Martin Wolf on the economy in 2023

This is an audio transcript of the Behind the Money podcast episode: ‘Martin Wolf on the economy in 2023’

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Michela Tindera
If the FT’s chief economics commentator Martin Wolf had to describe the past year, in three words, he’d say . . .

Martin Wolf
War . . .

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(Sound of firing and explosions)

Martin Wolf
Inflation . . .

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The alarming spike in inflation . . . Reaching another historic high . . . Desperate families . . . It’s now shot up to nearly 10 per cent . . .

Martin Wolf
Energy shock.

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As Russia’s war in Ukraine continues . . . New jumps in oil prices . . . Some of the big swings in the energy market . . . With soaring energy costs and widespread blackouts . . .

Michela Tindera
This is all to say that a lot has happened in 2022. Russia invaded Ukraine. Central banks began battling historic inflation. And the way we get our energy has been turned on its head. And Martin says that these events also pose big questions for the economy next year.

Martin Wolf
How quickly will inflation fall to levels the central banks will be comfortable with and therefore they can start easing? Will the energy crisis start really, globally at least, dissipating in the course of this year? And how will that relate to the military conflict?

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Michela Tindera
I’m Michela Tindera from the Financial Times. On today’s episode of Behind the Money, it’s our last show for the year, so to cap things off, we’re talking with the FT’s Martin Wolf about stories that defined the global economy in 2022 and how we might expect these to play out in the new year.

Michela Tindera
Welcome to the show, Martin. Thanks so much for being here.

Martin Wolf
Our pleasure.

Michela Tindera
So, as you said, inflation’s a word that’s defined this year’s events. It was surging in 2022 around the world. And by the summer, central banks started to respond aggressively to try and get it back under control. Martin, with interest rates hiked up, we’ve seen a phrase thrown around a lot — the end of easy money. What’s that mean?

Martin Wolf
Really, for about 20 years, but particularly since the global financial crisis, 2008-ish, monetary policy has been exceptionally easy. Most of the time, short-term rates have been close to zero. Lots of quantitative easing, ie central banks buying bonds, government bonds keeping rates down. That seems to be over for now — that is to say central banks are raising rates. The only big question, is it really the end or is it just interruption? I think it’s perfectly possible that inflation will be low again in a couple of years — 2024, 2025 — and rates of interest will go back to where they were before this tightening cycle, in which case it’s just an interruption.

Michela Tindera
OK. So central banks took this more aggressive stance in 2022. So what’s this mean for the economy in 2023?

Martin Wolf
Well, the economies, though to different degrees, are all hit by two shocks simultaneously, and they’re related. There’s a real shock because the price of energy has gone up so much. And that makes households and most businesses, except for energy businesses, much poorer, so they can’t afford to spend as much. And that itself is recessionary. And then on top of that, we’ve got central banks hiking interest rates that makes it more expensive to borrow. It’s gonna make quite a few people bankrupt, I would guess. And that’s also recessionary. So these two shocks coming together — the real shock of the energy prices and the monetary shock of higher interest rates — is gonna slow demand rather strongly. And in some cases, it will certainly generate recessions.

Michela Tindera
Now markets this year have really taken a nosedive. Do you think they’re gonna continue on that path for 2023 or is there hope that things will improve?

Martin Wolf
It’s likely that in the course of 2023, rates will have clearly peaked. And once they’ve peaked and people are looking at inflation falling — and inflation will be falling without a doubt because the huge spikes in food and energy prices are past us — then they will start thinking, well, the central banks are gonna be loosening, they’re gonna be cutting rates very soon. And in that situation, people might say, let’s get back into the market. So I wouldn’t be at all surprised either if there were some real recovery in the markets in the course of next year and certainly in 2024. But we’re at the point in which we really, I think, can’t be at all confident about the movements in the markets in either direction.

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Michela Tindera
Since Russia invaded Ukraine in February, we’ve seen the violence that’s covered news headlines all year, but the war’s also had significant ripple effects out into energy markets. Martin, can you explain why that’s happened?

Martin Wolf
So the tightness in energy markets already existed to a significant degree before the invasion. And that’s because the amount of investment in new oilfields, also gasfields, over the last several years have been relatively low. And the new, greener alternatives didn’t come online quickly enough. When we had this enormous increase in demand in our economies after Covid, that was already showing itself in tight energy markets across the board. Then came this war. It had one particularly gigantic sectoral effect, which is Europe was overwhelmingly dependent on piped Russian gas, and this has been, to an increasing extent, cut off. And that has generated monstrous increases in gas prices in the continent, which spread most of the world, but not North America. That’s the biggest single feature of the post-invasion energy markets.

Michela Tindera
What is the rest of the winter in 2023 expected to look like for Europe?

Martin Wolf
Well, the belief is that the storage is reasonably good because they managed to continue to import Russian gas for much of this year after the invasion. So we should be able to get through in Europe this winter OK without severe rationing or disruption. However, there is a concern that rebuilding storage might be difficult in the course of 2023, and that depends on the availability of liquefied natural gas, LNG, and the ability to ship it and import it. And of course, the global LNG market is tightening for everybody as a result of these pressures. So storage going into next winter, 23-24, will be lower than it is now, and therefore that winter could be worse than this coming one. But the optimistic view is, after that, market adjustments of many different kinds will start alleviating the crisis.

Michela Tindera
So the FT recently reported that Qatar struck a 15-year deal with Germany to supply the country with liquefied natural gas. How do you see alliances between countries shifting as a result of this?

Martin Wolf
Well, it’s clear that the wealthier Europeans are going to look for alternatives to Russian oil and gas. So where are they likely to get it from? Well, the US is one possibility. North Africa and the Mediterranean is another possibility, and evidently the Gulf where there’s lots of gas. And contracts like this will be negotiated and reached. And meanwhile, of course, Asian countries that also import this stuff will be trying to do the same thing. So it’ll be a race for LNG, but it’s inevitable because it’s so important in the short to medium term for the energy security of Europe. We are gonna continue to rely on gas for quite a long time.

Michela Tindera
So are you expecting more countries to move toward alternative energy sources, you know, instead of fossil fuels as a result of this, too?

Martin Wolf
Yes. I expect that every country will be trying to improve its energy security on all relevant fronts. So that means increasing renewables, increasing access to gas in the ways we discussed, improving energy efficiency — that’s very important, we waste energy a lot. Doing these three things together to get through the crisis and have a more sustainable position than we had before this crisis came along.

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Michela Tindera
Now, let’s talk about China. It’s the world’s second-largest economy behind the United States. But after decades of growth, that booming economy has been slowing down. From the country’s zero-Covid strategy to fallout from the property sector crash, things have been unusually tough economically for Chinese citizens. Martin, can you describe what that’s been like in China?

Martin Wolf
A lot of the middle class of China invested money in real estate. They invested a lot of money in real estate which haven’t yet been built. They put up the money in the promise that it would be built, and quite a bit of it hasn’t been built. And they stand to lose an enormous amount of money. And of course, the market itself has weakened dramatically. That affects employment — construction is a huge industry in China and employs an enormous number of people.

One of the things we’ve got to remember is China is still pretty poor. Its real income per head is about a third of US levels. And lots of people are really poor because it’s rather unequal. So once the economy is disrupted like this, lots of people find themselves without a real safety net on the breadline. I mean, really on the breadline or below it. And falling into severe poverty becomes a very big concern for a very substantial part of the population.

Michela Tindera
Yeah. What do you think this moment says about China’s future as a global economic superpower?

Martin Wolf
I think the Chinese are now in a pretty difficult situation. The US is increasingly hostile and it is clearly now beginning to do some fairly significant damage to the Chinese economy and particularly through its export controls on chip technology. So this hostility and friction will make its further development, particularly the more sophisticated end, significantly more difficult. It has very large imbalances in the economy, far too dependent on real estate investment, much of it useless, very heavily indebted, very difficult to sustain rapid growth. I think it now looks plausible that its growth won’t exceed 3 or 4 per cent, which is not that much faster than the west. And the pressure, the military and security pressure on it, is going to build up. So I think China has got itself into a bit of a cul de sac and while part of that is western hostility to its rise, a large part of it is, in my view, and I’ve written this many times, is that Xi Jinping has made a whole series of huge strategic errors. And he’s put China, as a result, in a much weaker position than it needed to be at this stage.

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Michela Tindera
So this year, I heard about a concept that’s recently received a good deal of attention. And it’s about this idea of climate reparations. It’s a question of who should really foot the bill for these climate disasters, since poorer nations that have a near-zero carbon footprint are often the ones most affected by climate change. So, Martin, why has this come into focus in 2022?

Martin Wolf
Well, I think people are focusing on the fact that the climate is getting worse and it’s quite likely it will go on getting worse because we haven’t done enough in the last 30 years to stop it from getting worse. So there’s going to be a lot of damage to relatively innocent parties, people who didn’t cause this problem, most of them or many of them in developing countries and developing countries that have emitted almost no carbon at all because they haven’t had those sorts of economies. And so they say, well, we need to be compensated for this. It’s not just a matter of adapting to it. We need to be compensated for these immense losses.

Michela Tindera
Well, late last month at the United Nations Climate Change Conference known as COP27, almost 200 countries reached an agreement. That agreement was to set up a fund to cover losses and damages that vulnerable countries are facing as a result of the effects of climate change. This was considered to be historic. Martin, what did you think of this agreement?

Martin Wolf
I think it’s a more or less completely useless way of dealing with problems of this kind. If the damages are huge, then of course, the reparations should be huge. And that means getting this through the legislatures of the big developed countries and, at a time when our economies are entering recession and our public finances are immensely stretched, I think the chances of getting this through our legislatures are basically zero. So we can have this debate, but it won’t solve the problem of climate change, and it’s not gonna make anyone better.

Michela Tindera
What do you think would be a better idea and in what sense? Should the focus be more on getting emissions down from high-producing countries or helping more vulnerable countries prepare?

Martin Wolf
All of the above and a bit more. The path forward now is that we have to get our emissions down worldwide, but above all, in the developed countries and other heavy emitters like China, very rapidly, far more rapidly than is now happening. Second, we need to help emerging and developing countries to get on a path that avoids repeating our mistakes, namely one in which the technologies they use are compatible with a stable climate. And that will require a vast amount of investment, and it will require a huge amount of financial support from the developed world. And then finally, there’s gonna have to be now a lot of adaptation. Climate change is going to continue. That means we’re gonna have to spend on doing all sorts of things to make it possible for countries and people to survive these destabilising climate changes. So this combination is broadly what we’re going to have to do: rapid mitigation in high-emitters, help with the rapid mitigation and a new energy path for developing and emerging countries, and adaptation.

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Michela Tindera
So we’ve hit on several big economic stories of 2022. Martin, what would you say will be the focus for 2023?

Martin Wolf
There are really two big questions and they are linked to some degree. The first is how easily the inflation surge will be brought under control and how quickly. That will clearly be falling, inflation, in the course of 2023, I think fairly early. But will it get back to the sorts of levels that central banks want to see? And that will determine when they start easing and whether they then have to tighten again. So the inflation path is really, really important.

The second thing is what happens with the war? Does it get resolved? Very unlikely. Does it become a sort of stalemate but decreasingly worrying? Or does it escalate? We don’t know. The war is really uncertain. And could there be of course, heaven forbid, another conflict. Related to that is: are there gonna be further really big disruptions to world trade and above all, energy trade? My guess on that is no. And things are going to start improving on the energy front. Adjustments are well under way. Market economies are very good at adjusting at a high price. It will take a few years, but we’ll get there.

Michela Tindera
Yeah. So overall, would you say you’re feeling optimistic or pessimistic about the year?

Martin Wolf
Well, the future is not forecastable. All we can say is if nothing very big changes, then things should start getting better in the course of next year. I think that’s right. Assuming nothing bad happens, really bad, then it’s gonna be a difficult year, particularly this coming winter. But, with luck, except in Europe where we discussed this great danger that the gas shortages will continue into the following year, I think the inflation shock and the energy shock will begin to dissipate and become more manageable as inflation falls. There will be a very significant slowdown. There already is in the major developed countries, but that might start bottoming out in the course of next year. As inflation falls, energy prices stabilise and/or fall. So by the end of the year, except with this risk of gas interruptions in Europe, things will really begin to improve unless some new adverse shock comes along, which we don’t yet know about. But of course, given the experience of the last few years, we can’t rule it out. One assumes there won’t be another one, but who knows?

Michela Tindera
Exactly. I mean, no one expected Elon Musk to buy Twitter in 2022 either. So . . . (Laughter)

Martin Wolf
Well, that’s not something I’ve devoted more than a microsecond to since I don’t, I’ve never looked at or participated in Twitter. But it clearly is a big deal in the world media. Well, we haven’t discussed the world media, but they’re a mess.

Michela Tindera
(Laughter) Well, on that note, that is, I believe, where we can wrap up this show today. Thank you for joining us, Martin. We appreciate it.

Martin Wolf
Pleasure.

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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. Thanks for listening, everybody. Now, that’s it for us in 2022. Behind the Money will be back with a brand new episode on Wednesday, January 4th. Mark your calendars. Until then, I hope all our listeners have restful holidays and I’ll see you next year.

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