest rates. Anyone who is a saver (including retirees) are being very negatively impacted. Inflation can diminish spending power of Governments, companies and individuals, possibly leading to discontent, civil strife, election of extremist Governments, etc.

The third driver of polycrisis is global warming, a longer-term but extremely significant development, with multifaceted effects ranging from more frequent extreme weather events to raising sea levels or rendering farmland less productive — or even useless.

Polycrisis may evolve where these three sources of crisis may not only combine to form a much larger crisis, but even reinforce each other. A hurricane may be much more devastating if personal savings have been wiped out by inflation. Or bad weather may create crop failures putting farmers into default.

The relatively decent growth rates in 2022 disguise the fact that the world is becoming a more vulnerable place, increasing the risk of serious downside events, which may create chain reactions.

Mr. Nemethy, the global crisis has not hit all the developed countries of the world similarly. The same can be said about the member countries of the EU. There are individual countries, which have successfully coped with the repercussions of the global crisis. Which is the ‘magic wand’ helping them?

There is no surprise that over the past year, the better performers were typically those that were energy self-sufficient or even exporters, as well as countries that had lower levels of debt. Saudi Arabia, Kuwait and Iraq all showed high single digit growth, thanks to buoyant energy prices. Guyana will be the fasted growing country in the world this year, experiencing 57%+ GDP growth, thanks to a big jump in offshore oil production. Within Europe, Norway had one of the highest growth rates, once again, thanks to energy exports. It is ironic that hydrocarbons—which are supposed to become obsolete—have become a ‘magic wand’ , as you call it.

How much has the bad shape of emerging markets throughout the world influenced the aggravation of the global economic situation, and which are some of the factors causing such a phenomenon?

As mentioned earlier, the IMF has identified over 50 countries that are either experiencing financial distress or are in serious risk of experiencing it.

Much of emerging market debt is denominated in US dollars. The rise of the US dollar had multiple effects on emerging markets: it made debt service much more expensive, while also creating a liquidity drain, as investors shifted resources to higher yield safer US dollars. There tends to be a “flight to quality” whenever crisis approaches.

Also, many emerging markets have higher exposure to debt, as well as to climate change. Emerging countries tend to feel the bumps on the road more than developed countries.

The world is no longer unipolar; Pax Americana can no longer be taken for granted, and globalization seems to have reversed gear as the world moves towards trade blocs. Given the above trends, do the major powers have any schemes to stop such a free fall or will they let it go? But how deep can it be, and do you predict that people’s boiling anger might erupt in social disorder?

As mentioned in my answer to one of your earlier questions, 2022 was a year in which global trade increased fairly dramatically, despite all the talk of globalization in reverse gear. Yet we have frequent anecdotal evidence of supply chains reorganizing themselves. A few companies may shift plants from China to the US—but more companies are shifting employment from China to Viet Nam, Indonesia or India (e.g. Apple). So aggregate global trade numbers remain intact, at least for now.

While you correctly say that Pax Americana cannot be taken for granted, the massive American military and financial support for the Ukrainian War constitutes a major exercise in Pax Americana. While more Americans are feeling isolationist (witness the election of Trump), the Biden regime seems to be less confrontational with foreign trade than the Trump regime, and there seems to be at least a temporary thaw in relations with China, (even though they are actively promoting repatriation of manufacturing to the US in certain key strategic areas, such as chip manufacturing).

In my view, electing Trump as President proved that isolationist tendencies in the US that are at least a century old — can be revived. We cannot rule out that a future US election will veer the US more even more strongly than Trump towards “splendid isolationism”.

A revival of isolationist tendencies or election of populist government does indeed have potential to put globalization into reverse and result in poorer governance, which would put further strains of everything from GDP growth to standards of living—which in turn could result in civil disorder, or even contribute to war breaking out. We can only hope we stay clear of this vicious circle, a vortex that has the potential of pulling the world down.

The shortest but the hardest question. Mr. Nemethy you are known for your touch of optimism of course based on reality and truth as seen by your observations as CEO and Founder of Euro-Phoenix Ltd. and World Banker. But you are also faced by a large number of analysts full of concerns, some overpessimist. So, according to you, which is the forecast for 2023?

My favorite expression for describing the world economy today is that we are ‘skating on thin ice.’ The world produces a 3%+ GDP growth in 2022, despite the Ukraine War, Covid variants, a real estate bubble beginning to implode in China, and many other countries.

Many institutions are still forecasting 2% plus GDP growth for 2023. And yet, there are so many risk factors out there that could cause us to break through the thin ice, including:

  • Sovereign debt crisis
  • banking crisis
  • escalation of the Ukraine war
  • Chinese invasion of Taiwan
  • possible unraveling of the euro
  • real estate bubble bursting
  • interest rates rise to the point where “something breaks”, triggering recession or depression.
The above list is far from exhaustive.

On the last point, I am very concerned that Central Banks are in a very-close-to -no-win situation. If they don’t raise interest rates sufficiently, inflation may skyrocket; if they do raise interest rates, they may crash the economy. It is a very narrow, perhaps impossible path. As Nobel prize winning economist Robert Solow once stated: “To try effectively to wipe out hard-core inflation by squeezing the economy is possible but disproportionately costly. It is burning down the house to roast the pig.”

In my view, Solow very effectively sums up what is happening. Something will break. The trigger is almost irrelevant. It could be any one of the above bullets. Given the fragilities explained in this article, especially stratospheric levels of debt, a chain reaction could be triggered that takes the world down a rabit hole.

I do not maintain the inevitability of this result. Believe it or not, I consider myself an optimist! As British Prime Minister Disraeli once said: “hope for the best, prepare for the worst.” As an economist, I would be doing readers a dis-service if I gave the world economy a glowing report, and did not provide a fair warning to be prepared.

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