Asia's Alphabet Soup Economies

Speaker A: Hello, uh, and welcome to geu, the macro podcast that delivers key insights into the global economy. Joining me today, Stefan Angric, Denise Chuuk, and of course me, Gaurav Ganguly, head of International Economics at Moody's Analytics. It's been a while since we spoke about Iran and its consequences, and it's also been a while since we spoke about Asia Pacific because, um, as you, as our listeners will be aware, we have devoted the last few episodes to talking about Europe. So I thought it would make a refreshing change to turn the conversation to. Towards Asia and what, what better people to talk about Asia with than Stefan and Denise? So welcome to the show and welcome back. Um, it's very hot in London. It's London Climate Week. Um, we're thinking about energy and energy security, but no doubt that's exactly what people in Asia have also been thinking about for several months now. And given the developments in the Middle east, it feels like, um, perhaps there is room to take a breather. I want to talk a bit, a little bit about this and not just about where we are in the, in the whole process. I mean, that's just. I don't even know where we are in the whole process. So much could still go wrong, I suppose. But I really want to talk about how Asia has coped with the energy crisis of the last few months. And maybe we could start with looking at the risk of recession. Um, we've had large swathes of Asia at risk of recession, but some countries have also been doing quite well. Can you take our listeners through that, perhaps, and describe our recession map and how vulnerable we think countries. Countries are right now? And do we think, given the events of the last week or so, do we think that that risk of recession has improved a little bit?

Speaker B: It's a good question. I suppose it depends on what our view is because like yourself, Gaurav, I, uh, struggle to keep up with world affairs at the moment. Um, it looks like the conflict is winding down, but then also the news I get on a day to day basis, you know, sometimes points in the opposite direction. With regard to the risk of the recession, though, we haven't really changed our view. I want to say, um, Denise chime in here if I'm misrepresenting this, right? But, um, I think broadly speaking, we think Asia Pacific is still pretty vulnerable, um, for the reasons we've discussed on previous podcasts. Right. M very dependent on commodities imports. Um, we've also had the conflict now show up in the econ data. Inflation has picked up quite significantly across Developing Asia, Philippines, Thailand, India, Indonesia. It would be even higher were it not for policy buffers, um, subsidies and the like. Um, and, you know, certainly that would, we would see greater damage if the conflict were to drag on from here. Um, broadly, I would say the way we're looking at what's happening in the Middle east is with some discomfort. We're trying not to become too optimistic. And I feel like our view broadly is that we're not entirely out of the woods, which is why we haven't really made any big changes yet. At the top level, of course, the AI boom is still sort of, um, plastering over the cracks. Right. It's the number one driver of our macro forecast right now. So that, you know, makes it hard to really see an impact within the GDP numbers, for example, because economies, um, in Asia more so than everywhere else, are very K shaped. Everything plugging into the AI boom is doing great. Everything else, not so much. Um, I don't know, Denise, what do you think? Am I representing this? Am I sort of, uh, summarizing our view correctly here?

Speaker C: Yeah, and I was going to say the same about the AI boom, right, because it's a bit of a disconnect in the sense where, you know, the men on the street, daily consumer, they're all very concerned over, you know, prices of groceries, prices of petrol, price prices, electricity. But at the same time you see economies, um, you know, out outperforming their targets, outperforming expectations. Ah, a lot of the tech, uh, industries, tech heavy industries, countries involved in tech, uh, like Singapore, South Korea, Taiwan, insane GDP numbers. Right. For developed economies, you're getting 6%, 7%. These are not numbers that are usual for developed countries economy. So, yeah, it's, it's a bit weird in the sense where, you know, things on a macro level look very good. But there's a lot of discontent, I think, beneath the surface.

Speaker A: Why do you think policymakers have not done more or have they done enough? Perhaps? Maybe that's the better question. Given that, given that we've seen these sudden pickups in inflation, we're not entirely surprised. Of course, we understand that the flow through of commodity prices through to the consumer basket. And, and there are countries in Asia where, uh, food and energy make up a pretty chunky part of the consumer basket. And in developed Europe, you can think of it's roughly 10%. Food and energy make up about 10% of the consumer basket. By the time you move over to a country like Thailand, it's close to 40%. So it's not Surprising that we see big pickups in inflation in some countries now. And this is, of course, a function of how long this has gone on for. But. But do you think that policymakers have been slow to react to all of this?

Speaker B: It's m an interesting question. Well, the reason I would personally struggle answering the question is because usually when we get questions, they point in the opposite direction. Um, people will often ask us, have they done too much? Is it appropriate for them to do anything at all? Um, it seems to me that policymakers have done as much as they want to, Gaurav. Um, it's certainly possible that they could have tried to do more. But as we've discussed in previous podcasts, this is a shock to the real economy. It's a shock to specific commodities that no amount of fiscal support can really make go away. Right. I mean, you can give people financial support to tide them over, but we know that government's appetite for that sort of thing is finite, as are their oil reserves. And we were getting to a point where if the conflict had dragged on, we would have seen greater damage because countries across Southeast Asia, their reserves are pretty thin, as is their patience to maintain, um, fiscal support. So I'd never considered the possibility of them doing more. Maybe I should think more in terms of scenarios.

Speaker A: Yours. It was just a bit of a random question, really, because I think my view is that is aligned with yours. I don't think they wanted to do more. And I think that's the key point here, which is that this was always viewed as a transitory shock, the time bound conflict, a transitory shock, something that would pass through the system and that would not disrupt the system too much, and therefore it was appropriate not to do more. And I think that comes back to what you were saying about fiscal appetite. Um, writing blank checks to the economy is not always the best thing to do. In fact, it's seldom the best thing to do. And that can lead to enormous fiscal burden, and that's not necessary. So providing targeted, efficient support is, of course the right thing to do. And in this particular conflict, um, perhaps it is indeed correct for policymakers to think that, well, if you just sit back and wait, then this will pass without doing too much damage to the economy. And certainly it seems to be playing out that way. But of course a lot of risks, and these are all heavily skewed to the downside, I guess. Also, looking back in the context of the various shocks that have hit the global economy since 2020. Since 2020, um, this one now feels like the Mildest, provided it goes away, certainly from a global perspective and a commodity price perspective. I'm not talking here about, um, what is actually happening on the ground in the GCC or across the Middle east, but purely from a global energy and commodity price perspective. This one feels quite mild to the shocks that have hit the economy over the past few years. And that suggests to me that inflation is indeed transitory, uh, in this instance, and policymakers are right, and that it will start to come down despite the fact that you've just outlined a few concerns about negative inflation prints in various countries across Asia. Am I right to think that? Am I right to be so bullish about all of this right now?

Speaker B: Let me just say I'm surprised that using the T word graph, can we still say transitory after 2022? It feels like no one wants to use that word anymore.

Speaker A: We're in a permanent state of Cris

Speaker B: m. Yeah, no, but also it feels like everybody's scarred by that episode. Right? I'm personally actually more afraid that policymakers might overreact to what's happening because everybody blamed central banks for 2022, which doesn't quite seem right, but nevertheless skewed the narrative a little bit. I have another T word for you, Gaurav, that also kind of answers, um, the other question you were posing earlier, which is terms of trade. Something interesting that's happened, looking at the latest data coming out of Asia, is that the, um, commodity price shock triggered by the Middle east also just hasn't hit economies as hard as it did in 2022, 2023. This is a little wonkish, but usually when you have, uh, a surge in global commodity prices and importers, import prices pick up more than export prices. So that means you pay more money for the same amount of imports, which basically sucks income from your economy, which is what causes the economic damage. The AI boom has now gotten so large that the terms of trade shock is not very pronounced at the moment because export prices are also sur. So this is actually something that Denise drew my attention to because it's something we're seeing in Southeast Asia. And to that point, I guess, uh, you could also argue that maybe there just isn't as much of a need. Right. It's not quite as big a shock as 2022, 2023. Of course, all of this is true at the headline level, on the micro level, in consumers wallets for SMEs, all of this is still terrible, right? But economies on the whole are looking better, which is what you look at when You're a central banker, for example.

Speaker C: I think it removes the concern over FX reserves, uh, but provided you are plugged into the tech cycle, so the economies like Bangladesh, Pakistan, where you are suffering that terms of trade without benefiting from the electronic side. So a lot of it depends, of course, on what you're exporting. So for a country like Malaysia, for instance, which benefits both from electronics as well as natural gas, they saw a huge trade surplus, um, in May. So that, that sort of dual shock, uh, cushion the increase in import bill from crude oil imports. Um. Yeah. No, I thought, I thought it was interesting. That's very different from 2022 because there was no positive, I think back then. Right. Everyone just suffered in terms of trade shock without really benefiting from it.

Speaker A: That's a really good point. That's another big difference between now and 2022 is basically the AI boom. 2022 didn't have any of that. And also I was going to go there, Denise, what you just said, so you beat me to it, which is that not every country is plugged into the AI boom. So, um, you can't really. Not every country benefits equally. Vulnerable, vulnerable countries do still experience terms of trade shocks. Um, but it's probably less damaging for countries on average, given the AI uh boom is helping so many countries, um, benefit. But with regards to, with regards to this K shaped economy, I wonder to what extent this ends up being damaging to Asian economies in the long run. Because there are industries that could simply. They're not benefiting from the AI boom and they're not benefiting from, um. Will they benefit from domestic consumption? Will we see growth spread out and influence all other sectors, or will we see leaders and followers in some sectors just falling behind?

Speaker C: I think that's an interesting question. I think the way I think about it is there's a lot of concern over displacement from AI. Right. So, um, we're seeing uptick in retrenchments. Maybe not, you know, big enough to move the headline unemployment number, but there's been quite a lot of, uh, retrenchment in big multinationals, uh, in the region. Right. Either they're shifting the operations elsewhere or they're just killing off operations here. Uh, the reasons they're giving is AI, but you know, whether that they're actually using AI to increase productivity is another matter. Right. But the fact is, um, I think there's a lot of concern that labor, uh, is being displaced by AI and this would hit, you know, wages and so on. Um, but yeah, interested to see what Stefan makes Of this, my flippant answer

Speaker B: to Gurav's question was going to be there is no domestic consumption in Asia. Uh, I mean the domestic economies, they're very weak and a lot of that is associated with weak wage growth. And I think your question really gets to the heart of that in that um, if you work for TSMC at the moment or for Samsung, you're doing great. But um, when we talk to clients, um, policymakers, prospects, um, all over Asia Pacific, something they highlight for us is that wherever you look, uh, the industries that are not plugged into the AI boom are not actually doing so great. And it's not like um, everyone in Taiwan is celebrating at the moment because wage growth has been stuck at fairly weak levels, much like in Japan for decades now. Again, if you work for tsmc, that's fine, but that's only a fraction of the entire population. So um, the fact that their economies are becoming more K shaped um, is a problem because it pushes up property prices in big cities. It um, doesn't change the fact that small um, and mid sized uh, firms that are import dependent currently struggling from the Middle east conflict, they're doing poorly. If anything it increases inequality. So you can kind of think about whether that is healthy in the long run. Probably not I would think.

Speaker C: I just had another thought. I think the other major non AI sector in Asia or Southeast Asia at least is really tourism. Right? But ironically there's also being hit by the Middle east crisis just because of jet fuel. You know, um, Europe is not able to pass through it or was not able to pass through to the Middle east to get to Asia. So that's not really affected by AI but it's being affected by the conflict. Right? So you know, again, I guess not in the right direction that we want to think about.

Speaker A: I guess what you're saying here is you can have a sector like AI that provides benefits and Asia is very grateful for that, no doubt. But other sectors languish and then they're also prone to shocks such as tourism. It's clearly prone to shocks. This year's tourist season is not looking great, is it? Even if prices come down from this point on air ticket prices come down significantly. It's still not looking great because people pre book their holidays. So this season is accounted for and then that's a bit of a loss. And so we can only hope that tourism comes back to support these economies towards the end of this year or early next year over the winter season. Um, so yes, I think k we're rapidly Running out of letters. Right. We had T for transitory, K for the economy, and I guess I'm going to move on to E for energy policy in a minute. So this is a real Alphabet soup of an episode. Um, but the letter K is probably going to acquire some prominence in years to come. The sectors that get left behind by AI, the sectors that are more prone to shocks, and the sectors that benefit from both participating in the build out of AI, but also participate in the implementation and the productivity gains that follow. I'm a bit concerned what that means for households and for consumers. But let's move on to energy policy because, um, there have been two big shocks to energy over the last few years. And you were saying earlier that at least in Southeast Asia, energy reserves are getting quite stretched and had this gone on for much longer, um, it could be quite damaging. And by the way, it's not over yet. And one mustn't rule out the possibility that the conflict comes back, rears its ugly head again, prices go up again and energy reserves continue to be depleted, which could be really quite nasty for the global economy. But what do you think policymakers have learned from all of this? And is there anything countries can do to make themselves more resilient from an energy perspective?

Speaker C: I mean, I guess m, the obvious answer is obviously to move to renewables, right. But I think Asia is remarkably slow, um, in the expect even after 2022, um, the uptake of renewable energy is not that high, I think especially compared to Europe. What is helping is cheaper EVs, cheaper solar panels coming out of China. So that's more of a price issue I would say, rather than a energy policy, like a directed energy policy. Right. So it's just that these things are becoming cheaper and people are moving towards that. But for Asia, I'm, I'm not sure, I'm not sure if this is what it will take to get them to move significantly towards renewables to taking their um, their climate goals, uh, seriously. I think not. Not every country has a carbon tax, if I'm not wrong, in Asia, Right. I think Southeast Asia, Singapore has a carbon tax, but other than that I'm not, I'm not too sure. Um, yeah, that's my cynical answer, actually.

Speaker B: No, I would agree. I mean what's remarkable is that central banks have reacted quite a bit faster this time around. Some, um, of that is of course also because of domestic idiosyncrasies. The fact that bank of Indonesia has hiked has a lot to do with what's going on domestically. Um, governance, um, standards, etc. And, you know, fiscal support was provided much, much more quickly and it was a bit more, a bit more targeted. Um, so for what that's worth, that was useful, I would argue. Um, but I'm actually curious, Griff, because you haven't given us your view yet on what you think is actually going to happen with the Middle East. Do you share the sense that we're not quite out of the woods yet? Have you become more optimistic or more pessimistic given the news flow over the last couple of days? Because I've just been struggling to keep up and sort of form a view ahead of our next baseline forecast.

Speaker A: That's a great question. And, and just, just hold on one minute while I go and look at one of my many crystal balls to give you that answer. Um, I've been using crystal balls a lot as an economic forecaster. It's my forecasting tool of choice these days in order to get ahead with the global economy. I don't know what my track record is. It's probably, probably quite reasonable. Um, you know what? I'm going to be a little bit more optimistic and I'm going to be a bit more optimistic because there's been a step taken towards moving, um, out of this conflict. And it's not just that the US that has taken the step, it's also the fact that Iran has taken a step in that direction as well. So I'm going to be a bit more optimistic about all of this that now we have both the US and Iran, um, quite keen to end this conflict and to negotiate a way out. Um, am I convinced that it's all over? No. What do I think about the balance of risks? Well, I do think they're skewed to the downside because there's so much that can still go wrong. No doubt about it. But the way oil markets have reacted over the past few days suggests that markets too are breathing a very big sigh of relief and thinking that, um, they're anticipating that this will all come to an end, anticipating that there's very little appetite on either side to go back into a military conflict. Um, perhaps even less appetite to close the Strait of the Hormuz on an extended basis. Very little appetite on the part of the, um, Iran to do that and then experience some kind of embargo and, and have faced financial constraints. So a lot of reasons for, for this optimism, but I would temper that with a huge note of caution that lots of things can go wrong. Um, but this is a Good way forward at least in, for the rest of this year and for early next year in terms of flows of oil into the global economy. I don't think anybody should be that optimistic as to expect oil flows to recover very quickly. There are lots of reasons why that won't happen. Um, to you know, we can go into that some, some other time. But also I think the medium term outlook for the region remains somewhat cloudy and the medium term outlook for I guess supplied future supply disruptions remains clouded. So what do countries do at this point? Do they continue to rely on the Persian Gulf as in, in order to transit oil out of, out of their economies or do they find alternative routes? Um, what about the geopolitics of the region and the Gulf countries relationship with Iran or even with the US for that matter. What about global investor confidence and investing in the region or tourist confidence and going to visit the region? All those sorts of things. There's still question marks around all of these. Right. But I do think that um, it's a step in the right direction and I am going to be a bit optimistic about the future.

Speaker B: Uh, I like it, I like this glass half full version of.

Speaker A: I would say it's a bit more than half full at this point. I would say it's um, sort of 60% or 55%.

Speaker B: Got it.

Speaker C: So maybe if I could press a little bit. Can we say it would be reopened or normalized by end of Q2, early Q3. Is that something we could say?

Speaker A: End of Q2 is, is, is, is infeasible. Right? We had rapidly

Speaker C: Q3.

Speaker A: Yeah. Q3, Q4, end of Q3, Q4. That feels much more likely that we'll start to see significant flows out of the street by then. But I wouldn't go to, I wouldn't go so far as to say it'll be completely normalized I. E. It'll go back to the levels of flows um, we saw prior, prior to the start of the war. It's quite likely that um, Saudi Arabia continues to use the port of Yanbu, perhaps expands it further. Um, over the medium term the UAE no doubt will want to use Fujairah, perhaps even expand Fujairah. So my sense is here that countries that can will find alternative routes and will try to normalize the total volume of oil and product hitting global markets through the use of alternative routes. Um and the strait will never quite go back to being fulfilling the role that it did. That's my sense of this.

Speaker B: Yeah, I'm quite amused that denise missing that Q2 happened because I feel. Yeah, Denise, Um, but, um, just to add to what you said there, Gaurav, I suppose even if you take a slightly more pessimistic view of the situation and maybe your timeline for things improving is a little bit longer, or you think there's going to be further setbacks along the way, I think I would agree with you that at the very least, what we can say is that this modicum of stability that we're having right now will at the very least enable us to find some sort of workable solution. Right. It will allow us to embark on the process towards that. And, um, I would, I mean, I would agree. If recent news flows to be believed, it sounds like Iran is working to put in place some sort of scheme to, um, put fees on ships, vessels transiting the Strait of Hormuz. But at the same time, if that is the case, then, um, so long as there are no military attacks, right, we could think about, maybe countries would start thinking about ways to get oil out in other ways and start building that sort of, of that sort of infrastructure. So maybe there is, uh, there is light at the end of the tunnel. I'm coming around to your more optimistic, your more optimistic view.

Speaker A: To temper my optimism, I was reading about the various reasons why, um, shipping flows through the Strait of Hormuz might take some time to recover. Have you guys heard of Biofoul?

Speaker C: No, I can't say.

Speaker A: Large vessels that stay stationary at sea over an extended period of time. Think about your very large carriers, the VLCCs, etc, that have all been parked outside of the Persian Gulf months now. Well, they attract a large number of marine creatures that stick to the hull. And you get all sorts of invasive species, you get all sorts of clams, barnacles, etc, that stick to the hull. And fuel costs are deeply important, um, as a deeply big part of running costs of a ship. About 50% of the running cost of a ship is fuel. And you need your vessel to be as efficient as possible. And if you have a large volume of sea creatures stuck to your hull, that's going to impede your efficiency. So actually, right now, um, companies are employing teams of divers to go and clean hulls before they can start to move again. And this takes hours. It's a manual operation, has to be done carefully because there are also maritime laws around the cleanliness of hulls, entering ports and bringing in invasive species. So there are all sorts of reasons why it will take time for the straight for oil flows through the Strait to recover, including things that we hadn't really thought about, paid attention to before. We were so stuck with thinking about mining and the logistics of moving vessels. Well, here's another one biofoul. Um, all these unexpected things that can cause problems. So I would say that it's going to take a while. I will say it's going to take quite some time for flows of oil to recover. But I will also say this which is that there is clearly a great desire both in terms of people that demand oil and people that supply oil for this to happen.

Speaker B: Yeah, it's interesting isn't it? I mean we've discussed so many disruptions that flow from the Middle east that I suppose the takeaway is that these sort of supply, supply disruptions rarely come alone. Right. One, one thing happens and you get a knock on effect that causes 10 other things to go wrong. And it takes a while to, to find your way back to the status quo Xante.

Speaker A: Now one country that has um.

Speaker C: Sorry, no, I was just going to add that um, cleaning ships of uh, barnacles is something not really affected by AI So if we want to future proof our jobs, maybe there's something we look into.

Speaker A: Fair enough. We could all retrain as diverse. It doesn't seem like until we can get robots, get robots to clean house, which is probably very feasible, you probably still have a human type job left. Speaking of robots, um, China is now a net exporter of robots. It's um, moved heavily into robot production. It's incredibly innovative and the Chinese economy seems to have weathered this particular shock quite well. It has huge reserves of oil. Its oil imports drop dramatically in order to help it cope and at the same time its trade surplus continues. How do you feel about China right now?

Speaker B: Well, I guess we're feeling okay about China. If I might sort of paraphrase our lead China economist Sarah's sort of feelings. I think uh, it's true that you know on the surface it seems to be doing okay. Um, within the country there are differences of opinion on whether you know, um, how they're managing it. Right. There's some friction between the central and local governments as to whether they should be running down their reserves as fast as they have. Uh, the damage to global demand that flowed from the Middle east conflict is something that has hurt China because it's over recent years become more dependent on global demand. But I would agree that by and large it's been doing quite well. Something else China related graph that kind of relates to your point there about robots is that um, there are a number of uh, Chinese chips producers that are starting to make significant advances and are now trying to get into the consumer electronics space. And um, you know, US electronics makers are considering to call upon them to help solve the chip shortage. The fact that prices for random access, memory storage, etc. Have just gone through the roof. And I just find that remarkable because of this running theme through our podcast, which is that every time the world starts buying stuff from China in large quantities, we know how this is going to end. Right? It ends in independence, it ends in, um, China becoming more efficient than everyone else. So this is an interesting sort of, um, point in time to now observe whether the Western world is actually serious about all of that supply chain security stuff. Um, because you could pick the short term solution and just go with cheaper Chinese chips to resolve the uh, AI driven chip shortage. Or um, um, you picked a more sustainable, short, long run solution. I suppose you build your own chips, maybe iPhones become a little bit more expensive, but in the long run you have supply chains that are independent from China. So, um, that's something else that was quite notable and interesting over the last couple of weeks. Interesting turning point, I thought.

Speaker C: Yeah, no, I was talking to someone about this. I think this came up because of the entropic export ban. And the question is if you can't, if you want to move away from American models now, where do you move? Do you move to Chinese models? Because that's the next, probably the next best alternative. So I don't think European models are to that standard just yet. But moving there also doesn't seem to solve your issue. Right, so then do you build your own model? Like what, what is the answer to that question? Right. If you can't trust Chinese chips, you can't trust Chinese models. You don't want to align yourself with American models in case you get export banned, then what, what can you do?

Speaker A: It's a very difficult area. Um, but my feeling of all of this is that the world, this, this comes back to the start of this conversation between, in a slightly different way he was talking about what policymakers have learned as a result of this particular energy crisis. And I, I think in the answer depends on which part of the world you're in. If you think about developed economies, the answer is, well, they've realized that they need a lot more energy security and the answer might well be renewables or nuclear in other parts of the world. It feels a bit more, shall we say, fatalistic. Well, there's nothing we can do about it. This isn't big enough we're just going to continue with this, uh, and we don't really see what policy choices we have. That might be the view prevailing in some parts of the world. And maybe that's the same sort of thing with, with this, but not necessarily such a clear divide between advanced economies and emerging economies. It's really hard to, for, for such an intertwined, interdependent, globally global economy to simply separate out. For China to do its own thing and for some other countries to do their own thing, there's a high degree of interdependence that must remain. So the question really is where do you draw the line? Is it defense or is it defense plus consumer electronics? Is it all chips? Is it some chips? I think that's where, that's where the lines have to be drawn. And these are very hard lines to draw. I think, I mean think about token costs. If token costs go through the roof, well, China is once again going to come out with the winner because it has so much renewable energy and it's able to power its data centers with a lot of cheap renewable energy and lower its token costs. So I think this is a very, very difficult question to solve. And um, we are going to see dependence for quite some time, um, to come. I, I just don't see the world simply disentangling and moving away. No, no. Is it, nor is it desirable to do that? I don't think.

Speaker B: No, I think we would agree. And the, I think what you're saying there applies everywhere, right? I mean the decoupling we've seen over the last couple of years is really decoupling on the cheap. Everybody's still buying Chinese goods. They just take the scenic route when they go to the States, right? They go through Mexico, they go through Canada, they go through Southeast Asia, but at the end of the day it's still China that makes things. And China's share of global, uh, value added is a third now and it's still climbing, uh, which is making policymakers everywhere uncomfortable. Most recently Europe, I believe French President Macron has spoken to that and is pushing for Europe to sort of become a bit more selective on what they're importing. But to go back to your point Gref, about how it's probably infeasible to um, decouple. I struggle as well about how to do that at all. You could say, okay, we only do it in defense, we only do it in high end chips. But there's supply chains attached to all of this. And um, last I checked, everything needs rare earths at the moment because everything now contains chips and getting to rare earths is incredibly difficult. Um, we're feeling this in Japan right now because um, China has basically stopped or let's say put very tight limits around exporting rare earths to Japan, which is also affecting the rest of the world. They're sometimes getting rare earths via Japan. And if you go by the latest report uh, by the US China Business Council that also suggested that firms in the US are still struggling to get their hands on rare earths despite the trade truce that is in place between the US and China. So long as that is the case, so long as you have these bottlenecks, these bottlenecks uh, that can be leveraged in case of conflic. I agree. How would you even decouple? But maybe also it's a good thing, right? Maybe you shouldn't decouple so long as economies stay joined by the hip. That also arguably then increases the cost of friction at the political level, which might not be the worst thing.

Speaker A: I strongly feel that isolationist geopolitics is taking us down the wrong path here. Um, that doesn't mean to say that countries should simply lower all barriers and trade freely with each other on in all areas. Clearly some areas are more sensitive, more strategic than others. But certainly being very isolationist is not feasible. Um, if nothing else, if, if countries, if, if advanced economies decouple from China, attempt to decouple very heavily from China, well they still actually sell a lot of goods into China. It's not just that they're buying goods from China, they're also selling goods into China. The European Union sells close to 175 billion a year into China. The US sells I don't know, about 140 billion into China. These are not small numbers all told. So trying to decouple from China could also um, lead to very significant um, industrial hollowing out in advanced economies. It could lead to significant job losses in industrial economies. Um, and it's therefore not a good thing in so many, so many contexts also of course mean that you're driving China into recession which um, has a significant negative impulse in the global economy for things like commodities. And so commodity producers might, will struggle. The world is simply too interdependent, um, for us to think about such isolationist strategies. And um, the world needs growth from China as much as it needs it from anywhere else. But speaking of growth from China, China really has, is also a K shaped economy just along different lines. It has one engine of growth, the export engine. The rest of the economy isn't doing that well. Right.

Speaker C: Yeah, no, that's right. I think we just got a ah, data dump a couple weeks ago. I'm mixing up my dates already but um, we're looking at fixed asset investment. You see that private sector investment uh, has, is still down. Right? A lot of the investments being uh, supported by state owned enterprises. So you know a lot of, and it's not surprising, I think this has been going on for over a year by now. Um, property is still looking pretty shaky. Uh, the domestic economy hasn't quite caught up I think and I don't think there's any indication that they really will in the near future.

Speaker B: Yeah, to that point a lot of people have uh, there's been a lot of buzz around the fact that property market transactions have improved and some people have used that to argue, hey look, Chinese property is sort of turning a corner. But you know, transactions, uh, the number of transactions increasing. That is only one data point. If you look at prices, prices are still heading south. Uh, the pace of DEC is slowing a little bit but that is not exactly a great sign. So to that point Gurav, I think I would agree. China uh, is also a very K shaped economy and um, that doesn't seem to be, doesn't seem to be changing just yet.

Speaker A: My sense is that China needs to do a whole lot more if it wants to reform its domestic economy, boost domestic consumption around and I think it's a similar sort of problem that um, Europe faces for different reasons but savings rates are simply very high across Europe, across China and people are simply worried about the future. Now in, in for there, for different reasons in China I guess it's because there isn't really a well developed old age safety net and so people rely on their own savings. So for the Chinese government, for the Chinese economy to see a big increase in the domestic economy and consumption and services then there's got to be a bunch of change occurring in terms of um, how people view their old age and how people view their savings and what sort of vehicles out there for them to save. That means I guess pension reform, savings reform, asset market reform, um, in addition to, I think we've talked about this in the past, um, changes in permitting procedures for migration, internal migration and allowing migrants to own property, making it easier for rural migrants to move to urban areas and stay there. Um, so I think China needs to do a lot of these things if it wants to really transform its economy. I'm just really worried. And none of this is new. I think we've talked about all of these things and it's all well known. What I don't understand is why China won't do it.

Speaker B: How much time do we have?

Speaker A: Give me the five minute answer.

Speaker B: Denise, do you want to start? I feel like we've talked about this and you have the better answer.

Speaker C: Yeah, maybe I'll start and then you can continue. And I guess we always get this question. We always get this around March when there are two sessions, uh, goes on and everyone's saying, oh, you know, what policy bazooka are they going to announce right now? And it's getting a bit of a joke, right, because, um, we've been waiting since COVID and we still haven't gotten it yet. There hasn't been really a strong, uh, demand side push in recent years. Um, we've gotten stuff on the margins, right? So like, um, I think there's like child, kind of like child care subsidies recently, um, some elderly. Something, uh, to do with elderly reform, I think. So. We got that recently. But a lot of this is happening on the margin, right? So there isn't really a big, um, you know, re innovation of the Social Security system or anything. And I don't think it's very surprising, right? Um, for people like us living in Asia, Social Security is not really a thing. Um, you don't, you don't get unemployment, right? If you're unemployed, you don't get paid, so you need to go find a job, right? Uh, if you're old, you know, you need to rely on your family to take care of you. And I hate to use this term, but a lot of it is just, it's just a little bit cultural, right, in the sense that this is the way things are structured here. And I think it's hard, especially for China, um, to change, to significantly change that way of thinking. So that's my answer. And I feel like it's a bit of a cop out, but I also don't really have anything else that's better,

Speaker A: I suppose, to add to all of that. It's the demographic hump.

Speaker B: I mean, maybe, but you could solve that because Asia is pretty rich. Um, I would maybe just add to what Denise said there. You know, I mean, we tend to all be very bullish on China these days because everything you see about China and the achievements in terms of, uh, the country's technological prowess, et cetera, they're all just quite remarkable. And it's nice to see a country that does big things, right? But China, like other places, is prone to, you know, um, um, having its own biases. Right. There is ideology the same way that you have ideology in other places. And the business model that has lifted China is in some ways parallel to what Europe's been doing after the global, uh, financial crisis. Gaurav. It's this idea that you just can't rely on the domestic economy to drive growth. You got to grow through, um, the rest of the world. And when you do that, you also create an economic structure that has certain incentives and creates interest groups that then push for maintaining that sort of, that sort of structure. And that is accompanied by, um, frameworks that justify that very structure. I suppose it's progress that China is at least acknowledging now that the lack of domestic demand is a problem, because I would agree with you that you would think it's in their long term interest to do something about that. So it's good that they're talking about it, but it's just still item number 12 on their list or something. Um, somebody said to me last week that Xi Jinping's priorities are tsmc, and he was saying T is technology, S is, uh, security, so supply chain security, M. M is manufacturing, and C is consumption. So consumption is item number four. It's in there, but it's not exactly. It's not exactly top of the list. Right.

Speaker A: You're really complicating this. Alphabet superbaz. But you know, you know what, I'm kind of happy that we're talking about these issues because for the last few months, we've spoken almost exclusively about the war in the Middle east, and we've been so preoccupied with this big energy shot. The fact that we're starting to think about the good old issues, the structural issues of growth, steer themselves in the right direction, that's somewhat comforting to me. And I'll take it as tacit ascent from both of you that you're somewhat more optimistic. Pretty much along the same lines as me. Um, with that, I think we'll wrap it up and call it a day. Thank you, Stefan and Denise, for joining me on today's episode, and thank you to our listeners. Once again, you've been listening to the global economy unwrapped.

Speaker C: It.