Business

Nobel laureate Michael Spence says US recession fears ‘are fading, but I don’t think it’s over’

In an interview on August 17, Michael Spence, a Nobel laureate and professor and emeritus dean at the Stanford Graduate School of Business, discussed the prospects for the U.S. economy. United States, China and Europe and the consequences of China’s decline on the world.

Spence, senior advisor to General Atlantic LLC and President of the company’s Global Growth Institute, also offers his views on the biggest risks facing the global economy.

Here is a partial transcript of highlights from the interview, lightly edited for brevity:

American economy

Q: Has inflation peaked?

A: Overall, I think inflation has peaked but it may not subside to an acceptable level anytime soon. There are different levels of transportation if I may put it that way. The spike of many commodities may decrease as the system adjusts.

But we have huge changes in the labor market and the configuration of the global economy. We have spent more than two or three decades ramping up our online manufacturing capabilities in developing countries. And every time the demand goes up, the supply side responds. There is no longer that level of elasticity on the supply side, meaning that the move from a demand-constrained world to a supply-constrained world is almost a regime change in the global economy.

Q: Is the recession fear over?

A: I think recession fears are easing, but I don’t think it’s over. There are still those who worry that inflation will persist enough to force the Fed to really rein in it. There is still a good chance that we will have a recession or a significant slowdown.

The Federal Reserve is responsible for reducing inflation. So it will continue to put pressure, but the magnitude of rate hikes could vary.

They take their inflation mandate seriously. They may worry that their lack of interest in inflation when it starts to show up causes some damage to their reputation, so they don’t want to do it again. On the other hand, they have a dual mandate, and they certainly don’t want to crash the economy.

Q: Sentiment among investors has clearly changed and the market is recovering. What are some of the biggest risks you’re seeing?

A: Financial markets are much more sensitive to interest rates, forecasts and forward guidance. And we’re in a world where asset prices have gone up dramatically over a long period of time with very low interest rates.

The rally we are seeing in the financial markets is one driven by fears of a very rapid and sharp change in interest rates, which will change the discount rate. And when there’s some evidence that perhaps the extreme scenario won’t emerge, you’ll get a sizable financial market reaction from it.

We are in a world where asset prices will be reset, not only in public markets but also in private markets, where valuations have fallen dramatically. There’s probably a whole collection of unicorns that were no longer unicorns.

I don’t expect these to just crash, but a reset in asset prices to the downside seems inevitable.

Q: The US labor market remains strong. What are some of the big changes you’re looking forward to?

A: There have been changes in labor market behavior. Some people who are willing to do a variety of jobs that are low paying or relatively unsafe will not return to those jobs. A lot of people are retiring because they have the assets they think are enough to do it. And then there’s a whole generation of people, especially young people, who think lifestyle is pretty important and have some kind of job they’re not willing to do.

Another part is that labor is taking over more power than before, and pressure from employers is easing. Partly due to geopolitical tensions and also due to bottlenecks in global supply chains. There is a real shift on the supply side of who will be willing to do what types of work and what types of remuneration.

So labor is getting stronger and stronger and my feeling is that these are not temporary changes – there is no longer an infinite supply of cheap labor. There is a beginning of a rather significant regime change in the way the global economy comes together. And that will certainly affect the labor market.

Q: What are the biggest risks to the US economy?

A: The biggest risk is still an expanded geopolitical conflict. Something wrong in Taiwan would be a disaster. With it comes a growing array of climate-related risks. If I had to choose one more, it would be a complete loss of function in government. We’ve had a pretty good run recently, thanks to some leadership and politics: infrastructure bill, semiconductors and science – it’s encouraging that they will all involve an important investment in long-term economic performance, including growth and productivity.

China’s economy

Q: How long will China’s recession last and how can it be managed?

A: China’s recession seems real. That affects not only the global supply chain, but also domestic demand. The imbalance in the real estate sector is large enough to pose a significant risk. I think they can manage that, but if they manage it, that will continue to slow down the economy.

And then you pile on top of that geopolitical tensions and disruptions to trade flows starting on the US side with the Trump administration.

China is still doing a lot of things right – they continue to invest heavily in things that have the potential to create a modern economy. The medium and long-term outlook in China is quite good, but in the short term there are quite strong headwinds.

Q: What are some of the most important implications for the rest of the world?

A: When China’s growth slows down, global growth is directly affected.

It affects trading partners and investments. And now we are going through the delisting of Chinese companies and we can get significant decoupling between the Chinese and Western financial systems.

That’s not good in the short term – it makes people nervous and inhibits investing. But in the long run, that’s also a bad outcome.

Q: When will China’s economy start to recover?

A: I expect it to recover in the next 2-3 years unless there is bad luck. We are moving into an era where technology and digital will be managed. China is on a similar path, but it has engaged in regulation extremely aggressively. Therefore, I think it has dampened some of the dynamism and animal spirits in the economy in a way that could have been avoided by a more thoughtful, gradual approach to regulating the tech sectors.

I think once the party congress is over and the president is in for a third term, there’s a reasonable chance you’ll get a rebalancing of the policy agenda towards a focus on economic efficiency. and social progress. Meanwhile, it got lost in the turmoil of geopolitical tensions and the pandemic.

Europe, United Kingdom

Q: What is your biggest concern for the European economy?

A: First is energy and Ukraine. Big shocks are most likely to come this winter. If we run out of gas and start asking companies to shut down two days a week, there is serious potential to drag the economy down or even cause a crisis. A depreciating Euro tends to create more inflationary pressures.

The UK is currently in a very difficult situation. With very high inflation rates, a lot of people are hurting.

The possibility of a recession in Europe is clearly still quite high, if not already. It will be a difficult period until they make the energy transition.

Global risk

Q: What are some of the biggest changes in the global economy that concern you?

A: A very large part of the world that you might call out of alignment. They do not want to choose sides, whether it is Russia or China, and they have made it clear that they do not endorse sanctions. There’s a large part of the world that doesn’t want to play the game being played right now.

Whether that will have a major economic impact is another question. But we’ve lost a significant amount of the foundation of the global economy, and we haven’t really started building a new architecture. And that’s pretty important for a large number of people on the planet, especially in a wide range of developing and emerging economies.

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