Rocky Recovery: These Strange Economic Times

Guest: James Politi, Washington Bureau Chief and former World Trade Editor of the Financial Times

The world is beset by new economic uncertainty. What’s next in 2022?

Global economics are reeling with instability. The world is beset with rising inflation, high energy bills, real estate crises in China, lockdowns, supply chain breakdowns and labor shortages. Altamar hosts Peter Schechter and Muni Jensen are joined by James Politi, the new Washington Bureau Chief of the Financial Times, to sort out the confusing world economy. Since 2018, Politi was the FT’s World Trade Editor and spent four years as FT’s Rome bureau chief. He joined FT in 2002 to cover the international capital markets. Previously based in DC covering the Federal Reserve and the US Treasury Department, James is the perfect person to tell us what is really happening around the world economically.

“What do you believe is the single biggest threat to the global economy?” asks Altamar’s Peter Schechter. “I think that the biggest threat, and we’ve seen it in the last 10 days, is the virus itself. And I think that’s what caused the big resetting of the global economy with the plunge of last year, which has really thrown everything into chaos on top of the human toll. We thought we were coming out of it. And now, all of a sudden, there’s a new setback. So, the biggest threat remains the virus, potential mutations, new lockdowns, new human suffering,” replies Politi. Indeed, it’s a huge concern as many of us thought we were finally seeing the light at the end of this dark tunnel.

President Biden has argued that his “Build Back Better” policy is needed to stimulate the US economy and correct inequalities that spun out of control during the pandemic. “But Biden has multiple challenges. He is keeping the team at the Fed, and he is trying to work with Congress on an economic package that’s modest enough to both avoid spurring inflation and aggressive enough to keep unemployment low. Will this package work for the Biden Administration to ‘build back better’?” asks Altamar’s Muni Jensen. “President Biden is in a very tough spot. When they came into power in January, they thought that they really needed to attack the slowdown with hefty fiscal stimulus. It was a real demand driven response. But now the tables have turned. They are trying to get through these big structural changes to the economy, and they’re trying to rationalize them as potentially deflationary…but actually that’s not the main mission of some of these structural changes, even though they’re trying to frame them as helping to ease inflationary pressures. They’ll probably be neutral or maybe might add to inflation in the first couple of years. And that’s a very difficult position to be in because the Biden administration wants to be seen as addressing sort of the prevailing concerns of the American people. And, at the moment, the prevailing concern is high prices. But their big spending agenda doesn’t quite fit that that category. That’s why they’re in a tough spot politically,” says Politi.

As the US works to address its domestic issues, another world power is facing tough domestic circumstances. China’s economy is slowing and, as the world’s biggest consumer and largest producer of commodities, how will the world adjust to this major shift? What does a weaker China mean? “It would certainly be a new hit to the global recovery if China were to become weaker. That would have ramifications across the board. And if the slowdown were to be serious enough, it could even potentially plunge the global economy into a new recession or something of the like, so it’s definitely a concern. And of course, the real estate troubles over there have only added to those worries. However, from a strategic point of view, given the level of hawkishness on China in the United States and in Washington at the moment, I don’t know that a slowdown in the Chinese economy would be necessarily sort of frowned upon in the US,” Politi added, with a touch of sarcasm.

With this shift away from China as the world’s most important supplier, emerging markets are seeing a newfound interest in nearshoring or reshoring practices, a concept we spoke about in a previous Altamar episode with the Dominican Republic’s Foreign Minister, Roberto Álvarez. What does this reorganization of supply chains mean for a changing global economy? “It’s very interesting because at the start of the pandemic, and even since then, there’s been this massive effort to say, ‘We really need our supply chains to be tighter, closer. We need to not depend on imports from other countries, if we are going to secure PPE, pharmaceutical ingredients, and semiconductors.’ And this reassuring kind of mantra, which is connected to a renewed idea of an industrial policy, even here in the United States, has definitely picked up and is continuing. We see it even in legislative action … I don’t think the US and other countries have actually made up their minds about whether they want purely domestic supply chains or whether they just want to find ways to smooth the global supply chains. It’s a pretty interesting debate that’s happening,” responds Politi.

Adding to the uncertainty, the London Interbank Overnight Rate (LIBOR) – one of the world’s longest-lasting financial benchmarks – disappears at the end of this month. What spurred the end of LIBOR? “Well, I think that what’s sort of interesting about LIBOR is of course it was ended because of a rate rigging scandal that tarnished its reputation and forced regulators around the world to essentially wind it down as the main benchmark for debt and for capital markets around the world. And it was forced to wind down because of a rate rigging scandal that then roped in Barclays and other banks,” answers Politi. “And so now, there was this kind of massive effort to craft a new essentially overnight financing rate. And the global regulators have come up with one and now it’s starting to get rolled out. And I think it’s a very interesting case of [seeing] if financial regulators can set a new standard for Wall Street and financial markets around the world that more fair, more equitable, and less prone to manipulation. And that experiment is unfolding as we speak,” continues Politi.

How will Omicron change the trends in emerging markets in the next year? What can we expect to see in the global economy in the coming year? Find out more by listening to the latest Altamar episode, available wherever you get your podcasts. You can download the episode here.

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