Transcript: Thinking about the global economy with Martin Wolf

This is an audio transcript of the Economics Show with Soumaya Keynes podcast episode: ‘Thinking about the global economy with Martin Wolf’

Soumaya Keynes
Most people split into one of two categories — they’re a micro person or a macro person. Some people get stressed out by standing back and asking the deep questions. Others love it. And today, I’m going to speak to someone who is solidly in that second category, asking about the biggest topic of all: Where is the global economy headed?

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This is The Economics Show with Soumaya Keynes. There are no simple answers here. There are no short answers. This topic is necessarily wide-ranging. And to take all of these on, I am joined by none other than Martin Wolf, chief economics commentator here at the Financial Times, and general legend. Martin, thank you so much for joining me.

Martin Wolf
It’s a pleasure. I hope.

Soumaya Keynes
OK. Let’s start with an easy one. What is your most controversial opinion?

Martin Wolf
That’s a very good question. My view tends to be . . . that none of my opinions can possibly be controversial, because they’re all obviously true, and the world is obviously waiting for obviously true things to be told to it. So nothing is controversial. But in practice, I suppose in the last few years, my most controversial position or opinion with our readers has been that American democracy is in a potentially mortal crisis and that one of its two prospective presidential candidates wants to make it a dictatorship.

Soumaya Keynes
Right. Yeah, I can imagine that word — dictatorship — might be pretty controversial with some of the more right-leaning readers.

Martin Wolf
Yes, indeed. And I’ve first put forward this proposition in March 2016, in a column under the heading: Donald Trump is how great republics meet their end.

Soumaya Keynes
OK, well, I guess you’re excited about the upcoming presidential election then.

Martin Wolf
Aghast is, I think, a better adjective.

Soumaya Keynes
Yeah. Fair enough. Let’s turn to something slightly more cheerful. Now, obviously the global economic outlook is a stupidly broad topic, but I thought we could take this in chunks, and I thought we could start by talking about the US and Europe. So one of the biggest stories around right now is the fact that the US is performing so much better than Europe. Why do you think that divergence has happened?

Martin Wolf
There’s clearly a divergence in recent years after a period when, in per capita GDP terms — very important, not aggregate GDP, which tells you less — they were pretty level-pegging. I would say there are two aspects to this and it’s difficult to separate them, particularly since Covid. But even since the financial crisis, macroeconomic policy, demand management policy in the European continent — including the UK here — has been more cautious than in the United States. Just focusing on the Eurozone, which is the biggest chunk of Europe. That was because the global financial crisis was followed by a gigantic European, Eurozone financial crisis, which ran on until 2016. And, really, monetary and fiscal policy was extraordinarily unsupportive of demand. And so growth was very weak. And we were just beginning to come out of that. And then they got hit by Covid. Then after Covid, they got hit by this huge shock from the Ukraine war. Huge energy crisis and fiscal policy and monetary policy were both restrictive relative to the US, particularly fiscal policy. So there’s a macroeconomic reason for the relative weakness of growth of the European economy compared to the US for a long period since the financial crisis, I would say.

And then there’s a second thing, which I think is parallel to that, that if you look at the sector which has been the dominant innovative sector in the contemporary economy, which is essentially the digital tech sector over 30, 40 years — and you could go back further, but I just focus on that period — I mean, clearly the US has been vastly more dynamic in that sector, created vastly more world-class companies in this sector. They are the dominant companies in the US. Most of them are new. They’ve been created in the last 40 years, and many of them are even younger than that. They completely dominate the American stock market, and there are simply no European equivalents. And if this is the most dynamic sector and it’s generating within it and indirectly probably too a lot of the productivity growth there is and a lot of the innovation there is, then it’s not terribly surprising if you look at productivity growth, the US is better.

So I think there are these two factors: the macro policy restrictiveness of the Europeans, and then this pretty obvious fact that the US economy is being driven in significant part by a new sector whose dominant players are American and there are no equivalents in Europe.

Soumaya Keynes
On that macro demand management point, obviously, the US has borrowed much more than European governments. Do you think that European governments should be borrowing more now?

Martin Wolf
I think that if I were in charge of Europe in some sense — let’s suppose they have a federal fiscal system, so the Eurozone was economically a single economy in that sense — then I think one could make the very strong argument that after the financial crisis and again now in trying to recover, they’ve been too cautious fiscally. And there was an argument for a more aggressive combination of fiscal and monetary policy. And certainly, I feel very comfortable in saying that over the sort of 2010-2016 period when they were in the Eurozone crisis. In the more recent period, it’s more difficult to be sure, because the Eurozone faced real shocks, which the Americans didn’t. And there was a lot of fiscal response to those shocks: subsidies to consumers for energy prices and so forth.

Should they have done a lot more collectively to support demand despite these huge external shocks? I think it’s perfectly arguable that they should have done so. They basically left everything to monetary policy. And once inflation started exploding upwards, monetary policy inevitably became restrictive because that’s the terms of reference for monetary policy. Would it have helped to get them out of this slump, post-Covid slump more quickly? I think it probably would. But I feel much more confident in feeling that there were huge macroeconomic policy mistakes. I mean, really huge from the aggregate point of view after the financial crisis then after Covid. But the US so far has got away with it. Will there be a fiscal crisis in America’s future? Possibly, but I don’t think it’s imminent.

Soumaya Keynes
OK. I want to move away now from talking about fiscal policy to talking about monetary policy. So we’ve got this longer-term divergence between the performance of the US economy and the European one. In the short term, though, investors are betting that the ECB is going to cut rates sooner than the Fed. It looks like there’s going to be a divergence in the path of interest rates, partly because of how well that the two economies seem to be doing. Where are you, I guess, relative to the consensus? Do you think that people are being too optimistic about the plight of the US economy, too pessimistic about the plight of the European economy?

Martin Wolf
I think I’m probably quite close to the consensus on what is likely to happen in the Eurozone. My sense is that the ECB has two characteristics. It will follow the macroeconomy. So if things look weak and they don’t look that great and inflation is falling, which they’re concerned about, they will cut. And I suspect that means they will cut a few times over the next year or so. But they won’t do so adventurously. They won’t want to jump ahead to the possibility with the aim, as it were, of cutting off even the possibility of a real recession. They’re not gonna be aggressive like that. And that’s because it’s a collegial decision-making process, and there are quite a few hawks there who will want to be absolutely sure that inflation is being brought under control and won’t mind if there’s quite a significant slowdown. So I think the Eurozone under the ECB, the monetary policy will become less restrictive because that will be consistent with what’s going on with inflation. But they won’t be dramatic about it. And they just have to hope that the economy doesn’t weaken dramatically because, for instance, there are some shocks which don’t always happen here.

In the US — having just been there and talked to senior officials there — I’m really not quite clear what’s gonna happen. And the consensus in the US on what’s gonna happen on monetary policy is changing all the time. I mean, the market consensus, it’s changing all the time because they don’t know either. And that’s because I think the Fed genuinely doesn’t know, because they don’t really know what’s going on in the economy. And a deep part of that is there have been quite a few surprises.

So just going over the last year, inflation fell more quickly than they expected until suddenly this year it didn’t. The economy in the second half of last year was much more robust than most people expected, even though inflation fell so dramatically. So suddenly this year, they found, well, inflation is higher than we thought it would be at the end of last year. And the economy’s also incredibly robust. So obviously we’re not gonna loosen. And I thought in last November they were going to loosen, and it made sense.

So the Fed is, I think, genuinely being surprised by the way the economy is behaving. And actually, in a lot of ways, what’s been going on has been quite surprising — both how strong the economy has been, given a very significant monetary tightening, and despite the fact that the economy has been so robust that inflation fell so far and now it seems it’s not. So I think the Fed doesn’t know — because it can’t really tell what’s gonna happen — and so the market doesn’t know and it’s constantly jumping about. And I think that’s a very realistic response to a very realistic uncertainty because there have been so many surprises in both directions.

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Soumaya Keynes
So we’ve been talking about the divergence between Europe and the US. But I suppose the even bigger trend is that both Europe and the US have seen a pretty remarkable slowdown in productivity growth over the past couple of decades. And my question is: how optimistic are you about that reversing? We’ve got all of this chatter about artificial intelligence, automation. Could that reverse our fortunes? How do you think about that?

Martin Wolf
I think my answer on that, which will be very disappointing, is I am intensely agnostic. I don’t think we, collectively, economists agree on why the productivity slowdown occurred. And this being so, that already makes it difficult to know what would reverse it. I tend to be with people . . . Robert Gordon is probably the best known author to say this is deeply structural and very difficult to change, because it is to do with the sorts of innovations we have now and the sorts of economies we have now, which are very different from those, the predominantly industrial economies of the past. So that’s part of the reason why we don’t get the productivity growth we want. And then the second issue is about AI. Is it going to transform — and this seems to be the crucial thing — productivity in sectors that we have historically tended to think of as really hard to transform, and which are basically service sectors and people-facing service sectors?

So let me take an extreme example. If AI and AI robots could mean that we could cut the number of teachers in a school by 50 per cent because they’re all being dealt with by tailored programs, and ditto universities and ditto with client-facing health systems, all the rest of it, then the productivity consequences will be dramatic. And health systems, for example, the information processing part of health systems, will we need doctors to diagnose people any more? It’s pretty obvious. If AI systems can do that sort of stuff and write all the columns in the world, for example, then we are going to have immense productivity boom. We’ll have superlative columns written on every subject you like every day. So that will be absolutely transformative. Clearly, I have no idea whatsoever whether that’s feasible. And my general view on this, looking at the last half century, is we’ve consistently told about unbelievably wonderful tech breakthroughs, and you don’t really see them in the productivity statistics that Bob Solow famously said about 40 years ago. So it could be that we’re on the, at a moment in which a gigantic amount of human moderately skilled labour is substituted by machines. That would be colossal.

Soumaya Keynes
Let’s talk now about China. So this is obviously a really difficult country to work out what is happening. What are you looking for when you’re assessing what’s going on in the economy?

Martin Wolf
For me, there are three really big issues. The first is the fundamental macroeconomic imbalances within the Chinese economy, which I’ve been writing about one way or another for about 20 years. The second is the international competitiveness of the Chinese economy within the context of an increasingly protectionist global environment, because it’s been a remarkably export-oriented economy for such a big one. Oh, that’s declining. And finally, it’s just the politics of China, and above all, the politics of China vis-à-vis the private sector. Is Xi basically trying to undo the economy that was created under Deng? And all this is coming together, and that makes it really difficult to understand what’s happening.

Soumaya Keynes
Could you just elaborate a bit on that macroeconomic imbalances point? I mean, what do you think the problem is there?

Martin Wolf
The macroeconomic imbalance problem is essentially China has the highest national savings rate of any significant economy in world history. It’s about, now about 40 per cent of GDP. And that’s because consumption is enormously repressed. Having a fantastically high savings rate allows a fantastically high investment rate. But this is now quite an advanced economy with a superlative infrastructure. What are they going to invest in? And they need to invest at home or abroad enough to balance this 40 per cent of GDP potential savings. Otherwise, they have a slump. And ever since the financial crisis, the bulk of the additional investment they need came from a huge real estate bubble and real estate boom, the biggest property investment boom in the history of the world. And this is coming to an end.

So the first big question is: what do they do to manage demand when that giant hole-filling exercise from real estate is ending? And it’s become pretty clear that they’re predominantly trying to do it through investment in the green economy, broadly defined and in advanced manufacturing. And the big issue here for the west is that’s gonna create gigantic excess capacity in those industries. And the question is: where’s that gonna end up? Biden is already saying we’re going to have more tariffs on you. You’re not gonna sell all your electric vehicles to us. And the Europeans are saying the same. So that’s the first big question. How do they fill the demand? Most of us have been saying for many years that they’ve got to shift income to households and get them to consume more, and Xi has very clearly said, I don’t want that to happen.

Soumaya Keynes
OK. I have a follow-up question about this macro imbalances point. I mean, and I share your concern about the risk of trade wars. My question is whether you think that officials in China understand how the rest of the world perceives this. Do they understand the risks of retaliation?

Martin Wolf
One of the things that I have become aware of is that the politics of China now on economic policy have really shifted dramatically, even from those of the earlier Xi period, let alone the period before that. And the current administration seems to have less economic expertise than previous ones. It’s more inward-looking, less experienced about the outside world and more ideological in the Communist party ideological way. And therefore it does seem to me that their awareness of what they’re doing — both in relationship to their own macroeconomic problem and in relationship to the rest of the world — is much less analytically rigorous and much less well-informed than it used to be. That’s my sense. I’m not sure of that, but that’s my sense. So I think they are being driven by ideological and political concerns that have always been there but are much stronger, and therefore they’re not fully aware of how the rest of the world will view this. And they are absolutely opposed to the obvious alternatives to this particular strategy they’re now pursuing than they should be.

Soumaya Keynes
Which are stimulating domestic consumption so that less of these electric vehicles are sold abroad and more of them are sold in the domestic Chinese market.

Martin Wolf
And that more broadly, investment is reduced somewhat. And the investment there goes overwhelmingly towards the production of goods and services that will meet a whole range of domestic demands in what is still a relatively poor country with a very repressed consumption. A lot of Chinese consumers don’t live very well, and that could be changed. But it’s quite clear that Xi has an objection to that, which is in significant part moral. He thinks that makes the Chinese weak as a people. You know, that austerity is good. So he doesn’t want to change the model, and that means he’s gonna run into some pretty big difficulties. That’s sort of certain.

Soumaya Keynes
OK, we are going to take a quick break now, but in a minute, we’ll be back to ask whether the poor countries of the world will ever catch up to the rich countries.

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Soumaya Keynes
OK, I have one final question, which is a big one. And it is about convergence between rich and poor countries. I think it was around the ‘90s, mid-2000s. There was this pretty stunning trend where poor countries were catching up with rich countries. They were growing more quickly than richer countries. And that’s amazing, right? That’s really what you want. But over the past few years, starting slightly before the pandemic, but I think reinforced by it, you’ve seen a reversal of that trend. How optimistic do you feel about the convergence resuming and continuing?

Martin Wolf
That is a very big question, and I think we genuinely don’t know the answer. But I think it falls into two parts. There are parts of the world which haven’t been doing well on convergence for a very, very long time. And the dominant parts really are Africa, Middle East and South America. And let me take an example. Brazil’s GDP per head has been basically in the same relationship to US GDP per head for the last 40 years. That’s a big story. That’s very depressing and disturbing and typically important in Africa because the population is growing enormously, it’s becoming very big. In other words, that’s been going on. The question is: will that change? And some of them are getting worse. And I can’t see how this performance is gonna change in present circumstances. And that’s a huge chunk of the world.

Then you got the region, which generally have been very successful in catch-up, which is east Asia and India, Bangladesh out of south Asia. That’s a huge chunk of humanity, includes China, of course. I think China is likely, despite the problems you said, to continue to grow faster on a per capita basis than the west, so they’ll continue to catch up more slowly. I think it’s overwhelmingly probable that India will continue to catch up. We’ve already discussed 3.2bn people roughly, not now, not quite 3.2 yet. It’s where it will be. So it’s about 3bn. So that’s fine. Indonesia is doing pretty well. Another great big country, over 200mn. Some of the other east Asian countries, not so well. But I still think that the chances that Asia, east Asia, south-east Asia and parts of south Asia will outperform the rest are pretty strong. And that’s a big chunk of humanity. So that convergence hasn’t stopped. India’s GDP per head is likely to grow, I think 4 or maybe 5 per cent over another 20 years. That’s a big catch-up thing.

So the answer is there is still convergence. It’s gonna be more difficult. Trade has slowed down. All that’s going to be there. But I still think these economies — Bangladesh, Vietnam, Indonesia — this is a pretty good story. And it includes a vast number of people. So the problem really is the regions that haven’t been catching up for a long time. And that convergence story you told was always a story about two different halves. And the one half remains where it is, the other half — it’s more complicated — but the other half is going to continue to grow and it will benefit from Chinese stumbles, and it will benefit from western resistance to Chinese exports, because that means we’re gonna get imports from somewhere else. And India would like to be one of those places.

Soumaya Keynes
I think I detect a note of optimism there.

Martin Wolf
Absolutely.

Soumaya Keynes
So I think it’s a good place to end. Martin, thank you so much for joining me.

Martin Wolf
Great pleasure.

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Soumaya Keynes
That is all for this week. You have been listening to The Economics Show with Soumaya Keynes. This episode was produced by Edith Rousselot, with original music from Breen Turner. It is edited by Bryant Urstadt. Our executive producer is Manuela Saragosa. Cheryl Brumley is the FT’s global head of audio. I’m Soumaya Keynes. Thanks for listening.

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