Martin Wolf: Are we headed for a global recession?

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This is an audio transcription of the FT press briefing podcast episode — Martin Wolf: Are we headed for a global recession?

Jesse Smith
Hello from the Financial Times. Today is Tuesday, July 5, and it’s your FT News Briefing.

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Electricity prices in Europe have reached a new record high. Foreign investors are bailing out Indian stocks. And the FT’s chief economics commentator, Martin Wolf, will discuss what’s happening in the global economy.

Martin Wolf
It is almost a perfect storm of shocks that has left us now in a period of great uncertainty.

Jesse Smith
I’m Jess Smith, replacing Marc Filippino, and here’s the news you need to start your day.

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European electricity prices hit their highest sustained level on record yesterday. German baseload power for delivery next year, with benchmark price reaching €325 per megawatt hour. The equivalent contract in France has doubled to €366 since the start of the year. The new records come as Russia’s cuts to European gas supplies ripple through the continent’s energy networks. Gas is used to generate electricity, so the cost of gas affects electricity prices. In addition, the maintenance problems of the French nuclear power plants aggravate the situation.

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Foreign investors have sold a record $33 billion worth of Indian stocks since last October. This is according to Goldman Sachs research. Our correspondent in Mumbai, Chloe Cornish, says all international pension funds and mutual funds that have traveled to India in search of higher yields are taking profits off the table.

Chloe Cornwall
Right now we’re in what’s called a risky environment where investors who have noticed that the Fed is raising interest rates and things are a little scary in terms of the global economy, want to move their money to safer places. And one of the reasons why it’s a good time for them to do it is because they have made quite a lot of money in India. So, over the past two years, there has been a massive rally in Indian stocks. Stock markets rose in India faster than their peers in other Asian economies. And it was partly driven by the need for investors to find an alternative investment destination to China in the Asia-Pacific region.

Jesse Smith
But if this Indian stock market leak sounds bad, it turns out there’s a whole army of Indian retail investors and domestic Indian mutual funds that have scooped up stocks that foreign investors are selling off.

Chloe Cornwall
So a banker told me he thought that if those domestic investors hadn’t gotten all those stocks back, the index might be 10% lower than it already is right now. India has some of the cheapest mobile data in the world, and it is now a nation of smartphones and smartphone users. And there are those very active online brokers that can let you trade for low or near zero fees in some cases. And so people really got into it during the pandemic years when they were stuck at home figuring out what to do with their money and their investments. So these guys have been really very active over the last two months buying stocks. And it’s a trend we expect to continue.

Jesse Smith
And Chloe, who just returns to foreign investors, some are now returning to China, right?

Chloe Cornwall
There is evidence to suggest, or at least Goldman Sachs thinks there is, that some of those global mutual fund managers who took money out of China are starting to reallocate back to China again. . And this may be at the expense of India. They are at historic lows, like the lowest in almost ten years, the amount of money they have invested in India. And, but the amount of money they’re investing in China is going up again.

Jesse Smith
Chloe Cornish is the FT’s Mumbai correspondent.

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Around the world, the economic news is not good.

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Inflation continues to top the list of Americans’ economic concerns. . .

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Inflation in the UK hit a 40-year high.

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The containment in Shanghai will shake the Chinese economy.

Jesse Smith
Investors aren’t the only ones slacking off. Sevi Marshall from Norwich, England readjusts his personal finances. She is in her twenties and works in a digital design agency.

Sevi Marshall
I’m spending a lot less money due to what’s going on in the wider economy. Rising inflation means everything is very expensive. I have a lot less disposable income and therefore have to find more creative ways to save money and be able to maintain a lifestyle similar to that of my co-workers and friends.

Jesse Smith
Nic Penazola also offers ways to adapt to the economic environment. He owns a business in the US state of South Carolina.

Nic Penazola
We are looking at strategies to reduce costs, such as changing our summer hours and reducing those at our local cafe. We have also started getting our egg supply from our own farm of around 60 chickens and leveraging that for coffee breakfast sandwiches.

Jesse Smith
As individuals and businesses readjust their finances, economists are taking a broader look to determine whether we are headed for a global recession. To talk more about it, I am accompanied by our chief economic commentator, Martin Wolf. Hello Martin.

Martin Wolf
Hi.

Jesse Smith
Martin, not to start with pessimism, but what seems to be most worrying for economists?

Martin Wolf
There’s so much, it’s almost a perfect storm over the last few years that kind of built up. We have been affected, of course, by Covid, which has generated the most widely shared recession in the global economy, probably in around 150 years. Then we felt that we are going to have a great recovery. And indeed, 2021 has really been a strong recovery. But then we realized we were getting all kinds of inflationary pressures. Many supplies had not returned. Energy prices started to skyrocket. Then, of course, the inflation problem started to get so bad that central banks said we had to start tightening. And then we were hit by a third major shock, the Russian invasion of Ukraine, which generated further turmoil in energy markets, another sharp rise in inflation and, to make matters worse, a food price shock. So it was a near-perfect storm of shocks that left us now in a period of great uncertainty. And it shows in the steep market declines from, admittedly, an extraordinary high supported by exceptionally accommodative and supportive monetary and fiscal policy. So, but maybe that’s another reason why we should look to a big, strong downturn.

Jesse Smith
Is there anything that gives you reason to be optimistic?

Martin Wolf
Well, I mean, I guess it can always be worse. But if you look at it from an economic point of view, if you take the combination of things that I’ve talked about, it’s hard to see next year as being other than overall rather disappointing economically , given what we hoped would be a strong, steady and continued recovery from the Covid disaster.

Jesse Smith
Martin, as we heard earlier, individuals and businesses are cutting spending to try to cope with rising prices and economic uncertainty. What do we know about the magnitude of this situation and the type of impact it is having on the economy in general?

Martin Wolf
Well, we know people’s real incomes are drastically reduced. They have to pay more for things that are really hard to cut. So basic transportation costs, air conditioning costs, food costs go up. Of course, if they inevitably spend more on these things, they will spend less on other things. Services were therefore still very weak last year because people were still not returning to normal behavior, returning to shops and restaurants. We were expecting a very strong recovery in spending in these areas which I assume will be delayed and I expect that is what we are seeing.

Jesse Smith
So Martin, now let me ask you the big question. Do you think we are headed for a global recession?

Martin Wolf
So if you have the idea that a recession is a real shrinking of the global economy as a whole, it’s a very rare event. It happened in 2020, if you measure it in certain ways, it happened in 2009. And I think most economists today would say that’s not where we’re headed. However, I would say that we can be sure that the growth is slowing down, it will be less this year I think, and probably early next year, significantly less than people were hoping for six months ago or even there a few months ago. And on top of that, I think it’s possible that we actually have a drop in GDP per capita, although I think it’s much less likely. It will be disappointing, but not necessarily catastrophic based on everything we’re seeing right now.

Jesse Smith
Martin Wolf is the FT’s chief economics commentator. Thank you very much Martin.

Martin Wolf
Pleasure.

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Jesse Smith
You can read more about all these stories on FT.com. This was your daily FT briefing. Be sure to check back tomorrow for the latest trade news.

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This transcript was generated automatically. If by any chance there is an error, please send the details for a correction to: [email protected]. We will do our best to make the change as soon as possible.

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