A report launched by the UN (the United Nations World Economic Situation and Prospects, WESP) on January 25 was the main topic of a discussion with the CEO of Euro-Phoenix and a former World Banker, Les Nemethy, who analyzed some of the main findings of the document in an exclusive interview with Albanian Daily News and according to them he was of the opinion that the world economy is decelerating.
“Whatever your forecast, even if it is a high growth forecast: we are in a race against time, with more significant upsides and downsides than perhaps any other time in human history. Much will ride on the quality of governance, which provides the environment and incentives for opportunities to emerge, while managing the risks,” said Nemethy.
Asked about a new wave of emerging countries marking the entry of them potentially into the global economy, the former World Banker was of the opinion that “The world is going through a profoundly altered international context, to use your expression. To use the framework of John Mersheimer, a renowned American political scientist, the world was bipolar during the cold war, unipolar after the fall of the iron curtain, and since 2017 has been emerging into what he calls “multipolarity.” Multipolarity is less stable, less predictable and less manageable than bipolarity, let alone unipolarity.”
According to him, since the Great Financial Crisis of 2008, the greatest contributor to global growth has been Chinese growth, which in turn has been fuelled by a Chinese debt binge. “The continuance of the rapid rise of China would have a beneficial locomotive effect on the global economy, but also shift the balance of power further in favor of China. My big note of caution however, is that if the Chinese debt bubble burst, it would create an implosion that would sweep the world like a tsunami.”
Asked about Macron’s theory of “strategic autonomy” the Euro-Phoenix CEO had the view that Europe only has true strategic independence if it has a sufficient deterrent—independent of the US—to resist possible Russian or Chinese aggression — e.g. Mutually Assured Destruction in the nuclear arena, as well sufficient conventional military power to counter a Russian attack.
“The United States, it seems, would not want a strong, united Europe that has a military strong enough to stand up to Russia. It would likely perceive this as a systemic rival. My own view is that if the China-Russia alliance becomes cemented, and Chinese economic and military growth continues unabated, the US may welcome a stronger Europe to provide more of a counterbalance,” said the CEO of Euro-Phoenix, Les Nemethy in the following interview:
Albanian Daily News: Mr. Nemethy, it’s my privilege to discuss with you on the global economic situation and prospects in 2023 in view of a report launched by the UN (the United Nations World Economic Situation and Prospects, WESP) on January 25 not only as CEO of Euro-Phoenix but also a former World Banker. According to its findings, the global economic outlook is pretty bleak for 2023. Global growth in 2021 was 5.8% and then in 2022, it came down to 3%. In the meantime it is expected to have a 1.9% growth rate globally in 2023. You have never lost your sense of optimism in our conversations, but what could you say on such a situation and the prospects?
Euro-Phoenix’s CEO Les Nemethy: True, the world economy is decelerating. If you had asked me a year ago, however, I probably would have forecast a good chance of less than a 1.9% global growth rate for 2023. I suppose we have something to be thankful for. However, that growth is unevenly distributed. You have countries like India experiencing growth rates in excess of 5% and China just short of 5%, with an increasing number of countries experiencing negative growth. And the possibility of even faster deceleration of global GDP growth is a scary proposition.
You mention global warming. A 4% global growth rate is no guarantee that our economy is on a sustainable course. In fact, a very high growth rate probably puts us on a less sustainable path. The amount of coal consumption, for example, would need to increase to support such a high growth rate. The amount of coal consumed at low growth rates is already very high.
Forecasting has always been a tricky proposition. There are so many risk factors, which may or may not materialize, today probably more so than at any time in the past. Some risk factors:
How does the 1.9% growth forecast change if tactical nuclear weapons are deployed in Ukraine? Or if First Republic Bank and a few more mid-sized banks go bankrupt? Or a major emerging country goes into sovereign default?
Risk factors seem to be increasing, both in number and in potential severity of impact.
To my way of thinking, forecasts are not worth very much, far better to have a detailed understanding of drivers of our economy on the one hand, and risk factors on the other hand. From this scenarios and probabilities can be developed.
I earlier mentioned a few risk factors; I should also say a few words about drivers of the economy. For example, one of the drivers in today’s economy is near-shoring, the need to create manufacturing capacity at or closer to home, to create more secure supply chains. This will require a huge amount of capital expenditure and labor in the coming years.
Perhaps the most significant driver over the long-term is technology. To name just a few technologies that will change the economic landscape:
Artificial intelligence may turn out to be one of the most beneficial technologies of the modern era. (Also potentially one of the most dangerous). It may render people redundant, but also dramatically increase productivity.
All of a sudden, nuclear fusion seems within reach of our generation. This would flood the world with cheap energy.
The revolution sweeping biology and medicine is breathtaking. What would that do to long-term GDP forecasts if an anti-aging drug were discovered that extended lifespan and healthspan by ten years?
Economic forecasters have little idea of which of these technologies will play out and over what time frame.
Whatever your forecast, even if it is a high growth forecast: we are in a race against time, with more significant upsides and downsides than perhaps any other time in human history. Much will ride on the quality of governance, which provides the environment and incentives for opportunities to emerge, while managing the risks.
– A series of severe and mutually reinforcing shocks – the COVID-19 pandemic, the war in Ukraine and resulting food and energy crises, surging inflation, debt tightening, as well as the climate emergency – battered the world economy in 2022. In addition one of the lowest global economic growth rates in recent decades is projected for 2023. Given such a bleak situation, can it be said that the world is in an economic crisis?
– I wouldn’t call 1.9% global GDP growth a full-fledged crisis. If one or more of those aforementioned risk factors emerged, we could tip into negative growth. That would start to really feel like a crisis.
Having a healthy GDP growth rate this year or next year is not at all the same as being on a sustainable economic path. Global warming, to name just one example, should it trigger extreme weather events and rising ocean levels, has the potential to achieve a crisis on an unimaginable scale, and we are already feeling its effects with ice caps melting and more extreme weather patterns.
– As a follow up Mr. Nemethy, the world is witnessing a new wave of emerging countries marking the entry of them potentially into the global economy. BRICS is one of the most striking examples of such a rise and it is happening when the share of the world global economy of G7 industrialized countries has dropped to 40 percent as compared to 70 percent a decade ago. Is such an emergence a prelude to a conspicuous global revival that reflects a profoundly altered international context?
– The world is going through a profoundly altered international context, to use your expression. To use the framework of John Mersheimer, a renowned American political scientist, the world was bipolar during the cold war, unipolar after the fall of the iron curtain, and since 2017 has been emerging into what he calls “multipolarity”.
Multipolarity is less stable, less predictable and less manageable than bipolarity, let alone unipolarity.
Then you have the Thucydides principle: that a changing balance of power increases the probability of war.
The coming decades of multipolarity and changing balance of power will actually be more dangerous than the cold war.
You are right in that the emergence of countries such as India have the potential to provide great impetus to global growth. Quality and continuity of good governance tends to be an issue in many of these emerging economies, so I expect the track record here to be uneven. The emerging countries never did act in unison, each pursues its own interests, and their economic performance will also be very different. Over the past few years, for example, countries like India have come along nicely, while others like South Africa and Pakistan seem to be coming off the rails.
– How much does demography influence the power of developed countries as, for example, G7’s population is less than 10 percent of the total world population, while only China and India make up 35 percent of the world population?
– The example of the British Empire in the 18th-19th century shows how a tiny country can dominate the entire world. It could do this thanks to its spawning the industrial revolution, which gave it an incredible advantage. As the industrial revolution spread, Britain’s advantage became less pronounced.
For the last 50 years, technology has flowed relatively freely to the developing world. The West did not even pursue theft of intellectual property by China with very much vigor. And so, the differential in per capita income and standard of living between developed and emerging has been diminishing year by year, while the G7 also had slower population growth than the global average.
The United States, now that it sees China as a systemic rival, seems to have had a change of heart about sharing technology. By preventing the flow of sensitive technologies to China (and therefore by definition to most of the developing world as well), most notably, advanced microchip technology, it hopes to preserve its advantage over time. While emphasis has been on the military aspects of this advantage, the economic dimension is not to be neglected. When it comes to something like artificial intelligence, for example, it is impossible to completely separate the military and economic side of things.
To come to the demography part of your question: The 20th century was about differing patterns of population growth. Countries like China, with rapidly growing populations (and rapid adoption of technology) moved from abject poverty and military weakness to relative affluence and military strength in the course of a generation. In the 21st century, most non-African countries are facing a population implosion, hence economic well-being and military power will gravitate towards those that can hold population decline and senescence to a minimum; there seems to be a trend towards guarding sensitive technologies.
– Mr. Nemethy, let me touch upon what the WESP 2023 report said regarding China’s economy and according to the document, it is expected to grow by 4.8 percent this year, leading the economic recovery in East Asia. In your opinion, which is the impact on the global economic recovery, and secondly, how is it seen by the US and the EU?
– Since the Great Financial Crisis of 2008, the greatest contributor to global growth has been Chinese growth, which in turn has been fuelled by a Chinese debt binge. The world has been a beneficiary of China Inc. levering up its balance sheet. Chinese imports have been a locomotive driving the global economy. After a Covid-induced hiccup, this trend now seems likely to continue.
The continuance of the rapid rise of China would have a beneficial locomotive effect on the global economy, but also shift the balance of power further in favor of China. My big note of caution however, is that if the Chinese debt bubble would burst, it would create an implosion that would sweep the world like a tsunami.
The US and its European allies share similar views on many global issues, and Russia’s invasion of Ukraine has brought them closer, as they coordinate weapons aid, diplomacy and sanctions to help the Ukrainians. But on China, American and European leaders have different priorities, and the latest visits of President Emmanuel Macron of France and Ursula von der Leyen, the head of the European Commission, focused on talks about strengthening overall economic cooperation and commerce between Europe and China.
– How much do these different strategies affect the trans-Atlantic relationship taking into consideration Macron’s theory of “strategic autonomy” for Europe reducing its dependency on the US, which, for its part, considers China as its main rival?
– Strategic independence is not just a question of intent. My view is that Europe only has true strategic independence if it has a sufficient deterrent – independent of the US – to resist possible Russian or Chinese aggression — e.g. Mutually Assured Destruction in the nuclear arena, as well as sufficient conventional military power to counter a Russian attack. In my opinion, if Europe were to start serious efforts at armament – and devote 4-5% of GDP to military expenditures – strategic independence would still be at least 10 years away. Mind you, given that there is always a risk that the US decides to retreat into Fortress America, Macron does have a point.
The United States, it seems, would not want a strong, united Europe that has a military strong enough to stand up to Russia. It would likely perceive this as a systemic rival. My own view is that if the China-Russia alliance becomes cemented, and Chinese economic and military growth continues unabated, the US may welcome a stronger Europe to provide more of a counterbalance.
The Chinese economy is hugely integrated with both the US and European economies. The US would suffer greatly if trade with China were to suddenly cease. So having a “good cop/bad cop” division of roles, with van der Leyen and Biden acting as the “bad cops” trying to catalyze the Chinese to change their ways, while Macron acts as the good cop, doing what he can to ensure that trade remains open. This may actually serve a useful purpose.
