2023: The Year in Global Economics

China's real estate doldrums, Germany's cold season, Argentina's Elvis ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

December 27, 2023

SPONSORED BY   SEEKING ALPHA

Good morning.

As we take the final steps toward 2024, the world is reeling, with a large swath of it rebounding from a global pandemic, caught in the middle of both trade and actual wars, and struggling with high interest rates and rising inflation. That's your first hint that our top global economic stories aren't all of the cheerful variety.

INTERNATIONAL ECONOMICS

For China, A Most Unfortunate Year

Despite bunnies often being associated with luck, the Year of the Rabbit has been quite the opposite for China. And Beijing made its bad luck worse.

From a tanking real estate market and debt-ridden local governments to Beijing being on the bad side of pretty much the entire Western world, China's economy in 2023 was far from the post-pandemic rebound the nation was hoping for after its extensive zero-covid policy.

Too Much for Too Long

One of China's largest problems lies in its property sector. In the early 2000s, developers began building homes, apartment complexes, and entire cities at an extremely fast pace, and they never really slowed down. Even with 1.4 billion citizens, China is now flooded with empty real estate that's only diminishing in value, and once-major property players like Evergrande and Country Garden are suffering due to years of over-borrowing and over-building.

Local governments aren't faring much better. Several Wall Street banks recently estimated that local governments across the country's cities and provinces have racked up as much as $11 trillion in off-balance-sheet debt, and Moody's downgraded its outlook for the Middle Kingdom's credit rating.

And while "tough on China" was a mantra of the Trump administration, the strategy has only furthered under a Biden White House. In August, Biden signed an order that restricted investment in China in microchips, quantum technology, and artificial intelligence — three of the fastest-growing pieces of the tech sector. Plus, Beijing's office raids, slow-deal making, and very stringent espionage laws are prompting US and European businesses to put their money elsewhere. Even Apple, one of the most successful western companies there, has started shifting its supply chain from China to India.

What's in Store?: China's 2024 surely can't be any worse than its 2023…right? In a note from Capital Economics published earlier this month, the research group said China's economy will continue to regain strength in early next year, thanks to increased household spending and government stimulus, but with both the property and exports industries in decline, economic recovery will lack momentum.

Here's a Tissue

Even though the world rejoiced seeing the Berlin Wall crumble in 1989, it took a while for Germany to get its groove back. By the time the developed world was hit with rampant unemployment from the 2008 financial crisis, Germany's labor market really didn't take a hit, which allowed its manufacturing sector to succeed in the years after the Great Recession. Known for its engineering prowess, Germany has become a top global seller of cars, heavy machinery, and electrical equipment to the rest of the world.

And given that both manufacturing and exports are very strong contributors to Germany's economy, it's less than ideal when both elements are facing headwinds:

After Russia invaded Ukraine, most of Europe distanced itself from Moscow including Germany, which received 55% of its gas from Russia. Putin started cutting off Germany's gas supply, and Germany halted Russian oil imports at the start of this year. The energy crisis combined with global inflation led to diminished production and a very cold winter for Germany. High energy prices continue to risk deindustrialization that could have companies aiming to set up factories and offices somewhere cheaper.
Germany's once-thriving trade operations have turned stagnant and are weighing down the country. Since the start of 2022, net exports have been a drag on the economy in four out of six quarters, ING reported. Elevated prices in manufacturing have sapped demand, and China, which has been one Germany's largest buyers, is now less of a partner and more of a competitor. De-risking goes both ways.

Feeling Better, Sorta: The German government reported that GDP will contract by 0.4% this year, and the International Monetary Fund expects it to be the only major economy to not grow in 2023. But 2024 could be a tad bit better. Economists told Reuters that Germany's GDP is likely to grow by 0.7% next year. The key is reviving the nation's aging labor force and investments in major markets like chip production. Intel and TSMC already plan to build factories in Germany thanks to about €15 billion in subsidies. So unfortunately, there's no time for bed rest.

INTERNATIONAL ECONOMICS

Argentina Has a Radical New President with Some Big Ideas

Photo of Argentinian President Javier Milei

Photo by Vox España via CC0 1.0

Argentina's economy has been on the downward trend for decades due in part to poor management by its government, but a radical new president with mutton chops and a chainsaw thinks he can fix all that.

Break the Wheel

From having a superhero alter ego to being a self-described anarcho-capitalist to cloning his pet mastiff five times, Argentina's newly elected president, Javier Milei, is…well, he's much more, um, colorful than your average politician, but what do you expect from a person whose nickname is "The Madman?"

Milei's unconventional style isn't just about his personality. Only a few weeks into his presidency, he's already taken steps toward privatizing money-losing state-run firms including Aerolineas Argentinas and the AySA water and sewage company.

While on the campaign trail, Milei generated plenty of hype by making extraordinary promises like shuttering the central bank and replacing the Argentine peso with the US dollar. But many economists say they haven't heard much that would address underlying fiscal problems. Can Milei's monetary policies put Argentina on the track toward a better tomorrow, or will they cause even more turmoil?

Dollarization would replace Argentina's current inflation rate of 143% with the much much lower 3.1% of the US, which is great. But dollarization, combined with closing the central bank, would mean surrendering monetary autonomy over to the US Federal Reserve.
Plus, Argentina appears to not even have enough dollars to replace its currency, which could mean a lot more borrowing. The country already owes the International Monetary Fund $46 billion.

More Change Needed: Guido Agostinelli, an economist at the University of Buenos Aires, told DW News Milei's strategy could make things a whole lot worse for the roughly 18 million Argentina's already living in poverty. "How many pesos do we have to give to get one dollar?" he posed. "If the exchange rate is very high, the consequences for the country would be extremely negative because that would mean Argentina would be much poorer in dollar terms, and the income of Argentinians measured against the dollar will be very low."

So that one-two punch of dollarization and abolishing the bank might not have Argentina's citizens rolling in the Benjamins anytime soon.

Written by Griffin Kelly

Finance Executive Online

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