“We are at a turning point in the world economy”

“One cannot know. I have the feeling that the vulnerability of the political system is very high at the moment,” Rogoff said on the sidelines of the World Economic Forum. After the financial crisis, after the pandemic and after US President Donald Trump was in office, “a major recession would be very destabilizing. Who knows what the administration and Congress would look like then.”

Nevertheless, he assumes that the Fed can raise interest rates a little further as the labor market remains strong. For Europe, on the other hand, the former chief economist of the International Monetary Fund (IMF) expects a severe recession, contradicting the most recent, more optimistic forecasts of some economists.

“It’s ironic that global warming is now saving the European economy,” says Rogoff. But the underlying problems with regard to the long-term energy supply in Europe “are not yet solved”

Read the entire interview here:

Mr. Rogoff, there is a heated debate among economists at the moment: some are warning of a major crisis, while others believe it will be less of a problem than expected. Where are they standing?
I’m more pessimistic than average. The probability that we will achieve a so-called soft landing…

…where central banks raise interest rates just enough to cool the economy, but not send it into recession…
…is not particularly high. Especially if inflation stays high.

However, Europe has done surprisingly well so far.
The European economy has not had many friends in recent months. And it’s ironic that global warming is now saving the European economy.

Do you still expect a recession in Europe?
Oh yeah. I expect a deep recession in Europe. I know the numbers so far have all been shockingly good. Ironically, Italy was able to record growth. But the underlying problems are not solved. So I think Europe still has a long way to go.

However, the economists at Goldman Sachs no longer assume that there will be a recession in Europe this year.
I feel there is a premature declaration of victory in the Russia-Ukraine situation that I do not share. There will always be more setbacks. And who will invest in Europe if the uncertainty remains as to what is going on there?

The war in Ukraine has been going on for almost a year now. So you’re not particularly optimistic that a solution will be found there soon?
no I think it’s entirely possible that Russian President Putin will use tactical nuclear weapons when the situation is grim enough for him. I think we have to brace ourselves for more shocks.

What does it mean for the European economy if the war in Ukraine drags on for a long time?
I don’t see a future where Europe doesn’t have to invest a lot more in security. For one thing, you don’t know whether someone like Trump will be elected again – or someone who is even more isolationist. Europe cannot depend on the US to defend itself every time. I am aware that all this will develop slowly. But I think we’re going to see a sharp increase in defense spending around the world. In Europe, in the USA, but also in China, although I prefer to speak of military spending here. India and other countries could also follow suit. This is one of the reasons why inflation will remain relatively high for a long time.

what are the others
Green energy, for example. We just have to spend a lot more globally than we’re spending now — maybe three trillion a year, about three times what we’re spending now.

In the fight against rising prices, the US Federal Reserve (Fed) remains committed to bringing inflation back to its target of 2 percent. Even if it triggers a recession in the US. A recession now is less bad than later, so the argument goes.
You can’t know. I have the feeling that the vulnerability of the political system is very high at the moment. After the financial crisis, after the pandemic, after Trumpism, at least in the United States, but also in other countries around the world, such as Britain and Italy. If we got another big recession now, it would be very destabilizing. Who knows what the administration and Congress would look like then.

If you were Fed chairman, you would stop raising interest rates now. The key interest rate is currently in the range of 4.25 to 4.5 percent.
I would raise a bit more because the job market still looks very strong. But then I would take a break. The effects of interest rate hikes will take many months to fully impact the economy. I’ve done a lot of research on this. And the result is that the effects of a rate hike are most noticeable at least three to six quarters after the rate hikes begin. That’s one of the biggest challenges of monetary policy: you have this tool of rate hikes and you have to make a decision long before you know what’s going to happen.

China has surprisingly announced the end of the zero-Covid policy. How do you rate that?
This will give the global economy momentum in the short term. Chinese consumers had to hold back for a long time. Now they want to travel and buy things again. And that has a great demand impulse, which, by the way, will also continue to drive inflation.

And long term?
The country has many problems and we have to be prepared that it will no longer be the engine of global growth that it was in the past few decades. China’s growth model no longer works.

how come
It was based on building infrastructure like office towers, bridges and so on. But they overdid it, especially in the smaller towns. It can’t go on like this anymore. Another problem is certainly the centralization of power. I don’t think that’s compatible with innovation and growth. Previously they had a system that allowed an entrepreneur class. But this is now being attacked and suppressed. I just don’t think you can have a very creative economy under these circumstances. And China is struggling with demographic pressures. In 2040 there will be 200 million fewer workers than today.

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What does that mean for the globalized world as we know it?
So I believe we are at a turning point in the global economy. I base this on two things that will be different in the future: China’s dominance in the global economy and higher interest rates. Companies are not turning away from China completely at the moment. But nobody wants to rely completely on China anymore and just hope that everything will go well. Friendshoring…

…a strategy of moving supply chains to do more business with friendly nations…
…is a trend that will accompany us for many years to come. And don’t forget: US President Biden abolished much of his predecessor Donald Trump, but not the punitive tariffs against China. We will have to brace ourselves for further geopolitical tensions. And other nations are benefiting from this development, such as India, but also Indonesia and Singapore.

The USA is also currently operating friendshoring and nearshoring, in which they are trying to bring chip production back into the country, for example.
There is an ingrained belief in the US that if China beats us economically, they will beat us militarily, and we will regret that. So chip production has to be brought back into the country. The entire future of tech is based on who controls the chips. And Taiwan is too vulnerable to China. The US urgently needs to reduce its dependency on Taiwan, even if that is a great pity.

What would happen if China attacks Taiwan?
I could imagine the US destroying the factories in Taiwan so the Chinese can’t use them. That would still be very bad for our own economy and certainly not a satisfactory result.

Do you also expect a recession in the US this year?
Yes. I reckon that it won’t be short and violent, but rather weaker but longer. I think that’s the most likely scenario.

Mr. Rogoff, thank you for the interview.

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