{{ subpage.title }}
Episode 9: What's next in 2023?
From the ongoing conflict with Russia, to interest rates and government regulation, to tensions with China, Bailin and Bremmer talk through the biggest risks and opportunities they see in the next six months. They also discuss the rapid rise of artificial intelligence, political polarization, and more.
This episode is moderated by Shari Friedman, Eurasia Group’s Managing Director of Climate and Sustainability.
Shari Friedman
Managing Director of Climate and Sustainability, Eurasia Group
David Bailin
Chief Investment Officer, Citi Global Wealth
Ian Bremmer
President, Eurasia Group and GZERO Media
Sustainable Investing Spotlight
Listen:"We need to keep that investment flowing to come up with better ways to do this so that everyone is fed within the constraints of what the planet is able to bear," says Peter Ceretti, Director of Global Macro Geo Strategy at Eurasia Group.
In the latest episode of Living Beyond Borders, a podcast produced in partnership between GZERO and Citi Global Wealth Investments, Ceretti is joined by Harlin Singh, Global Head of Sustainable Investing, and Malcolm Spittler, Global Investment Strategist and Senior US Economist, both at Citi Global Wealth Investments, to discuss the latest causes and ripple effects of food shortages around the globe.
Following shortages that came out of the COVID pandemic as well as the war in Ukraine, the dual food problems of affordability and availability persist. While temporary impacts may be waning, the experts also discuss the longer-term impacts of the global food production system on the environment and what will - or won't - be sustainable going forward, including the food system's massive dependence on fossil fuels.
This episode is moderated by Shari Friedman, Eurasia Group’s Managing Director of Climate and Sustainability.
Peter Ceretti
Director, Global Macro-Geostrategy, Eurasiia Group
Harlin Singh
Global Head of Sustainable Investing, Citi Global Wealth Investments
Malcolm Spittler
Global Investment Strategist and Senior US Economist, Citi Global Wealth Investments
Shari Friedman
Managing Director of Climate and Sustainability, Eurasia Group
Episode 7: How AI is changing our economy
While the fears about job losses may be overblown or premature, there is no question that the use of this technology is changing jobs and industries. As tech giants increasingly adopt AI to improve productivity, we'll look at the main challenges they face, as well as what regulators need to keep in mind as elections around the world continue to be susceptible to misinformation.
This episode is moderated by Shari Friedman, Eurasia Group’s Managing Director of Climate and Sustainability.
Shari Friedman
Managing Director of Climate and Sustainability, Eurasia Group
Archie Foster
Managing Director and Head of Thematic Equities, Citi Investment Management
Dev Saxena
Director of Geo-technology , Eurasia Group
- Episode 6: Can the US and China find common ground? ›
- Episode 3: Inflation Nations: What to know about inflation and interest rates - GZERO Media ›
- Episode 4: Broken (supply) chains - GZERO Media ›
- Episode 5: Energy transition today - GZERO Media ›
- Episode 8: Global food (in)security - GZERO Media ›
- What's next in 2023? - GZERO Media ›
Episode 6: Can the US and China find common ground?
With competing motivations, the superpowers are both looking at ways to protect themselves - from the 2022 CHIPS and Science Act in the US to President Xi Jinping's increasing diplomatic moves with Europe and elsewhere. But the countries are also intertwined, and they are each looking to navigate a delicate balancing act on the global stage.
This episode is moderated by Shari Friedman, Eurasia Group’s Managing Director of Climate and Sustainability.
Shari Friedman
Managing Director of Climate and Sustainability, Eurasia Group
David Bailin
Chief Investment Officer, Citi Global Wealth
Ian Bremmer
President, Eurasia Group and GZERO Media
- Episode 2: The economic power of women - GZERO Media ›
- Episode 3: Inflation Nations: What to know about inflation and interest rates - GZERO Media ›
- Episode 4: Broken (supply) chains - GZERO Media ›
- Episode 5: Energy transition today - GZERO Media ›
- Episode 8: Global food (in)security - GZERO Media ›
- What's next in 2023? - GZERO Media ›
Episode 5: Energy transition today
They discuss the increasing need for energy security being a big driver for renewable energy in regions like Europe, how the war in Ukraine is still affecting energy markets, and what kinds of investments need to happen in technology and infrastructure to realize more sustainable and cleaner energy globally.
Malcolm Spittler
Global Investment Strategist & Senior US Economist, Citi Global Wealth Investments
Raad Alkadiri
Managing Director of Energy, Climate and Resources, Eurasia Group
Shari Friedman
Managing Director of Climate and Sustainability, Eurasia Group
Transcript: Season 4, Episode 5: Energy transition today
Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.
Malcolm Spittler: Our general rule of thumb is when there's a gold rush, don't go digging for gold, invest in the makers of the picks and shovels.
Raad Alkadiri: It actually all comes down to one thing and that's money. Will there be the money for investment in renewables, in energy efficiency made available? And I'm not just talking about the industrialized world, I'm talking about globally.
Shari Friedman: Welcome to Living Beyond Borders, a podcast from Citi Global Wealth Investments and GZERO Media. On this program, we examine global risks and opportunities from the angles of both politics and economics. I'm Shari Friedman, Managing Director of Climate and Sustainability at Eurasia Group.
Today we're talking about a highly flammable topic, in more ways than one: fossil fuels and the transition to cleaner energy. In the short term, energy prices and energy security have dominated the discussion over the past year. It's mostly because of the ongoing war in Ukraine and the knock-on impacts of inflation, especially in Europe.
In developing nations, there's been an issue of availability and affordability of energy. The IEA, the International Energy Agency, reported that for the first time in decades, the number of people living without electricity rose last year, standing today at 775 million globally.
We're going to unpack all of this and discuss new regulations in the U.S. and Europe that are hastening the shift toward alternative energy sources. Joining me now are Malcolm Spittler, senior U.S. economist and strategist at Citi Global Wealth Investments. Welcome Malcolm.
Malcolm Spittler: Thank you very much for having me.
Shari Friedman: And Raad Alkadiri, Managing Director of Energy, Climate, and Resources at Eurasia Group. Hey Raad.
Raad Alkadiri: Hi Shari. It's great to be here.
Shari Friedman: So first, Raad, let's start off with you. There's a lot of talk about energy security and how it plays out in the current discussions. Let's start with defining what we mean by energy security.
Raad Alkadiri: That's actually ax more complicated question than you might realize, and I think it's like the old comment about the theory of relativity, that the more you think about it, the harder it gets. Generally, I think energy security is understood as having sufficient energy supplies to meet countries consumption needs and maintain economic growth. But really, when you start to sort of unpack it, that's far too simplistic a definition, I think, to do justice to the complexities of the issue.
Energy security means different things to different states depending on what those states are like, what's their resource base, what types of energy the economy is based on, the stages of development that a particular country has reached and crucially, I think whether a country is a net consumer or producer of energy. And I think that last facet is often very much misunderstood in the debate over energy security. You know, for a producer, state energy security is all about ensuring demand. It's got nothing to do with ensuring flows and supplies.
Shari Friedman: That's really interesting about the difference between an energy consuming state and an energy producing state in terms of energy security. And this difference also translates over with inflation. And Malcolm, while inflation is still an issue almost everywhere in the globe right now, where are we with energy prices, particularly in Europe, and where do we see that heading for the rest of 2023?
Malcolm Spittler: Yeah, Shari, that fits really tightly with what Raad is saying, that Europe is largely an energy importer, and they've had a really extreme experience in the last year where there's been obviously the conflict in Ukraine that has radically shifted where they're getting their energy from and it has had dramatic impacts on the economics of transition.
Basically, the price that is seen to be reasonable for green energy went up drastically and simultaneously, going back to that idea of energy security and its links to national security, the idea that Europe can continue to rely on its historic sources of piped natural gas from Russia, of transported oil across oceans. This is a radical remaking and a reimagining that we have to see happening where Europe is now deciding that it is worth basically investing in green energy and simultaneously seeing prices where green energy is very, very competitive. For those people who have already adopted green energy in Europe, there have been, if anything, windfall gains from this high energy price environment that has been going on.
That being said, the prices are subsiding a lot. Looking ahead at this coming winter: January, 2024, natural gas price futures in Germany are at about 60 euros. That's down substantially from where they peaked last August at 340 euros. This is an evolving environment where a lot of the big challenges that were facing Europe from this invasion of Ukraine and the utter disruption of business as normal, are actually being handled with surprising grace.
None of the worst-case scenarios that economists were anticipating for this last winter came to pass. The kind of large slush funds of cash didn't have to be tapped to backstop consumers in the same degree that was anticipated. And it's actually been a lot more of a, I don't want to say optimistic scenario, but a better scenario than feared.
Additionally, when we look forward, there is this idea that this is an untenable situation to be put into as an economy. And this gets into energy security and how it ties into national security, which is the idea of being a recipient of energy, whether you're India or China or any other nation-state that is entirely beholden on foreign actors is a dangerous scenario that we're going to likely see a lot of entities putting basically national security level dollars into energy security moving forward.
Shari Friedman: Raad, do you feel like we're out of the woods, specifically Europe, on the impact of having to transition away from Russian gas?
Raad Alkadiri: I don't think Europe's going to be out of the woods, no, for a while, and that's primarily because of how reliable, oddly enough, the supply of Russian gas was. And I think in hindsight there are questions that are being asked about European dependence, but the reality is that that Russian gas flowed for decades and it was relatively low cost. Where Europe is now is in a situation financially and economically of having to resource its gas from areas further around the globe and at higher prices.
And Malcolm mentioned the $60, that's still significantly more expensive than Europe was paying for its energy, paying for its gas prior to the war with Ukraine. So I think Europe has some way to go. It's really in many ways going to come down to a couple of things.
It's going to come down to the availability of alternative supplies on a regular basis and not just for Europe, but also for the markets that Europe has backed out. I think it's also going to come down to a question of politics in Europe and the extent to which Europe can drive energy efficiency gains and can drive gains in terms of seeking alternative supplies and entrench them, make them structural. Europe's done a great job of reducing gas demand by 18% last year. How much of that is structural and how much of that is actually by necessity and forced upon industries and consumers we have yet to see. But the more structural it becomes, the more it can be maintained, the less challenges Europe is going to have.
Shari Friedman: Following up also on what Malcolm was saying about kind of this shock making everybody realize that there is a risk on these highly integrated energy markets, how do you think, Raad, that the war in Ukraine has affected the overall energy story and how we purchase and the energy flows globally?
Raad Alkadiri: I think we could probably have a podcast or several podcasts on each of the points that come out of that but let me try and do something I'm not renowned for and be succinct. Look, I think if you had to look at it, there's probably three key ways at least that I would point to.
One immediate and two a couple more that are more structural. And I think they pull on what Malcolm was saying. That disruption of supplies from what was one of the world's biggest oil and gas producers. And not just the supplies that we lost, but the fears that those losses could be even greater, I think, is probably the most immediate impact that we've seen over the last 14 months.
And you know, that's what drove up prices for oil and particularly for gas, which is where we've actually, ironically, seen the biggest disruption. We haven't seen a great deal of loss of Russian oil. we have seen over 110 BCM of Russian gas loss from the system and replacing that is going to take time and is going to be costly. All of that disruption added to inflationary pressures, and that has had an economic impact, as I mentioned, and not least on energy-intensive industries and where those industries are going to place themselves. That was the immediate one, but I think the two structural ones are equally interesting.
What you've had as a result of this is a greater politicization of energy markets and that goes with the energy security issue. You've had a rewiring of the system and that's likely to last. And that rewiring has been shaped by politics, not markets. There's no market reason why Russian Urals barrels are going to Asia and not to Europe. If the market was left to its own devices, that wouldn't happen.
But you've also seen readjustments in what's not available to countries and the pricing out particularly of emerging markets and the implications that's had on energy policy there. Going with this greater politicization has also been something that is the greater political intervention in markets by consumers. I mean if you think about it, when OPEC makes a cut nowadays, the first question is will the U.S. use its SPR? That wasn't the case 14 months ago.
Shari Friedman: And SPR, that's strategic petroleum reserve, yes?
Raad Alkadiri: That's, that’s right. And as you've seen consumers using price caps, using SPR, using sanctions, et cetera to influence the flow and cost of energy and politics defining what is good and bad oil. I think the third issue and the second structural issue is also just how much I think this makes collective action on issues like climate and emissions more difficult.
I mean, again, this is a product of energy security and critically how energy security is defined differently. We've talked about the EU where it's been about availability. I mean, energy security in the U.S. is about price. In Asia, it's about the reliability of supplies. So as it's defined differently, it leads to different policies, and that has not only exacerbated, I think, the tension between the industrialized world and the global majority, but I think as consumers look inwards and as they're more short-term focused in what they are prioritizing, agreeing the type of long-term multilateral measures for solutions to climate becomes much more difficult.
Shari Friedman: So Malcolm, Raad was just teeing up this idea also of kind of integrating climate change into the idea of energy security, and this past year has also had this shift toward so-called clean energy. First of all, it would be good to discuss what we're talking about when we're talking about clean energy and what do you see this acceleration look like?
Malcolm Spittler: So generally we define clean energy and it is - it's difficult, some people include nuclear, some people don't. We generally see it as carbon neutral energy. I think this last year has been, if anything, an unambiguous win for the acceleration of this transition. So something that was really brought to fore by the events in Europe was that no country in the developed world that has the ability to deal with it will let its consumers go cold in the winter. That almost no price is too high to pay, whether it's through government subsidies, whether it's through kind of moving heaven and earth to bring energy into the country, this is seen as a central bedrock element of being a developed nation.
And that meant that over this year, prices that people were paying prices that governments were effectively subsidizing in many locations for heat were incredibly high. This means that I think one of the least sexy but most exciting technologies is suddenly having a moment, heat pumps. These are literally just a more efficient way to move heat from outside even when it's quite cold to the inside of your home. They've had a moment where the break evens in Europe have been reached and they are much cheaper to operate than a traditional gas heater in this type of high gas price environment that we're experiencing. And that has meant a dramatic shift.
The thing that we all fail to imagine when we're imagining energy security, and we're imagining energy in general because it is so kind of primitive feeling, is that almost half of global energy is used for heating. So an efficiency gain on how we heat, like heat pumps, which are currently in terms of state-of-the-art, about 300% efficient. That means you put in one joule of energy, you get out three joules of heat because they're actually moving heat instead of producing heat.
Well, there are already pipeline technologies that push that to 500%. And as a theoretical limit number, I've seen maybe 20 times efficiency - that's a theoretical physical limit as opposed to an engineering limit. But even if we just go to that five X efficiency that is currently in a testing stage for many of these companies, that would mean half of global energy could become an equivalent amount of electricity of 10% of the current global. That is a transformative event and that is something that has been hastened by these high prices and those are going to become more cost competitive over time.
This is not something that could happen quickly. Obviously, replacing the heating system in every building in the world is a many decades-long project, but it's a many decades long project that is now cost competitive. Renewables have really depended on things being shifted from consumable fuels to electrification and the heat pump technology that has suddenly reached a maturity means that nearly half of global energy consumption is now within reach.
Shari Friedman: Malcolm talked a lot about how we're going for some of the solution technologies and then the other piece of that is weaning globally ourselves off of fossil fuels, which is something that there's been a lot of contention of in the discussions on COP 27 and we anticipate continuing in COP 28. I'm wondering, Raad, as you've tracked these markets a lot, how realistic do you think it is in the short term and midterm that the world weans itself off of fossil fuels?
Raad Alkadiri: It depends how you want to define short and medium term. I mean, I agree with Malcolm absolutely. I think the Ukraine War has given a fill up to energy transition plans and to the acceleration, particularly in the industrialized world. But the experience of the last 14 months has also underscored something else that energy producers, hydrocarbon produces are very keen to point to. And that is that oftentimes energy security requires quick fix action and over the past 14 months it's been fossil fuels that have been relied on to fill the gap. Now that won't always be the case, but it reinforces, I think, their importance and it reinforces and shows the tension between short-term and long-term measures.
I think in the short term it is going to be difficult. And you know, hydrocarbons do have a role in energy transitions as well as transition fuel and also in final production. So beyond the host of countries that have a vested interest in keeping that production up, I think the importance of keeping economies going also points to you will use what energy is available.
But to me, it actually all comes down to one thing and that's money. As we are talking about these things, beyond the policy aspect, will there be the money for investment in renewables in energy efficiency made available? Is there going to be the money for investment in infrastructure? And I'm not just talking about the industrialized world, I'm talking about globally. Particularly in the global majority in emerging markets.
Shari Friedman: I mean this is a great place for Malcolm also to comment as an investor working at Citi, I'm wondering if you could talk about the timeframes. Are you seeing that there is an increase in investible low carbon solutions in emerging markets as Raad had noted? And where are you seeing maybe the timeframe where you're going to see this flip over where there will be more investment and a phasing out of renewable energy from your perspective?
Malcolm Spittler: Well, I believe we actually had the moment where globally, we have switched to having more money being invested in renewables than fossil fuels earlier this year. Obviously, that global figure is highly, highly concentrated in the developed market. But I think there's something that is so exciting about markets, which is basically they pile on. This is something that can be quite devastating, but it also means that as soon as it is cheaper across the board to produce new energy and for the developed world, it's about replacement. Whereas for the emerging market it's, to a very large degree, about producing increased capacity because they're still much lower consumers of energy than the developed world. So I get very excited looking at the developing world and thinking, okay, we now know it is cheaper to build a renewable solar plant or a renewable wind plant than it is to build a new coal plant.
So I don't see, I think to Raad's point, a phasing out in the developing world of fossil fuels nearly as fast as in the developed world. But what I do see is in new projects and kind of the expansion of the electrification in that world shifting more to these projects that now have a shorter payback and lower cost situation. Whether we see large amounts of money flowing in that direction from the developed world in terms of financing, there's an open question. But there is a lot of policy that is moving that direction and there's a lot of kind of political will.
I will also add that something that's quite different about installed renewable energy as opposed to flow-based fossil fuels where in a downturn, you can slow down the amount you're extracting of fossil fuels, you can pump less oil, you can dig less coal. It does not have the same kind of economic incentive to shut down solar plants. So we're actually going to see probably supply holding up on electricity from renewables through an economic cycle in a way that we haven't historically.
And I think that actually has the chance of increasing volatility in fossil fuel prices both to the downside during recessions, which is the stage of the economy that we see next for the United States and with a little bit of a delay into Europe, but also potentially to the upside and to the degree that fossil fuel participants in the market are already seeing this, namely OPEC has decided to already start cutting production even in advance of a start of a recession in the United States.
That becomes a good thing, not just for them and their ability to produce more energy, but also for their competition. Because in this scenario, energy prices stay higher through the business cycle and basically you get a boosted profit margin for renewables where fossil fuels are just fighting to stay even, which is a remarkable opportunity and something that I think we'll be playing out in every business cycle from here until we have moved past fossil fuels.
Shari Friedman: And as we look at this transition, there's longer term factors that are affecting the energy transition. We have climate change and all of the surrounding new regulations coming from policies like the Inflation Reduction Act and Europe's Fit for 55.
Raad, first let's talk about the realities of climate change and the now increasingly unlikely prospect of reaching 2030 goal for net zero. Are you seeing shifts in fossil fuel companies and energy-intensive industries that indicate that we are going to see a sufficiently rapid decarbonization?
Raad Alkadiri: I don't think we're going to see a sufficiently rapid decarbonization to meet 2030 goals, no. But I think you are seeing a shift in the hydrocarbon industry and you are seeing a shift in energy-intensive industries. I mean they're being brought along kicking and screaming in some cases and with a healthy dose of greenwashing in others. But the reality is that they are being brought along and you're seeing a significant shift in their business strategies. I think for them there's now suddenly a willingness to be part of energy transitions rather than to try and stop it. And obviously they're trying to ensure that they're not pilloried as the problem as opposed to being potentially part of the solution.
But in terms of their strategies in the oil and gas companies, for U.S. companies and for some of the national oil companies, the big ones like Saudi Aramco or Abu Dhabi's ADNOC, what they're focusing on is what they will call technology plays, it's decarbonizing hydrocarbons or making the barrel or the molecule cleaner. And it's essentially how do you reduce your emissions from production transport and the processing of oil and gas. And there you're seeing money going into things like CCUS to reducing flaring to stopping fugitive emissions.
And for some of them, and particularly some of the Middle Eastern national oil companies sort of looking at longer term solutions and more expensive solutions like direct air capture or how you can use carbon in a circular carbon economy. But their strategy is essentially how long can you produce oil and gas if you make it cleaner, if you make the process cleaner in terms of scope one and scope two, can that extend the life cycle of oil and gas and that's what they want to do.
I think the European companies and the super majors there have been trying to reshape themselves. They're more sort of on the energy provider track and that's involved moving downstream and focusing, as Malcolm mentioned, on electrons and focusing also on retail. But changes that Shell have introduced recently, that BP have introduced recently to their strategy shows how difficult it is to reinvent the business, particularly when you're trying to deliver the types of dividends and returns to shareholders that have been demanded by those investors and in the timeframe that they demanded. And that's the bit that is stymieing oil and gas companies, I think, is they have a responsibility to shareholders. They need to deliver returns either as profits or as national revenue, state revenue. And for that they are intent on investing in what they see in the short term as the most profitable assets and to develop the most profitable natural resources of the state.
Shari Friedman: So Malcolm, how do you see the fossil fuel companies reacting to both the potential for more stringent regulatory environment and the increasing extreme risks of climate change?
Malcolm Spittler: I think it really depends on the time horizon you are speaking about. And I think Raad is absolutely right on the short time horizon, they have this responsibility to their investors and actually a kind of sworn duty to do what is in the best interest of their investors. But that gets very complicated as we shift out in the time horizon, and this is where we see a lot of companies starting to try and position for a different world.
I'm going to step back and I'm going to step way back and think about when we first started seeing oil coming on. Basically, prior to the emergence of oil as an energy source, we were using a whole lot of whaling ships around the globe. They were going out and finding whales and producing energy for people's lights. And that was a major industry.
It took 60 years for there to be no more whaling ships after the first petroleum and the first kerosene product became available competing in that domain. But there were no new whaling ships for those 60 years. Basically it was a one-way ticket.
I think the companies that are looking at the future and saying, we want to be here when the century turns over are taking a very different course of action right now than the companies that are saying, let's enjoy it while it's good. And I think that's going to be something that plays out very dramatically.
There's just no way to maintain those really high margins for the next 60 years like they have been enjoyed for the last 60 years. And I think we're starting to see, and I think genuinely seeing in a real way, firms trying to build out a post oil future in their own imaginations.
Shari Friedman: And so this follows onto, I guess, in a short-term and a long-term perspective on how, Malcolm, you're looking at fossil fuel companies from an investor's perspective. What do you look at when you start evaluating a company? And how do you see this trend going?
Malcolm Spittler: Well, we're really evaluating it in two different timeframes. We have a relatively positive view on oil and gas companies in the short term, basically on the back of this Ukrainian crisis. But we don't have a very positive longer-term view. We see there are potential legal hurdles. I mean will there be lawsuits kind of like we saw in the tobacco industry that place large amounts of old profit up for grabs by nation-states. There would likely in that scenario be a major competition between different countries in trying to sue the major actors. This is a very complicated environment in terms of that sort of liability. There are a lot of kind of legacy assets associated with oil and gas that are going to become big question marks in the decades to come.
For instance, what's going to happen with all of the gas stations across the world as we move to electric vehicles? Clearly the number of gas stations is going to not need to be the same level 10 years hence as it is today and 20 years hence we probably will have almost none. Each one of those gas stations is a liability because it takes a substantial amount of work to take it offline, clean it up, and meet the standards of the locality, whether it's a high standards location like the United States or Europe or a place where it can be kind of buried and forgot, which is sadly going to be a very common phenomena.
But somebody is going to be held accountable for that. And it may, in many cases, end up being local governments. It may be nationalized. That's a big question. But it does mean that in the long term there are issues of accountability that could really cloud the profitability scenario for oil and gas companies even beyond the price picture.
Shari Friedman: So I want to zoom out a bit and leave the specific fossil fuel conversation and talk just about the energy transitions in general. There's going to be some nations that are better positioned for energy transition and some that are going to be caught in some of these liabilities that we've been talking about. So Raad, I'd like to start with you and who do you think is better positioned right now and who might be less well positioned in the near term and in the long term during energy transitions?
Raad Alkadiri: It depends on what the definition of winners and losers are in terms of this.
Shari Friedman: I didn't say winners and losers.
Raad Alkadiri: Who is better positioned and who isn't? I mean I think this possibly sort of goes with my Eeyore type mentality, but I think one of the biggest losers is the world at this moment in time. But that's partly because we don't look like we're going to hit 2030 goals. But more importantly, the difficulty from a political level of reaching common agreement and common action. I mean this is a global issue and it does require a certain level of coordination and that becomes more difficult as energy security comes to the fore and as you get sort of countries looking inwards as they protect their energy and national security.
But I think if you look at which countries are best positioned ironically or perhaps not as obviously given the emission levels there, I would say China is. Just simply because it is spreading its bets and it's putting a great deal of money into various different sources of energy to ensure reliability, but backing renewables very heavily. And there is a political agenda as well that is linked to the environment and that is linked to the quality of growth in China that will help that. I mean we keep going back to Europe and Europe is certainly better placed. The question there is going to be can Europe produce the regulation and the policy to go with its very, very high ambitions.
And I think the U.S. has clearly taken advantage of the past 14 months and the Biden Administration has used the changing situations globally and in energy to push its own agenda. I mean that is, in some ways one of the issues that the Ukraine War has changed and how it's helped energy transition fans. It's a second-order impact. But as it's exacerbated U.S.-China tensions, you have had this focus of us and the Biden Administration on industrialization, on onshoring, et cetera, which is given a push to green transitions because that's been an important element of it.
As for the countries less well produced, again, those that don't have access to the investment and certainly in the developing world, those that are priced out of some of the transitions and transition policies and that, you look at the cost of LNG and what that's done to countries like Pakistan, those kind of implications.
And one of the biggest losers out of all of this is going to be Russia. Having started this spat, Russia's lost influence in leverage. It's getting less for the hydrocarbons it's produced, those hydrocarbons are seen as politically tainted and it's going to struggle with sanctions for probably many years to come.
Shari Friedman: Malcolm, when you look at this from an investment perspective, how are you looking at energy transitions in terms of investing and how would you advise on both the institutional and also the individual level for companies who want to make sure that they have access to capital?
Malcolm Spittler: Yeah, I think it's really crucial to see this as a transformation, but it's also a transformation where there's a little bit of a gold rush element. And our general rule of thumb is when there's a gold rush, don't go digging for gold, invest in the makers of the picks and shovels. So we really like a lot of the entities that are producing the input materials and the input technologies to the new green infrastructure. Kind of the necessary outcome of an energy transformation is that energy prices will go down.
In fact, I would go out on a limb and say over all of human history, there have been little tiny wiggles, but otherwise energy prices go down. The amount of human work that is necessary to produce energy is on a multi-thousand year downward trajectory and I don't see any shift to that. And so ultimately this transition is one where I see the other side as having radical energy abundance and very low-priced energy. So kind of in the longer run I'm thinking who benefits from that more than energy consumers.
So we're wondering what entities are currently spending the most on energy and thus have the most to gain from that shift in the longer time. So short term, absolutely oil and gas, we have to meet the demands of today. Unambiguous there are business cycle dynamics that are at work and we have to focus on those and pay close attention. Medium term picks and shovels, long-term energy consumers. That's how we've been kind of framing it internally.
Shari Friedman: Malcolm Spittler, senior U.S. economist and strategist at Citi Global Wealth Investments and Raad Alkadiri, Managing Director of Energy Climate and Resources at Eurasia Group. Thanks to you both.
Malcolm Spittler: Thank you so much for having us.
Raad Alkadiri: This was great.
Shari Friedman: And that's it for this episode of Living Beyond Borders. Listen to all the seasons episodes by heading to gzeromedia.com and click on the Living Beyond Borders tab. Or you can find episodes in the GZERO World Podcast feed wherever you get your podcasts. For GZERO, I'm Shari Friedman. Thanks for listening.
- Episode 7: Future-proofing: How we fix broken supply chains ›
- Episode 9: US/China power struggle, the global political balance, and your finances ›
- Episode 1: Should I STILL be worried? ›
- S3 Episode 9: US/China power struggle, the global political balance, and your finances - GZERO Media ›
- Episode 6: Can the US and China find common ground? - GZERO Media ›
Episode 4: Broken (supply) chains
While there are some impacts from the war in Ukraine and pent up demand, they also look at how tension between the US and China, as well as increasing regulation and calls for transparency, are changing the shape of supply chains as well as the economy as a whole.
Jon Lang
Director for Trade and Supply Chains, Eurasia Group
Charlie Reinhard
Head of Investment Strategy, North America, Citi Global Wealth Investments
Shari Friedman
Managing Director of Climate and Sustainability, Eurasia Group
Transcript: Episode 4: Broken (supply) chains
Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.
Jon Lang: Other than the impacts of the pandemic, which are easing, and from Russia/Ukraine, I'd say that the greatest risk, to global supply chains today and moving forward will likely be from the U.S.-China relationship, the movement towards, I would say, selective decoupling. And you know, this relationship really presents a two-way risk from both China and from the U.S.
Charlie Reinhard: I think it makes sense for firms to reassess the value of their suppliers and their vendors; to cut costs where they can, to free up resources that could be utilized to build customer loyalty, and to be very, very relevant with the target audience during an economic downturn. All of this has to happen thoughtfully.
Shari Friedman: Welcome to Living Beyond Borders, a podcast from Citi Global Wealth Investments and GZERO Media. On this program, we examine global risks and opportunities from the angles of both politics and economics. I'm Shari Friedman, Managing Director of Climate and Sustainability at Eurasia Group.
Every morning we wake up, we get out of bed, we make breakfast - or some people just make coffee - we get dressed, we log in, or we head to the office. Each stage of that process, and throughout the rest of the day, we rely on products that we bought locally or had delivered to our house, but that were probably made thousands of miles away: from the sheets to the coffee, to the cars we drive, or the shoes we wear to the subway.
Over decades, the costs of many goods like these have decreased or they've stayed consistent, and that's in large part thanks to globalization and the use of ever more efficient supply chains and just-in-time delivery models.
Then came the global pandemic, which brought this efficiency to a grinding halt. And we learned how vulnerable the system was. A delay at any point in this very complicated supply chain can lead to months of waiting time on refrigerators or couches or whatever it is that you're trying to purchase.
Supply chains have somewhat rebounded since 2020, although prices are still high and there's still some glitches. And now, industries are facing new challenges like the war in Ukraine, a rapidly evolving regulatory environment, and in particular, increasing geopolitical tensions between the U.S. and China.
We're going to talk today about all of this and what it means for businesses, consumers, and investors. I'm joined now by Charlie Reinhard, Head of Investment Strategy for North America at Citi Global Wealth Investments. Welcome Charlie.
Charlie Reinhard: Thank you for having me.
Shari Friedman: And by Jon Lang, Director for Trade and Supply Chains at Eurasia Group. Hi, Jon.
Jon Lang: Hey, Shari.
Shari Friedman: Charlie, let's start with the COVID disruptions. Where are we now in terms of recovery from COVID when it comes to supply chains? Do you feel like we're back to normal?
Charlie Reinhard: Yes, we are largely back to normal. The New York Fed has a Global Supply Chain Pressure Index, and it measures the stresses from global transportation costs, and also regional manufacturing disruptions, in seven major economies around the world. These economies are the United States, China, Japan, the Euro area, South Korea, Taiwan, and also the UK. And as of February, these supply chain pressures came down and are now back to where they were at pre pandemic levels. That doesn’t mean that every industry is back to where it was, but in the aggregate, the supply pressures have receded.
Shari Friedman: That's an interesting index. It seems to cover a high percentage of global GDP. And Jon, you know, there's many factors at play as we emerge from the COVID disruptions, including labor issues. How do you view the state of supply chains right now and what industries do you feel are most affected?
Jon Lang: Yeah. Well, as Charlie mentioned, to some degree, there's a great deal of difference between the degree to which we've seen supply-chain easing based on industry. In aggregate, however, as Charlie mentioned, we have seen a good deal of easing, and it's important to remember that the COVID supply-chain story and the disruption story is both a supply-side and the demand-side story.
So, if we look at both of those independently, on the supply side, which really faced a lot of the COVID-related disruptions at the height of the pandemic - that's where we've seen just the fact that the pandemic has moved to an endemic phase in a number of countries, that policy to contain the spread of the pandemic has eased. This is where we have seen reflected easing in those supply chains.
There are a few standouts, however. Particularly in the United States, you see on the labor side, a number of outstanding risks and not necessarily because of broad sick-outs, but we still find ourselves in a tighter labor market in the U.S. Those have had impacts in supply-chain logistics, particularly trucking and in warehousing staffing as well. Both of those continue to be, I would say, while the broader narrative has improved, sticking points to some degree on the supply side of the supply-chain easing picture.
So if you look at labor specifically, we all saw last November the threat of a rail strike in the United States created such an issue that Congress did intervene to support a resolution there. Just at the end of last week, we saw a 24-hour strike at the critical ports of Los Angeles and Long Beach; I think between the two that accounts for 40% or so of containerized imports into the United States.
This is a piece of a much longer story with U.S. West Coast ports in the midst of routine contract renegotiations with those ports' labor unions. To a degree, companies have really, and importers have really, with the anticipation of potential disruptions, begun to mitigate against those risks by diversifying their imports into to East Coast ports even in advance of these talks.
Another sticking point continues to be a historically low warehousing availability. And this really reflects what companies did to initially improve resilience from the outset of the supply-chain disruptions, which was to alter their inventory strategies, so to increase inventory to reduce risk of stock-outs, and this limited warehousing space continues to be an issue today.
Shari Friedman: Mmhm. So we weren't really set up for these disruptions given our just-in-time. Charlie, on this show we speak a lot about prices and inflation. To what extent are these a result of pent-up demand in the system?
Charlie Reinhard: Inflation is receding, but we do think the calculus has shifted from inflation being more a product of supply chain disruptions into one that is now more reminiscent of pent-up demand. We can see that the individual components of inflation – used car prices, energy prices, and commodity prices have been receding. Of course, they were much higher when the pandemic broke out. And then also during the war in Ukraine when the war first broke out. By contrast, we still have firm prices for transportation services and airline fares. And all of that is related to pent up demand for travel and experiences that individuals are still working through.
Shari Friedman: Jon, going over into the bigger picture to look at some of the longer trends behind these supply-chain shocks, we know what the COVID-19 pandemic did, but why was the system so vulnerable to disruptions like this? I think you touched upon some of it in the lack of warehousing, but if you can kind of look through the system and identify the vulnerabilities, that would be helpful.
Jon Lang: Sure. Well, as you mentioned, COVID really exposed global supply chains, which were built over time for speed, for low cost, for innovation, through market comparative advantage. The supply chain really worked well in a relatively stable trading world, which we saw for decades you know with the general international policy agreement on the Washington consensus, the preference for trade liberalization, and the adherence to the multilateral trading order. And this created the right environment for increasing globalized supply chains.
But during the same period, we didn't see any major black swan events on the level of the rapid, global spread of the COVID-19 pandemic impacting not one region or portion of the supply chain, but essentially impacting the entirety of the global supply chain, from sourcing to manufacturing to distribution, and across all geographies nearly simultaneously. And these challenges were compounding in nature, and as you would address one issue, the added pressure from opening that constraint would reveal constraints on and on downstream.
And it's within this historically stable environment that multinationals built supply chains in the just-in-time model that you referenced, with reduced lead times and low cost. And following the initial spread of the pandemic, this supply-chain strategy became an early corporate casualty of the pandemic, as companies rushed to build resilience into the supply chain you know with a move to what has come to be called just-in-case strategy. This was really highlighted with a heavy focus on increased lead times, significant adjustments to inventories, as we've discussed in the warehousing context.
It's also inadvertently served to reduce demand pressures on global supply chain logistics as retailers particularly are still working through built-up inventory in those historically high warehousing levels as opposed to heavy import reliance recently. So once again, taking some of the pressure off those upstream logistics.
While the development of globalized just-in-time supply chains was an international strategic approach, given the relatively stable global trade and commercial environment over the last several decades, you know another unintended factor likely served to mask the true brittle nature of this strategic approach. And that's the issue of supply chain transparency. And transparency is one of those themes which I think will prove to be one of the most important supply chain considerations moving forward and I believe contributed to how global supply chains became so vulnerable, reflecting the lack of full awareness of that risk profile.
Shari Friedman: And that risk profile, of course, goes across – like, it's not just, are you going to be able to get your materials, you're going to see that compounded, right, with the social and the environmental pieces. Is that right?
Jon Lang: Yeah, that's correct. I mean really, so the transparency theme right now, is creating a two-pronged risk profile for companies; both reputational, as you mentioned, regarding ESG concerns and supply chains, environmental, forced labor, human rights. But also increasingly we're seeing countries, particularly the United States, Europe, Japan, and others, beginning to legislate on forcing companies to proactively identify these issues presented by a lack of transparency in supply chains.
Shari Friedman: Right. And Charlie, you know, Jon was talking about how our entire system was built upon this efficiency that kind of assumed this stability inside of the global structure geopolitically and an ability to get things from place to place very efficiently. And now we've seen some vulnerabilities. How do you think companies are changing in light of the way that they’ve had to adjust so far? What are the lessons that they’ve learned?
Charlie Reinhard: So before the pandemic, as you recall, and as Jon mentioned, cost containment and productivity improvements were the focus of supply chain progress. They're still important, but the disruption brought on by COVID forced companies to focus on their basic business continuity. And to do this, they needed to bolster their resiliency and their flexibility. They had to get far better visibility into their supply networks. They had to act very quickly and upgrade their real-time visibility and their demand planning capabilities. And to do this, they really needed to enhance their digital capabilities. They needed to adopt new supply chain risk management processes.
The challenges led to new alliances and strategic agreements between manufacturers and suppliers such as chip makers as an example. And firms within the same value chain realized that they needed to share data and cooperate more than they ever had before as coordination became of the essence. To do this, they also needed to secure their data that they were sharing. That became incredibly important. And so, this rose to a greater importance for security protection.
Now, as Jon mentioned, companies had to address a number of different bottlenecks, and they in cases had to do this rather creatively. So for example, some companies that were short on storage space, they needed to actually buy their own warehouses. Some shippers that couldn't source containers, sometimes they had to make their own or they had to find others that they could charter. Some had to shift to alternative ports or even to air freight as opposed to shipping by sea.
Some companies had to reformulate their products around the components or the ingredients that they did have on hand or could find. And others had to stockpile the chips and parts and batteries, for example, in the auto space, that they could find in order to have some vehicles available that they could produce and also to sell.
A number of retailers during this time period, they over-ordered to make sure that they had inventory available that they could sell and to prevent stock outs. But later on, this led to a different set of problems such as having to discount certain products for which they had ordered too much or selling seasonal items over two years rather than one year. So some of these adaptations are probably permanent, while others might be temporary. But yes, I do believe that there were quite a number of lessons that were learned as firms adjusted to the challenges that were presented by the period.
Shari Friedman: Yeah, that's interesting. It seems like as we're moving from this just-in-time to what Jon called the just-in-case, there's going to be adjustments that are just going to be unavoidable. And as we know just as the pandemic really created a shift in global supply chains, then we got another massive hit from the unforeseen war in Ukraine.
Jon, how have we seen this impact on global supply chains? What has this looked like specifically between countries and what has the effect of sanctions been?
Jon Lang: Yeah, as we've touched on, there are a number of different geopolitical macroeconomic impacts, which have roiled global supply chains, including certainly Russia's invasion of Ukraine. The supply chain impact here really depends a bit more on where you sit. As unlike the pandemic, it has not had the same effect on nearly all points along the product value chain from sourcing to product consumption.
But geographic impacts have been felt much more acutely in places like Europe and across the global south where Russia and Ukraine export significant portions of agricultural commodities and energy as well and where disruptions have had a bit more of an outsized impact. The trade and financial sanctions themselves have been biting and are a testament to your point about the strengthening alliances, to strengthen transatlantic trade policy cooperation through the Trade and Technology Council.
There are three areas of impact potentially here to supply chains from sanctions, as you mentioned, but also from Russian unilateral limiting of raw materials exports, as well as corporate reputational risk leading companies to independently disengage from the Russian market, even if not required to do so by sanctions. And the sanctions package is really most directly impacting those companies that are working to try to remain in operation in Russia, complicating imports and cross-border payments for treasury management purposes.
But for the country overall and its domestic industry, strong technology sanctions will, over time, degrade Russia's military and technological capabilities. In some areas, however, sanctions’ impact to Russian exports have been offset by export increases to other non-sanctioning countries seeking, for example, lower cost Russian energy, which has partially offset some of that sanction's impact.
You know, additionally, Russia has signaled its willingness to use export restrictions of its vast raw materials for leverage. And while this remains a possibility, I think this likelihood, regardless of threats from Moscow, is limited owing to Russia's need for continued revenue from raw materials and energy exports. But you know, we can see this through the actions, such as the renewed grain export deal last month, continuing to allow Ukrainian agricultural and fertilizer exports via the humanitarian corridors from ports along the Black Sea.
But really putting sanctions aside, companies are also taking or have taken unilateral action to insulate from some of that reputational risk from continued sourcing from Russia. A number of companies have elected to suspend business with Russia despite sanctions not specifically targeting their activities. Things like Boeing's early decision to suspend titanium sourcing from Russia and the choice of a number of large bulk maritime containerships to no longer take bookings from Russian ports.
But while the direct supply chain impacts from Russia and Ukraine are more, from the perspective of the U.S., more limited than the pandemic, certainly, and geographically dependent that the invasion has certainly proved yet another challenge for global supply chains and a driver of the need to improve resilience.
Shari Friedman: Going back over to Charlie, now we have this other kind of more gradual movement, which is a shift in the regulatory environment. And I'm curious to know how the changes in the regulatory environment are affecting supply chain. So for example, ESG, environmental, social, and governance and reputational and economic risks that Jon had touched upon.
Charlie Reinhard: You know every firm needs to keep current on the regulations that could impact its supply chain and its reputation, and it's complicated. As Jon mentioned, there are sanctions programs on Russia, but also on other countries as well. We've got the Uyghur Forced Labor Prevention Act, and also shell companies and shelf companies can sometimes conceal who is actually the beneficial owner of a company, who actually has control or a high ownership stake in a company. So it's become quite a challenge, but firms do need to rise to the challenge.
You know, around the world, we're seeing, especially in Europe, for example, the European Corporate Sustainability Reporting Directive expanded greatly the requirements within the EU for ESG reporting. Germany, on top of that, has their own supply chain act to further bolster the due diligence on human rights and the environment that firms need to address. They have to track their emissions, their diversity, and also some other ESG data.
And of course, they need to collect all of this data and gather it and assemble it from their suppliers. In the United States, there was an effort last year the SEC proposed its own version of expanding ESG disclosure regulations. It didn't pass yet, but as you mentioned, this is a slower moving dynamic that firms do need to contend with. And of course, you don't want to be the firm that is making the news for all the wrong reasons by running afoul of regulatory laws or being less skillful than your competition in navigating the terrain.
Shari Friedman: Yeah, indeed, indeed. And you're starting to see, the implications are different by geography. The pace on which a lot of these regulations are coming forth are different on geography. But we are seeing a convergence as you're noting, and Jon, kind of going back to these very broad geopolitical trends, we've seen a couple of shifts that were unexpected, and now, we're starting to see a shift that could also cause significant disruptions on supply chains. We're seeing this balance of power shift between the U.S. and China. Are we seeing a true regression in globalization toward more dependency on regional or national alliances? And then, what is this going to mean for the global flow of goods?
Jon Lang: Yeah, other than the impacts of the pandemic, which are easing, and from Russia, Ukraine, I'd say that the greatest risk, as you know, to global supply chains today and moving forward will likely be from the U.S.-China relationship, the movement towards, I would say, selective decoupling - certainly between China and Western countries. And this relationship really presents two-way risk from both China and from the U.S., which is the most forward-leaning country in its use of policy tools to incentivize supply chain resilience, certainly for national security purposes.
To answer your question about, are we seeing a regression from globalization? I would say we're seeing a reworking of what we previously considered globalization. You have to remember that, historically and including today, a lot of global trade is actually with neighbors and partners within a country's region. So a lot of people in the United States may consider, when asked, that China is the greatest U.S. trading partner globally, when, in fact, it's Mexico and Canada.
Historically, with the exception of a few major trading partners in the world, trade does tend to be more regional in nature. I think a lot of companies are pursuing, particularly when it comes to selective decoupling or the commercial impacts and trade impacts to the relationship between the United States and China, and China and the West, are choosing to improve resilience in the medium to long-term through redundancy efforts.
So this has become popular in the China plus one model, for example, or the make in China for China, where companies will manufacture goods to service the Chinese consumer market within China, while, at the same time, investing in redundant sourcing and manufacturing outside of China on a regional basis perhaps, to service other economies.
And this is reflective of an interest in reducing risk from trade tensions, risk from differentiated standards in product development. So this is something that we see will be increasing as time moves forward. Not to say this is the end of globalization by any means, but a bit of a restructuring from the highly globalized supply chains that we've seen in the past.
Shari Friedman: Won't that increase prices, if we're seeing that level of redundancy? I mean the purpose of a lot of this globalization without redundancy was price reduction. So what do you think that effect is going to be?
Jon Lang: Yes, I think the investment in that redundancy may very well will lead to price increases for the consumers, particularly for low margin goods, think textiles, footwear, things like that. But I think, from an economics perspective, the answer to that might be that, particularly national security concerns, and this is very much the mindset of policymakers, particularly in Washington, that those national security concerns are externalities, which were not baked into the final price of consumer goods historically. That additional price will be reflective of the changing nature of the geostrategic position in the United States vis-a-vis China in the world.
Shari Friedman: So, Charlie, what are you seeing in terms of tensions with China and how they're going to be affecting the global economy?
Charlie Reinhard: I think China's going to be affecting the global economy in two different ways. You know, we're all connected in terms of terms of trade. And some of the areas with which we're connected, we're probably going to continue the way that we are. But in other categories, there are certain flashpoints around technology where, for national security issues, we are going to be going in different directions.
The other way that China is going to affect a global economy this year is simply the fact that it's reopening and has been loosening its monetary policy, while the rest of the world has been tightening its monetary policy. So we're actually of the view that China's economy will be about the only one that accelerates this year versus what we experienced last year.
Shari Friedman: Charlie, in an ideal world – you know, you're looking at placing capital. And so, if you were going to decide how you see companies and governments and individuals reacting, what would you see as an ideal way that all of these would react to strengthen global supply chains?
Charlie Reinhard: Well, I think companies and governments need to control what they can. For example, companies can use digital technology to get data faster, and to bolster their ability to get early warning signs when something is off. They can automate to improve their agility and resilience.
So for example, they could use this technology to automate how they're going to restock at a retailer or how they're going to assign truck routes, for example, at a logistics firm. There's a huge incentive, I believe, to substitute capital for labor. Jon spoke at the beginning of the call about how labor markets have been relatively tight, but we can use robotics and artificial intelligence to create teams of people and tools to enhance productivity, and contain costs in the future. So those are some of the longer term things that firms can do.
Because we are envisioning an economic slowdown this year, there are also some cyclical things. I think it makes sense for firms to reassess the value of their suppliers and their vendors, and to cut costs where they can, to free up resources that could be utilized to build customer loyalty, and to be very, very relevant with the target audience during an economic downturn.
All of this has to happen thoughtfully. You know, we have seen capital spending budgets rise rapidly during the pandemic in the last couple of years. And so you don't want to over-extended heading into an economic downturn, but with interest rates higher and also some inventories higher than what we want to be, this is a really good time for firms to address their working capital.
So those are just a couple of suggestions on the corporate side, both long term and where we are in the cycle. In terms of governments, I think that there's discussions that we can have in order to bolster cooperation. I think is going to continue to be very important in the future. I think we've all recognized in the last few years that for better or worse we're incredibly connected. Even if we make attempts to increase our onshoring and our reshoring and our friend shoring and we reroute certain aspects of our supply chains. We are incredibly connected. So the degree to which cooperation can be fostered through discussions and trade agreements and symposiums. I think all of that's very important for laying the kind of landscape in which we could all prosper in the future.
Shari Friedman: Right. And this gets to what Jon was saying as kind of limited decoupling that there's going to be kind of strategic and limited decoupling, because it's very hard to do anything that would be complete given our interconnectivity. And Jon, do you agree with what Charlie just outlayed, and what are you seeing happening globally?
Jon Lang: Yeah, I do agree with Charlie, and I think to Charlie's point, about achieving some of those production efficiencies for longer term cost savings will be critical, because there will be cost increases as companies seek to diversify and improve their own supply chain resilience through redundant sourcing and manufacturing all comes with a cost.
That said, supply chain diversification is not something that happens overnight. This is something that happens in the medium to long term with careful planning and investment, seeking new opportunities for investment in third party countries that may have closer alignment with the consumer market, that then would be less subject to adverse policy activity, particularly related to the selective sign of U.S. decoupling. And let me also add to that, policymakers, they're not pursuing a strategy of complete decoupling with China.
You know, as Charlie noted, we're too intertwined for that. There are commercial areas where the U.S. and China can certainly pursue and maintain activity. But from the standpoint of the policymakers, some of those other areas on the geopolitical side will be focused on technologies, dual use capacity products as well. We've seen putting technology aside, and we've certainly seen a lot of investment in particularly G7 markets with the rise of industrial policy and domestic subsidies to encourage reshoring and onshoring more broadly.
The U.S. certainly encourages friend shoring and nearshoring. We've certainly seen this begin to emerge in some of that trade data. Stand out certainly include places like Vietnam and India, and a number of emerging markets that are trying to move up the product value chain. But broadly speaking, aggregate trade data still maintains that we have a robust trading relationship with China, and a lot of those top line trade numbers have not changed significantly.
There's also a lot of reasons that companies would like to remain in China. Certainly, their consumer market is one. China is working to vertically integrate a number of its industries to discourage redundant investment outside of China. The raw materials in China. The maturity of China's infrastructure is certainly a bonus for companies maintaining a manufacturing presence in China, putting aside national security concerns that may not be reflected elsewhere.
But gradually speaking, we are beginning to see this trend where companies are looking to third markets, particularly if you're looking to service the U.S. consumer market, those markets that have a robust trade relationship, preferably with market access provisions to the U.S. as a sign of where things are moving in the future.
Shari Friedman: So it's interesting, I'm hearing from both of you guys that this shift is going to be not just as everybody thinks this geographic shift, but it's actually going to be also on the part of companies and supply chains, a behavioral shift on how they operate, how they create redundant systems, and perhaps the geographic shift will happen, but not be so stark as people tend to paint it.
Charlie, we'll close with you. We've talked a lot about a dependence on systems that are vulnerable, a dependence on many goods that we've expected to come in very cheaply, and now we have these shifting geopolitical relationships. What does this all mean for investors and the economy overall?
Charlie Reinhard: I think investors recognize that the world is a highly connected place. And so there are going to on occasion be headlines that could take markets up or down and create some short-term volatility. That being said, I think investors also recognize that this connectivity has led to tremendous progress in terms of the goods and services that are available, the medicines that we take, the technology that we utilize, and all of this is helping us to live better lives over the course of time. And these technologies and these innovations are worth investing in.
And so for investors, I would advise that they take a long-term focus and recognize that over time the global economy is going to grow, the U.S. economy is going to grow, and when that happens, profits are going to grow as well. And so it may take some time, investing is two steps forward, one step back, but over time, we're all going to reach higher living standards with more robust supply chains backing up these efforts.
Shari Friedman: Well, that's ending on a good high note. Charlie Reinhard, Head of Investment Strategy for North America at Citi Global Wealth Investments.. And Jon Lang, Director of Trade and Supply Chains at Eurasia Group. Thanks to you both.
Charlie Reinhard: Thank you.
Jon Lang: Thank you.
SHARI FRIEDMAN: And that's it for this episode of Living Beyond Borders. Listen to all of this season's episodes by heading to gzeromedia.com and click on the Living Beyond Borders tab. Or you can find episodes in the GZERO World Podcast feed wherever you get your podcasts. For GZERO, I'm Shari Friedman. Thanks for listening.
- The Graphic Truth: The great supply chain squeeze ›
- Episode 7: Future-proofing: How we fix broken supply chains ›
- Episode 9: US/China power struggle, the global political balance, and your finances ›
- Episode 1: Should I STILL be worried? ›
- S3 Episode 9: US/China power struggle, the global political balance, and your finances - GZERO Media ›
- Episode 6: Can the US and China find common ground? - GZERO Media ›
- Episode 8: Global food (in)security - GZERO Media ›
Episode 3: Inflation Nations: What to know about inflation and interest rates
In the latest episode of Living Beyond Borders, a podcast produced in partnership between GZERO and Citi Global Wealth Investments, Reinhard joins Eurasia Group’s Rob Kahn for a check-in on the lasting, sticky rates of inflation, how the Fed will continue to adjust interest rates, and what kind of recession - if any - investors should prepare themselves for.
Shari Friedman
Managing Director of Climate and Sustainability, Eurasia Group
Charlie Reinhard
Head of Investment Strategy, North America, Citi Global Wealth Investments
Robert Kahn
Director of Geoeconomics at Eurasia Group
Transcript: Episode 3: Inflation Nations: What to know about inflation and interest rates
Disclosure: The opinions expressed by Eurasia Group analysts in this podcast episode are their own, and may differ from those of Citigroup Inc and its affiliates.
Charlie Reinhard: Even at the end of this year, we don't think the Fed will truly be at its goal of three and half percent, but we do believe that during the course of this year, they will not be concerned only with inflation as the months go by, increasingly the pendulum will shift and they'll be concerned about the employment part of their mandate as well.
Rob Kahn: We know from history that that process of raising rates to bring the economy back in balance is very hard to predict. It can be very uneven and bumpy, and it's very rare that the Fed does that in a way that achieves a perfectly smooth soft, landing.
Shari Friedman: Welcome to Living Beyond Borders, a podcast from Citi Global Wealth Investments and GZERO Media. On this program, we examine global risks and opportunities from the angles of both politics and economics. I'm Shari Friedman, Managing Director of Climate and Sustainability at Eurasia Group.
Today we're looking at a topic we've tackled frequently over the past three years on this podcast: If the economy is so good, why do things seem so bad? Consumer spending is up, hitting a two-year-high earlier this year. The job market continues to surge and unemployment's at its lowest that it's been in 50 years. But we continue to hear the R word: recession.
So why is this, and what is the connection between jobs, interest rates and inflation creating this swirl of uncertainty as we head deeper into 2023? Today we have the perfect duo to answer this question. I'm joined by Charlie Reinhard, Head of Investment Strategy for North America at Citi Global Wealth Investments. Welcome.
Charlie Reinhard: Thank you for having me.
Shari Friedman: And Rob Kahn, Managing Director of Global Macro Geoeconomics at Eurasia Group. Hey Rob.
Rob Kahn: Hey Shari.
Shari Friedman: Let's start by asking the big picture question. Is the U.S. economy good or bad, or both? Charlie, what do you think?
Charlie Reinhard: If we think of the economy as being one part real growth and one part inflation, we actually have different answers. In the case of the real economy itself, we're starting the year out in a position where things are good, but we think that they're going to become bad during the course of time. Leading indicators have turned down negative. The Fed is still raising interest rates. Because interest rates are higher, we see a softening in interest rate sensitive areas of the economy like housing and when we're done constructing homes that were decided back when interest rates were lower, does the order book exist to continue building those homes?
And if we're not building homes, we're not ordering the appliances, the heating systems, the cooling systems. And if we're not ordering them, we're not shipping them. If we're not shipping them, we're not insuring them. There's a ripple effect when it comes to housing.
And of course, we've also seen some layoff announcements in technology also in areas of finance as well. So for a variety of reasons, we think that the economy is going to slow. It's starting the year off strong, but we think that we're going to slip into a mild recession.
In the case of inflation, we're starting off from a bad position, which we think is going to get better during the course of the year. Inflation has already come down. It peaked at 9.1% in June of last year, and we think it'll be at three and a half percent by the end of this year.
We've recently heard from S&P 500 companies in their fourth quarter reporting season. Profits are slightly negative compared to a year ago. And not only are they negative, but seven of the 11 major sectors are in profit recessions versus four sectors just three months ago. So it's spreading.
This means that CEOs and CFOs are going to be looking to contain their costs. And of course, for many labor is the big expense. We've seen rents tapering off, supply chain improvements, supplier delivery times have shortened, backlog orders have come down, commodity prices have come down. So when we put all of that together, we think that inflation is going to continue to dissipate. So an economy whereby the growth picture gets worse and the inflation picture gets better is probably the best way to describe how we see events unfolding this year.
Shari Friedman: So kind of both. And on this recession piece, Treasury Secretary Janet Yellen is bucking a bit against the idea that we are entering into a recession. And she had this to say ahead of President Biden's State of the Union speech in February.
Janet Yellen: You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years. So what I see is a path in which inflation is declining significantly and the economy is remaining strong.
Shari Friedman: So Rob, do you agree with this assessment?
Rob Kahn: Not really. Now where you stand depends on where you sit. And as Treasury Secretary, it's her job to make the case for the administration's policies working and her optimism is part of that story. In that sense, I agree with most of what Charlie said. The economy has shown impressive resilience to date. It's growing around two and a half percent now led by the consumer. So we are certainly not in recession now, but it's coming at a high price. Most importantly, high and sticky inflation. The economy is out of balance.
And so as we look ahead - the path forward - I am less optimistic than Secretary Yellen, that inflation is declining significantly and the economy will remain strong. In fact, I would take the Fed at its word when it tells us that they're prepared to raise rates until they have slowed demand, and that likely means a cooling of the labor market. And we know from history that that process of raising rates to bring the economy and back in balance is very hard to predict. It can be very uneven and bumpy. And it's very rare that the Fed does that in a way that achieves a perfectly smooth, soft landing in which growth stays strong and inflation comes back down to where they want it to be, a 2% target.
So that means in my view, that interest rates are going to have to rise quite a bit more from here and highly likely will produce a significant downturn in demand and growth as the year goes on.
Shari Friedman: Rob, what are the principal reasons why inflation has persisted? And to what extent does some of this trace back to the actions taken to shore up the economy during the worst of the pandemic?
Rob Kahn: That's a really tough question, and I should start with a reflection on how economists have done up until now in predicting inflation and an acknowledgement that, as Jay Powell said in a slightly different context, we're trying to feel a way around a dark room without hitting too much of the furniture. It's difficult, it's challenging.
And the reason why we're operating in darkness is because of the extraordinary and unusual nature of the shocks that we have had to deal with in recent years, from pandemic, to war, to all the supply chain disruptions associated with that. This is not typical of the boom/bust cycles of the U.S. economy, and it certainly is something that our experience and our models that are based on our history don't give us much insight to.
As I look back at why inflation is so high now and why we were surprised by that, it is a mix of both supply and demand factors. On the supply side, the disruptions from the pandemic were severe and it's certainly taken us longer than we expected to work through them. They're still with us. We're still seeing many continuing challenges with working through that.
And just as we thought we were kind of at the peak of the disruption and starting to move back to a more normal economy, I think the war between Russia and Ukraine provided an additional set of challenges, particularly in the areas of energy and food which are so critical to so many consumers and households.
Add on to that, that I think these shocks have changed the way people look at their jobs and at their lives and their futures. That has affected labor supply, and the return of people to the markets disappointed, our hopes, and there are a lot of reasons for that. That's the supply side of the economy and tells us something about how much is available to be bought and at what price.
But of course, there's also a demand side too, and it's also interesting to ask ourselves why has demand pressed up so hard against this restricted supply. In that case, part of it is a resilient U.S. economy that has responded well to these challenges.
Part of it also, and this is what differentiates us from so many other countries, was an extraordinary fiscal effort; that the amount of stimulus that was provided by the U.S. government in the early days of the pandemic was really extraordinary. We had the capacity to do that. Many countries did not have what economists would call the fiscal space or the ability to provide that much support, but in the U.S. we certainly did.
There's an active debate about whether we went too far, but be it as it may, in those early days, we felt extraordinarily at risk and along with an extremely expansionary monetary policy, fiscal policy did provide that floor under activity.
But it did put a lot in spending into the system which we are still working through and has contributed to not only resilient demand, but pressure on markets and has led to price increases that in turn has proved very sticky and has remained at much higher levels than we have hoped. And that's why it puts the Fed in a very tough bind.
The rate hikes that we have gotten so far haven't had the effect we had expected it to or had hoped to. And so I think we're seeing a momentum to inflation that I think is very worrisome if your goal is to put inflation down on a firmly downward track. And I don't think we can have great confidence that the policies that have been put in place so far are going to be enough to get us to where we want to go.
Shari Friedman: So there's a lot, Rob, that you kind of packed in there with this interconnection between inflation and interest rates and this move to try to kind of keep the economy in this balance. Charlie, moving over to you - I'm wondering if you could kind of create this linear trajectory and unpack this piece that Rob was talking about given the correlation between inflation and interest rates and why the Fed is implementing these incremental rate hikes.
Charlie Reinhard: Sure. So the Fed has two mandates. The first is full employment and they feel pretty good about achieving that mandate at this particular juncture. The second is stable pricing. They want to average inflation that's not too much beyond 2% over the course of a cycle, and that's where they are concerned. So they are raising interest rates in order to bring that about.
Now the problem is that if you're looking at inflation data and if you're looking at the unemployment rate, you're actually looking at lagging information. The leading indicators are suggesting that the economy is going to weaken. In order to bring about lower levels of inflation, the public needs to believe that it's achievable. And we can look at expected inflation for the next 10 years by comparing a 10-year treasury to a 10-year inflation protected treasury and expected inflation is somewhere between two and two and a half percent. So, so far, it's well anchored.
The Fed of course, needs to keep it anchored in order to bring about their inflation goals. Of course, when you're looking at trailing information or lagging information, you run the risk of making a mistake as you would if you were only looking at your rearview mirror and not looking at what lies directly in front of you.
And so, we think that they are likely to go too far; to make a mistake. And of course, a reduction in demand is the arch enemy of inflation. So if we were to see the unemployment rate move higher during the course of the year, and we think that we will, that should also help bring about lower inflation.
But you know Rob made a really good point earlier about the stickiness of the inflation that we are seeing. And even at the end of this year, we don't think the Fed will truly be at its goal of three and a half percent, but we do believe that during the course of this year, the balance of their concerns, because of that dual mandate, will change. They will not be concerned only with inflation as the months go by. Increasingly, the pendulum will shift, and they'll be concerned about the employment part of their mandate as well.
And so, once we have some negative job growth, we think that the Fed will pause. They'll probably pause for a few meetings and then eventually they'll lower rates by the end of the year.
Shari Friedman: Just in terms of interest rates, I think it's important to note that historically the interest rates are still pretty low. I mean, I remember when I was taking out student loans, they were quite a bit higher than they are right now. So is this a case of us getting spoiled by low and maybe unrealistic rates in recent decades?
Charlie Reinhard: Back in August of 2020, I think we made a generational low in interest rates with a 10-year treasury yield of just half a percent. We think that interest rates, the 10-year treasury, is likely to be lower at the end of the year than it is today. But generally speaking, when we think about where interest rates average in the period following the financial crisis you know, up until recently, we're likely to experience higher rates on average in the future than during that time period. Inflation is likely to run a little bit higher, as a result of that interest rate should be higher as well.
Rob Kahn: As Charlie was saying earlier, people's expectations about inflation do seem anchored so far, although that's not something I feel we can count on persisting forever. And I think that's because the last 30 years or so we have lived in a period of very low inflation.
I think there's a lot of reasons for that, demographics, the influx of a lot of workers from the emerging world into the global marketplace, which put downward pressure on interest rates and on price pressures. Some people have referred to this as secular stagnation or other ways of capturing, but fundamentally these are broad long-term drivers that contributed to a period of low inflation.
But there are arguments that some of that may be in the process of reversal. And I think to some extent how much you worry about those reversals depends not only on how you see the world evolving, but what you've experienced. And I am struck that I grew up at a time of high inflation and volatile expectations prior to the Great Moderation. And when I talk to colleagues who are much younger than I am, they don't have that same experience. And I think that probably contributes to a little more concern on my part that we could be shifting in coming years to a higher rate environment with greater and higher inflationary expectations.
And so that idea of being spoiled, what that's capturing, it partly relies on your view on the fundamentals, right? Is the world changing in some material ways, that maybe we're a little less globalized, a little less reliant on cheap global labor in a way that may contribute to higher base inflation? That's part of the debate, but also simply what we're used to, which feeds into our expectations and then in turn can feed into these inflation dynamics.
Shari Friedman: So people may have gotten spoiled, but the interest rates nonetheless are likely to rise. Rob, the former Treasury Secretary and economist Larry Summers took a lot of heat for his assertion that higher unemployment is needed to beat inflation and to stave off recession. Is there any truth to this idea? And kind of going back to this interconnectivity, what's the connection now between wages and employment and inflation?
Rob Kahn: He's right, although it's shorthand and as the Fed often emphasizes, they don't desire higher unemployment, nor do they feel it's essential. They hope they could cool down the labor market, take pressure off prices without a significant increase in unemployment, but they'd be prepared to tolerate it. I think what Larry's getting at is simply that this high inflation has to be addressed through some reduction in demand. Fed's tools, primary tools, which are higher cost of money, will work eventually through reducing demand, and that will reduce, in addition demand for products, the demand for labor.
And that means, of course, in the first instance, the number of vacancies go down, firms will be a little more cautious in advertising for new employees or to hire new employees. And that should lead to some increase in unemployment, as I say, is the natural price of getting back to balance.
Obviously, that causes distress and particularly for sectors of the economy that are in lower skilled professions are more vulnerable to cyclical downturns and the like. Those people, many of them had seen a lot of gains in years prior to the pandemic. We saw real wages of a lot of low-income groups rise significantly. It would be a shame to lose that, but you can't get yourself into a policy position where you kind of say that any increase in unemployment is bad simply because policy should never allow that to happen. That's the situation if you get into that where you're chasing higher and higher levels of inflation in an effort to keep unemployment low.
The goal here is to find some sort of level of activity and resultant level of employment that is sustainable over time in a regime of price stability - because we ultimately believe that stable prices is supportive of higher activity and higher employment.
Shari Friedman: Mmhm. And Charlie, moving back over to you. We've talked a lot about kind of the U.S. policy tools, but are there other factors contributing to the inflation rate and just generally overall uncertainty? Like for example, continuing supply chain issues and the energy price hikes that really were exacerbated by the ongoing war in Ukraine?
Charlie Reinhard: Yeah, so certainly the supply chain disruption that we had during COVID, the war in Ukraine, have complicated matters, and also we had a very big policy response fiscally to also contend with. You know, in normal times, I think technology is actually an advantage. The little barcodes that we see on the back of our packages when we have robust and well-working resilient supply chains do a wonderful job of communicating up and down the supply chain when we need the next shipment and we can better match supply with demand.
When supply and demand are growing at the same pace, things can remain in balance. And I think the technology has contributed to the longer business cycles that we've experienced since the 1980s. That being said, we have been through some unusual times.
Now, in the U.S., inflation did peak back in June and it's come down and I think supply chain pressures have lessened to a large degree. When we look at freight rates, delivery times, backlog orders, I think it's come down quite a bit. In Europe, the situation was a bit different because of the closeness to the events that have had been taking place in Ukraine. Europe has done a wonderful job, I think, in diversifying away from Russian gas and benefited from a mild winter. That mild winter has allowed Europe to reach a very good place with respect to natural gas storage right now.
Of course, the war is still ongoing, so we can't say that it's going to remain that place, but for right now it does -. that aspect does look pretty good. Now that being said, in Europe overall inflation is coming down, but core inflation when we remove food and energy, that hasn't really turned down yet.
And as a result of that, they're probably a bit behind in terms of the inflation cycle than we are in the U.S. Some of that reflects the terms of trade between the U.S. and Europe. The dollar was strong in 2021 in the first three quarters of last year. Ultimately that'll turn itself around, but it's not just the Fed, but the European Central Bank President, Christine Lagarde, that has taken a very hawkish stance lately as well to try to bring about better levels of inflation in Europe.
We actually think inflation in Europe will also be around three and a half percent at the end of the year like in the United States, but it's going to take some policy tightening in order to bring that about.
Shari Friedman: So Rob, Charlie had just noted several geopolitical factors that are having an impact on the global economy, and I wanted to turn over to China. As it lifts its zero COVID policy and starts to reboot its own economy, is this going to have a global impact and specifically toward the U.S., is it going to have a mitigating factor in a pending recession?
Rob Kahn: Well, geopolitics, it's hard to imagine a time when it played a bigger role in the performance of the global economy than now. So many of these factors you can mention, most notably the war, but also factors like rising U.S.-China tensions and the like are potential negatives to global growth. Probably the one possible upside risk here comes from China's recovery. From my perspective, the decision last year to rapidly exit its zero COVID policy and accept the high health costs of doing so was really shocking. And it reflects, I suppose, the president's own desire to change the narrative politically and economically in China.
But for whatever reasons, the path by which China rebounds and returns to growth is a major factor for the global economy and for the U.S. economy as well. I think China matters more for the U.S. now than certainly a decade ago, but probably more than in any other time for the U.S. economy because of the way in which we are integrated in trade and in finance.
Now that said, while a China recovery - and does provide an upside to global growth: we expect China to grow about 5% this year. It will not be smooth, and I suspect, will not pack the punch that past Chinese booms have. Let me explain why that is.
It does seem that this recovery's going to be more focused on the Chinese household and the Chinese consumer than past recoveries, which were very much driven by infrastructure and housing. And as a result, put significant upward support for and pressure on commodity prices, key resources that are such an important part of global trade and finance. I think this may be a recovery that is more homegrown and home focused and doesn't drive Chinese imports of critical goods in the same way.
Also, we could see some surges of new variants as the year goes along. I think also Chinese monetary and fiscal policy will be a little more cautious than it has in past cycles, because of some of the legacy they're dealing with in terms of COVID and in terms of strains on their economy that are persisting from their past real estate challenges in particular.
All of this suggests to me that stimulus will be tempered, and also that the growth may be more gradual and more stop/start than maybe some of the storytelling suggests. So I do think that it's still going to be a positive factor for growth. It probably is the biggest upside risk to a story of moderating and soft global growth this year, but it's certainly a lot of uncertainty about how that plays out.
Shari Friedman: And then the idea of the variance also kind of throw a wrench into the possibility of growth - and globally as well. Bringing it back over to U.S. tools. I want to touch on this congressional battle over the U.S. debt ceiling that we'll probably see coming up this summer. Rob, can you explain how that is going to affect all these different pieces that we've been talking about today?
Rob Kahn: Well, let me start with the good news here on this one because so much of what we're talking about here is how things can go wrong and what the risks are. I am highly confident that the U.S. government will not miss a payment on its treasury bonds and bills. It will find a resolution to this debt limit battle in time. But I do worry that this could be messier and more down to the wire than we've ever witnessed before. Now I know many of you will at this point say, “well, haven't we been through this before? It seems like every other year we have a debt limit showdown. We talk about the risks and in the end, they get to a deal and they move on.”
And indeed, there's a tremendous political incentive to do it, but I would highlight a few things. First and foremost is the divisive nature of our politics today, which of course, in some ways has never been worse. And certainly, a desire on the part of the Republican caucus in the house to use the debt limit aggressively to try and change the trajectory of spending, with both sides very far apart in their visions of what U.S. fiscal policy should look like. And it just seems very hard to trace out a path by which those two sides get to a solution other than the fear of a default.
Furthermore, there is a perception and it's not without some merit that we are better prepared now to navigate a close call on the debt limit than before, both because the Fed is prepared to manage any dislocations to money markets and also because arguably the U.S. government understands better than maybe in the past how it might be able to prioritize payments if it has to and pay some suppliers late, delay some bills while at the same time paying on the treasury.
Now that idea that you can prioritize payments is a double edge sword because on the one hand, to the extent it is true, it does provide some additional time for negotiation. On the other hand, of course, the perception that these deadlines aren't real and that you can navigate around it by just simply paying some bills and not others, is not only a – you know, can become an excuse for non-action, it also could be very destructive to our credit rating. Indeed, at least one of the major credit rating agencies has already said that even if you're paying on the treasuries, if you're defaulting on other obligations, it does undermine your credit worthiness.
I think ultimately, we will get a deal, it will probably maintain spending around current levels.There may be some promises of future cuts. We've, in the past, had certain kinds of rules for constraining spending. They haven't proved very effective, but we could use that again. And there may also be agreements on other non-fiscal issues that each side care about, like immigration or some public programs like Medicare or food stamps and the like that could contribute to a deal.
So I think ultimately I could see a deal taking shape, but it may well not happen until September or October in line with the budget. It may ultimately mean that we actually need some period of market turbulence, some period of actual kind of anxiety about getting this done to actually bring both sides to yes.
Shari Friedman: Right, right. A little bit of heat. It sounds like it's going to be a very exciting summer here in the United States. So Charlie, we've been talking a lot in this broad economics speak, and people are probably wondering, how does this translate down to my own investments? How do I proceed in this environment - and what would you tell them?
Charlie Reinhard: Well, each person is different. That being said, you know, we think that we're in the late part of an economic cycle, so we're proceeding in a manner where we're a little on the cautious side, but we think that events are going to change during the course of the year; that opportunities for being less cautious will open up during the course of the year.
One thing I should mention, though, is that if we were to summarize all of the economic research and financial research that has ever been done on investing, it would really come down to having a diversified portfolio with a pro equity bias, not meaning having equities all the time, being a hundred percent of your portfolio, but rather investing with an eye towards the notion that the economy is going to grow eight or nine years out of 10, and when the economy grows, profits grow, and when profits grow, that takes securities along with them.
Shari Friedman: Yeah. So I mean, what you're saying is this idea of: it's cyclical and here's where we are in the cycle. And so you just have to understand that it's never in one direction. It's up and down, and here's where we are. So, we’ve been dancing around and kind of connecting this issue of whether we’re going to have a recession or not. And just to kind of have a final conclusion and to put this into black and white, are we heading into a recession?
Rob Kahn: In a word, yes, I expect a recession kicks in later this year or early 2024. I put around a 75% probability on that. As Fed interest rate hikes do slow the economy, as sentiment shifts, financial conditions tighten, and as that spreads through the economy, we will see a slowdown that will ultimately take us into recession. I don’t think it needs to be as deep as 2008 or 2020, but it could take a while for the recovery, given that monetary and fiscal policy will be kind of on hold for now and won’t provide support for the early stage of recovery.
Shari Friedman: And Charlie, what do you think?
Charlie Reinhard: We think that we're going to enter a recession. It'll be somewhat mild by historical standards, and it won't necessarily be very long by historical standards. And we're looking for a recovery next year. And in terms of profits, we would expect S&P 500 profits to contract by about 10% this year and then begin to rebound next year.
Shari Friedman: Charlie Reinhard, Head of Investment Strategy for North America at Citi Global Wealth Investments, and Rob Kahn, Managing Director of Global Macro Geoeconomics at Eurasia Group. Thanks to you both.
Charlie Reinhard: Thank you.
Rob Kahn: Thank you, Shari.
Shari Friedman: And that's it for this episode of Living Beyond Borders. Also this season, we'll discuss a wide range of topics like the economic benefits of more women in the workforce, the current state of the US-China relationship and energy transitions at this critical moment for climate policy.
Listen to all of this season’s episodes by heading to gzeromedia.com, and click on the Living Beyond Borders tab. Or you can find episodes in the GZERO World Podcast feed wherever you get your podcasts. For GZERO, I'm Shari Friedman. Thanks for listening.
Episode 2: The economic power of women
Women were disproportionately impacted by job loss during the pandemic, but there are indications that is changing as employment numbers climb back to levels seen before March 2020. Still, there is a long way to go toward equity, as Liu and Tambaro explain.
This episode is moderated by Shari Friedman, Eurasia Group’s Managing Director of Climate and Sustainability.
Shari Friedman
Managing Director of Climate and Sustainability, Eurasia Group
Ida Liu
Global Head, Citi Private Bank
Celeste Tambaro,
Managing Director, Financial Institutions, Eurasia Group