Growth Summit 2023: Chief Economists Briefing

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John Defterios: Okay. Good afternoon, everybody, and thanks for showing up with such a good audience here late at the Growth Summit 2023. I'm John Defterios. I'm a Professor of Business for NYU Abu Dhabi. I'm an Energy Fellow for the World Economic Forum and served as the Emerging Markets Editor for CNN for 23 years. It's a delight to be here.

I think this is actually – and I've heard Professor Schwab and others suggest this – this is the right panel at the right time. I think it's very true, because there's so much uncertainty out there. In fact, we're waiting to find out what the US Federal Reserve thinks about the inflationary threat, or the threat of recession, at this time.

We have a group which puts out a publication and I think if we can bring that up now, it's the Chief Economists Outlook for 2023. We're going to get a sense of that debate today, but you can download it both on the website, with a QR code, or as we put it on your screen throughout the session today as well.

It's a delight to digest it because of this level of uncertainty that we see today, to have an outlook at this window of time, when there's so much disruption in the banking sector. And I spend a lot of time in the Middle East, particularly in the Gulf states, and when you go there and there's growth of 6.5% to 8.5%, depending on the country you're in, or you're sitting in Europe or in the United States, or if you go to Southeast Asia or India right now, a completely different outlook. It's almost parallel worlds that we're living, today.

Let me introduce our panel. Sitting to my direct right is Svenja Gudell; she's the Chief Economist of Indeed. We have Paul Donovan, the Global Chief Economist for UBS Wealth Management Asset. And joining us, despite the fact she was struggling with the flu, and we are glad that she made it out of bed today, Sandra Phlippen is the chief economist for ABN Amro. And it's great to have Greg Daco, the Chief Economist of EY-Parthenon. Let's give a nice welcome to them for our session.

I want to, because I know who's in the audience, and some said they were quite willing to ask questions, I want to allow at least 15 minutes for us to take questions from the floor. So I'm going to ask the panel to be very direct with the answers, as in 90 seconds or less. We're not going into professorial mode, which I can do now as a professor.

But to be really direct, to foster the debate, I'm going to ask the same of those in the audience as well. Identify who you are, because we're live streaming here at the World Economic Forum because it's very open dialogue. But keep the questions super direct so we can get direct answers as well.

One of the things that stood out for me out of this report and these are members who helped author the report, that it is almost a 50-50 split whether it's going to be a recession this year or we kind of struggle above the line not going into recession. But the common theme is there is no extreme position; that there's not a grand shock that we're not expecting. But I think it's a little bit ironic because we're living through a mini banking crisis, if I can put it that way, if you're in the United States. We saw what happened to Credit Suisse. In fact, I was at the Financial Sector Conference in Saudi Arabia as that story started to unfold. Is it contained and what is the role of government, which are key questions today? Because the government played such an outsized role during the global financial crisis, and yet again during the pandemic, it was a lender of last resort ready to put money on the table when needed. But have we set up a trap for everybody thinking that the consumer can always rely on the government to kind of rescue the day? I'd like to start there, Paul. Is it going to be a recession or not, in your view? And has the government kind of boxed itself in – governments, in the plural – thinking they will rescue everybody all the time? I think it's a good place to start.

Paul Donovan: So I don't like the word recession, because there's no a proper definition of it. And two quarters negative GDP needs to be retired like five years ago. Yes, we've got half the global economy with declining populations. You can't talk about negative GDP as being a recession indicator. Do we get a significant economic downturn? I don't think we do, because the middle class still has cash and that's going to help. I think the problem is actually a lot more granular, that lower income groups, I think, are already suffering, certainly in the States. If we look at survey evidence and the Pulse Survey and so on, more and more US lower income households are reliant on credit card to, you know, pay the bill at Wal-Mart. That's going to be a challenge. So I think that for some people it is going to feel like a recession, if you want to use that word. But I don't think we're going to get a significant downturn in the major economies because the middle class will keep us going through.

John Defterios: Yeah, it's interesting, Sandra, that stood out for you as well, right, that there's cash in the savings accounts. It was a product of the pandemic and people were trying to save for a rainy day. And this will buffer a downturn in 2023.

Sandra Phlippen: Well, indeed, we looked in detail at the cash buffers of households and firms in Europe and in the US, and we did that to basically get a better handle on the question, is there more resilience in the economy than we than we thought, given the super high inflation and the decade for high falling real incomes, that was going on during the energy crisis? Because if there is more resilience, basically that also means that that spending capacity stays high and prices will will stay high. And that could mean that the central banks will have to do more, and that is not a... I mean, I don't see any way this can end super well. I do agree it won't be a really deep recession, but in any way this can't end really well. Because, you know, if firms and households are more resilient, it just means that central banks will have to do more tightening. And if they would do more tightening, that that may delay the pain for a while on the economy, but it will just be a harder landing if there's more tightening ahead. So what our finding basically is that, like to put it really short, households have better cash buffers than firms and the US is in a better shape than Europe. That's the basic outcome.

John Defterios: Good. I think I'd like to use the first round to get the pulse of everybody here. Greg, in terms of both of the report and then your outlook – and I think we should add to this dialogue – what external shock could change what you're thinking? Go ahead.

Gregory Daco: Yeah, well, I think we are in an environment where there is an undeniable slowdown in global activity, but we are in a multi-speed global economy. And I think that's part of the reason why it's difficult to get a definite answer as to whether we will see a recession or not. So the 50-50 split is not the old economist's joke of having on the one hand, and on the other hand. It's actually that it's very difficult to decipher the unique conditions that we're in as we're coming out of the pandemic. We're still in this unbalanced world on a number of fronts.

And the other thing that I would note, when it comes to a recession, is that oftentimes recessions are a reflection of economic imbalances that are large and significant that correct themselves. And, to join the earlier point made about cash buffers, I think one of the key elements to underline when it comes to the US economy in particular, is not only the fact that there are a lot of excess savings, is that even if you look at credit conditions in the US, the amount of debt that has backed spending is not historically high, actually it's historically low. And add to that wealth and you have relatively healthy consumer fundamentals. They are starting to see some cracks in the foundation of household finances, but as of right now, they're still relatively healthy. So I would tend to think that in that type of environment you see a mild recession. But you also have to remember that there are a lot of nonlinearities in economics. It's not like people are slow their spending; oftentimes they stop spending, consumers and businesses alike.

John Defterios: Okay, Svenja, you focus on the labour market and I know you wanted to underscore that in different parts of the world, and we've been talking about it here for the last two days in Geneva about the disparity of this global growth outlook and the widening of the wealth gap, which has been a common theme. How does this outlook that's been put together by you on the panel here and others that are part of the community of the World Economic Forum?

Svenja Gudell: I think and I agree with what all the other panelists have said before, it's really, it's a picture of mixed signals at this point. And that's what's making this incredibly hard. And take with that a still very strong labour market in a lot of different countries. It's hard to cover it with blanket statements, because you really have to dig deep to actually see the different trends, and I think that's also part of the problem coming out of the pandemic. During the pandemic, we moved largely in one direction. Now coming out of the pandemic, we're at an inflection point and we're moving a lot of different directions, and different sectors are doing different things and impacting the economy differently. And we're moving away from, for example, from goods consumption to more service consumption, again on the labour side. And that transition has different impacts. And we're coming off of, you know, in some countries still very high inflation having impact as a lot of sentiment measures. Right?

I fully agree that consumers are feeling inflation very differently depending on where you are on the income distribution. And so for some people, they already feel like they're in a recession when they're trying to, you know, pump up their car or when they're buying eggs or milk or whatever it may be. And for others, it doesn't really impact them quite as much. And take with that how much wages have accelerated. They're starting to come back down. But nominally they've gone up quite a bit, shockingly so, making up for a period of time where we didn't see that much wage growth. But it's nothing compared to inflation, so real incomes are not looking as rosy.

So you see this competition in the labour market where people are churning quite a bit, although that data is starting to change as well, particularly in the US. We just got data in that the quits rate is starting to come back down. And I think for the first time, I'd say in many months, we're starting to get signals that are pointing more in the same direction, because I think if you had this panel probably two months ago, we would have all said, well, the labour market still is really, really strong, but we're seeing some signs. There probably would've been more debate. Now I think we're starting to get more signals all pointing in the direction that there is a distinct slow-it-down, you can't really argue with that anymore. But having said that, it's still a strong labour market and that goes for the US as well as many other countries.

And that's where it gets interesting for the future – and I'm past my 90 seconds, I'm sorry – but where you start to look at long term worst, the skills mismatch, right, I think in a country like Germany, where you're worried about certain skills not being available anymore, but too much, too many business/administrative type jobs or workers being available, but not enough jobs. And so you have all these these mismatches going on in different countries. And how that's going to evolve long-term is going to be interesting, and then how is that going to impact the economy?

John Defterios: I definitely want to circle back on those topics you were talking about there and the influence of AI, which has been a pretty big week on that subject as well. But I wanted to kind of take a pulse of what the Federal Reserve should be doing today. Right? And is it chasing the inflationary threat or is it overreacting to it? I remember reading the headlines when the inflation rate had spiked up, and this is the highest inflation since 1980 – and I had started university then and you know, that was 18%. So we've conditioned everybody to very low inflation and very low interest rates. And this is a new era, is the central bank prepared, Paul, to deal with it? And I'd love to just get everybody to jump in on this. Go ahead.

Paul Donovan: So we in our closed session yesterday, we were having a full and frank exchange of views on this very topic. So my view...

John Defterios: I was wondering what that shiner was on your lip...

Paul Donovan: Greg, just didn't agree. [laughter] I think we've had three phases of inflation. We had the transitory inflation which was transitory, which was demand-led durable goods all over. It's now in deflation in the States, outright deflation of durable goods. You had the supply shock, which was the energy shock. Now in disinflation, another big drop in the oil price yesterday, we now have a profit margin-led inflation episode, which is unusual. So as we just heard, I mean, the real wages are... well, have been falling, i.e. prices have been rising faster than labour costs. That's a pretty good hint that you've got a profit margin-led inflation episode. Starbucks and the results yesterday, you know, for selling something they call coffee, are saying well you know we've had a big increase in margin on pricing and this has only been partially offset by higher wages. And that I think is the problem, because all throughout this period we've had a Fed chair who is, you know, knows in the Economics 101 textbook when inflation is high, raise rates and don't stop. And that's not how you do it. This is not how Bernanke or Yellen or Greenspan would have done it. This is how Arthur Burns did it. And that, I think, is the problem. But no, I'm not a big fan of where the Fed is at the moment.

John Defterios: Do they stop, Sandra? I thought it was an interesting statement from one of your counterparts of this panel, the Chief Economist of the Bank of England. It was that Huw Pill, who's saying that consumers and workers cannot be demanding higher wages because you're just setting up a vicious cycle of very high inflation. But I thought that was pretty out there.

Paul Donovan: To be fair to Huw, he was taken slightly out of context. He also said 'and companies need to stop ramping up profits'. So he did also mention the companies.

John Defterios: He id balance it out. But it is unusual, wouldn't you say, Sandra, for the the central bank to get into that conversation?

Sandra Phlippen: That is unusual, but well, maybe a few arguments in the other direction of Paul – to just keep it a bit lively here. There are a few things to kind of push back on here, I think. The first is that if you look at the profit margins and how they have unfolded during the last episode, like the energy crisis, and that has indeed been a lot, if you compare to historical profit margins, but it's very sector based. So it's mainly construction and retail. So not in all these sectors and also in the medium-term, this is not sustainable.

But what I think matters more is that something that the Fed and the ECB also worry about, is the fact that the impact that all of this has had – so the pandemic and the energy crisis – the impact that that is having on individuals and firms is very heterogeneous. So we always think, I even just said it myself, that we have a historic fall in real incomes. But actually, if you look at granular data, so we look at financial transaction data of millions of households on a daily basis, and what you actually see is that like in September 22, in Europe, when when the energy crisis was at its hottest, around two-thirds of the households which we looked at had basically not yet a higher energy bill. And that is really weird because one third has a crazy energy bill and is basically going bankrupt. And that leads to headlines around those one-third of the population that have a crazy energy bill, and that leads to politicians providing generic subsidies and lump sums and all kinds of transfers because they want to save everybody from that situation. But if the impact is so heterogeneous and you keep spending generically, what you get is really inflation.

And that is something that went with the pandemic, but that was more spectrally concentrated because we knew where to support had to be going. And with the energy crisis, it's much more difficult. And so there's all there's all that misalignment of government spending that goes directly into inflation. So, for example, we did one specific study where we looked at like a really scientific impact effect study on a lump sum transfer of €1,300 to poor households. And we basically saw that around half of that money is spent within three weeks and not on energy – and basically all of that is inflationary.

And I think that the Fed and also the ECB, they're worried about this because the inflation headlines that are picked up on also drive wage negotiations. Of course, it doesn't mean 14% wage demands are not really what is going down the line, but it is it is a starting point that is extreme. And I think that is something that central banks are keeping in the back of their minds. And if I were a central banker, I would rather be a little bit more cautious, because once inflation expectations gets to de-anchored, you can't just put them back anymore. And so I feel some understanding for for their decisions.

John Defterios: Oh, core inflation. Let's take the European example, Greg, then, 8.5% in February down to 6.9%, but the core is at 5.7%. Has it peaked and the ECB's job is nearly done?

Gregory Daco: Well, I think in general inflation has peaked, but we economists tend to think about inflation. Most people tend to think about price levels. That's what really matters for businesses, for business leaders, for consumers. And there there's that massive confusion between inflation having peaked, but still rising. If it's rising at 5% core inflation or even headline inflation, that means that prices are rising 5% every single year. That's still too high. So I think we have to distinguish the cyclical momentum from the structural momentum. The cyclical momentum, I very much agree with Paul. I think we are in an environment where in the midst of the slowdown in economic activity, we're seeing a number of signs that inflation is cooling, whether it's consumer prices or producer prices in the US, which generally reflect profit margins.

And so to the very point about moderating profit margins going forward, import prices, all of those prices are growing at a slower pace. That's disinflationary and I wouldn't be surprised that we enter an environment where the disinflationary trend carries on a little bit longer and overshoots the target. There's not going to be that smooth landing to 2%. The other trend that is important to monitor is the structural trend. We're in a world where we are seeing increased deficiencies on the supply side, demographics, an ageing population, reduced immigration, the globalization or slower globalization is another example of where an environment with increased fragmentation will lead to higher costs of goods and services going forward. And then the decarbonization, the greening of the economy, that's a massive potential to increase inflation. So we have probably higher inflation over the structural medium term, but lower inflation as we navigate through that cycle.

What that means for central bankers is they need firmer anchors. They can not proceed just by looking at the data and being excessively data dependent. That's a big risk. We've seen it for the Fed, we've seen it for the ECB, we've seen it for other central banks where they focus too much on one specific data read – the payrolls report, a CPI report, an inflation expectations report. We know that inflation expectations are still well anchored. We know the economy, at least in the US, is slowing. So that's the type of environment where I would think the Fed should pause and start to wait to see the effect of prior tightening. Will it pause? Probably not this time. They'll probably proceed with one more rate hike, but I think it's going to maintain that flexibility for potentially still raising rates in June because it does not want to close the door to any further rate hikes. And importantly, it wants to maintain these rates at an elevated level.

John Defterios: So you bring up an excellent point. I remember the stimulus package when President Biden was coming into office, I was saying in my coverage then, I'm not sure what the Fed is looking at that they thought they needed another trillion dollars of stimulus. And then it was a knock on effect because the stimulus continued in Europe in this post-pandemic phase. Did they really get it wrong, or Svenja, do you want to drop into this debate? I didn't understand it and it seems to be feeding the inflation today, and they're trying to put the genie back in the bottle. That's the reality?

Svenja Gudell: I'll take, perhaps, an out-there stance for a second. I think the Fed has a pretty difficult job and I also believe that while you run the risk of having recency bias, just looking at like your three or four or five or six, whatever, how many it is data points along the way, I think the data quality overall has certainly deteriorated. We're talking a whole lot about that. It's been really difficult to get a good angle on what is actually happening.

John Defterios: Because of the post-pandemic recovery? The labour market?

Svenja Gudell: Well, definitely what's going on the labour market. But data in general, I think looking at I actually, you know, Sandra and I were talking about this, I think it was really good that during the pandemic we started looking at higher frequency data, because the world was moving much faster than our data was moving. And while we still look at some high frequency data, there's not as much available anymore. We're not investing as heavily anymore. We're moving back to the old targets. But the data is still pretty crappy. And so it'd be great to see some better data. But in the absence of such, it's fairly hard to make these decisions.

And then, leaning on what Greg was saying, there are these long-term structural shifts, right? I think it's certainly really important to take a look at, for example, on the labour market side, we have an ageing economy, in the US and many other industrialized countries, and the labour force will be shrinking and that's going to have an effect on how we produce, and how much going to cost to produce and wages, and therefore inflation at some point as well. And I think those are things that will stay with us and are important to keep in mind, even though, sure, you're looking at slightly outdated data that's from the last month or so.

John Defterios: Good. I don't want have just a Western perspective on this panel. So I want to bring in some other growth trends.

Sandra Phlippen: Something that that kind of sticks in to the air here is the idea that that, you know, deglobalization and climate change and all this all inflationary. But I do think that it's very important to note that it's only inflationary as long as growth is playing the game, a long ride, because if people can't afford higher prices anymore, or if we're getting a negative growth, that is disinflationary. So I think it may be in the medium term, it might be inflationary, but at the end of the day, if it's going to erode growth, that is disinflationary. And, in my view, I think it might be a dominant factor.

Gregory Daco: I mean, I've said a number of times that really the key in this type of environment is productivity growth. I mean, that goes to your point, because if we are able to increase productivity at the business level, then what tends to occur is that that increases the supply for the overall economy and global economy, but it also alleviates the inflationary pressures. Because if you think about a business leader that's conducting business for which the cost of labour has increased, even though wages have not kept up with inflation, they've risen quite a bit. So that's a constraint on the cost front. And what businesses are doing is essentially pricing that out, and passing that along. They were able to do that for the most part of 21 into 22, now much less because there is less capacity to to pass on those prices. But higher productivity growth to me is really the key to what you're saying, because, yes, if we have low growth in this type of environment of transition, then we have lower inflation. But if we have stronger productivity, that's really the key.

John Defterios: But there's no magic wand to productivity, though, right? And this is the ageing population quandary, is it not? And Paul, jump in as well. Go ahead.

Svenja Gudell: I was going to say this is a good bridge into AI, and what that will do to productivity. Because I think thinking about the impacts long-term that AI could have, productivity is certainly at the top of the list in terms of how we make a shrinking labour force more productive and do more for us.

John Defterios: Okay. I want to pick up on that. And Paul, you can jump in as well. But we had the head of AI for Google resign and then, you know, he went on mainstream media saying I had to resign because I see a real threat there. And you taking the glass half full approach saying that it'll boost productivity. But there's a lot of destruction along the way. I don't know how to....

Svenja Gudell: ... not tay that there aren't a lot of problems and discussions worth having around that. Absolutely.

John Defterios: Are we starting to weigh the impact, Paul, of AI?

Paul Donovan: Well, I think that whenever you have a revolution, an industrial revolution, I mean, the point is these things are revolutionary, and you don't necessarily end up with mass job losses. I mean, we haven't through history. You know, it's not that we're sitting here with one million people employed in the United Kingdom because that was who was employed before the first industrial revolution. We create jobs. The problem, of course, is that if you were an artisan weaver and sort of lower middle class in 1750, you were the lowest of the low by 1800. So you still have a job, it's just no status and no pay. And that was because of technological change.

But then other jobs come along, which was right. And this is what we've got to reflect. I think it's the disruption and the change that's come through. And I think perhaps to some of the earlier points around deglobalization and ageing populations and so on, as with AI, what this does in terms of pricing is changed relative prices I think more than it changes inflation. But you know, I started my career as a Japanese economist, ageing population, inflation... not a noted consequence. If you look at globalization, arguably globalization has raised inflation over the last 20 years, it just has lowered manufactured prices, which we care about and raised commodity prices, which emerging markets care about. And similarly with AI, I think we will see relative productivity shifts with associated roles and price changes coming through. So I think it's more about relative change, than it is the aggregate level that we're talking about.

John Defterios: Because you brought up emerging markets and I was Emerging Markets Editor and it seems like we're very complacent about some of the dislocation we're going to have with higher interest rates, Greg, and the pressure – I see you nodding, Sandra, as well – this could have, for example, on Egypt and Pakistan is a worry. We've seen three or four in Africa and Latin America go knocking on the door to the IMF and the World Bank, of course. Is this a surprise shock that we're not factoring in now? Have you given it thought, Greg?

Gregory Daco: Well, I think we're we're in this environment where we've seen successive waves of shocks, where essentially we've seen the pandemic as a supply shock. Then we had the war in Ukraine as a supply shock, and those shocks have lingering effects. The Suez Canal issue is another example, and they have lingering effects. And I think for emerging markets, this is very important because they tend to be on the losing end of these supply shocks very directly, in terms of the benefit of supply. You think about grain, or you think about different types of commodities that are transacted.

But also on the inflationary front, because there is a tendency to have a larger basket that is concentrated on energy consumption, basket on energy and food in these economies. So that is a big risk in this type of environment. So I think, yes, your question is right. We need to focus not just on advanced economies. It's not just a question of thinking about the growth prospects for the US and Europe, but really thinking about the inclusiveness of that growth and the distribution of that growth around the world, not just in some privileged economies.

John Defterios: Okay. Sandra, do you want to weigh in? Then I'm going to open the floor to the audience here.

Sandra Phlippen: I just wanted to add one thing, and that is something that I heard the beginning of this conference – a saying by Ricardo Hausmann. He said, basically, and it's I think it's a really relevant point, that we need to be much more aware that the the fiscal aid that is that has come from the US in an overdone way from since the pandemic, that has led to benefits and resilience on the ground locally in the US. But the costs have mainly been spilled over to the rest of the world. So the rest of the world doesn't face the benefits from all that fiscal stimulus, but they do face the costs of it. And I do think that's something to really keep in mind.

John Defterios: Very good. Thank you. I'd like to see you in the hands up for questions. We have the benefit of having the Minister of Economy and Planning from Saudi Arabia. So nice to see you, Your Excellency. Can we get a microphone to you? I'd love to give you, have you share your perspective on what it feels like in Saudi Arabia? Because I'm going there about 10 times a year, as you know, and last year was almost 9% growth. And you're calculating 4.5%, 5%. I'm not sure if you've recalculated since we heard from you at Davos, we don't have a lot of time but can you share your concerns right now? And is inflation a real challenge? It t's a phenomenal diversification of the economy with oil prices, even this range of 75, 80.

Faisal Alibrahim: I think inflation, definitely we're anticipating or we're actually waiting to see what the Fed will do. We have a concern that there will be more of a trickle down effect on the US economy if the same pace continues. But I think most people expect something less than what we've seen in the previous hikes. We'll wait and see. That definitely has an impact on the global economy and of course it does.

Saudi Arabia's more integrated in the global economy than before. It's always been a big player and now even more with its transformation. So, yes, we do pay attention to that. We expect next year to have a different growth, I'd say, let's say forecasts for the kingdom because of the oil production profile. But our non-oil activities are projected to grow as fast as last year, maybe a little bit less, but that's what we are paying attention to the most.

John Defterios: Good, so am I correct? 4.5%, 5% this year, which is still very good and back into that range of 7%, 8%, 9%?

Faisal Alibrahim: This year a little less because of the production cuts. But on the non-oil activity side, similar to last year, which is in the fives, fours and the fives.

John Defterios: Good, so it doesn't feel like a recession in Saudi Arabia, I don't think. Laura Tyson's here. I think I think you said you'd ask a question or weigh into this debate if we can get a microphone to her. If you can raise your hand, Lauren would be great. Any other questions from the floor and one here as well afterwards, please?

Laura Tyson: I'm also going to be talking about this at the closing session, so I will try not to be repetitive On the issue of US policy, I think it's important ... a note made here that U.S. makes fiscal and monetary policy for itself. Okay. But we're a very big part of the world economy. So if we stimulate fiscally to, and I think the general view of this session is that we went too far, I'm not sure I think we went too far. I know the decision-makers sitting there trying to decide what to do when Biden became president. A number of them had been around during the 2008 recession. A number of them did not want a very slow recovery. They wanted a really fast recovery. And they looked at the experience from ... it took nearly a decade to fully recover from the Great Recession. The fiscal response was very weak and the monetary mechanism wasn't really working. So this time around they said that's not going to happen. We would rather make a mistake, the error on being too stimulative on the fiscal side, we know we're going to do that because we'll get out of the recession fast. And of course, the US did. The U.S. absolutely did; the recovery of employment, the recovery of the labour market, the recovery of the economy measured, and a whole bunch of other indicators really fast, really fast. So I think the policy...

John Defterios: ... So you were the Chief Economic Adviser to President Clinton. Was that a mistake to step on the throttle as Biden came into office, though? Would you have done the same? Would you have recommended the same?

Laura Tyson: I would have done the same, I would have done the same. I know a number of the people who were involved and I think they thought ... they weren't thinking about Clinton, but they were thinking about the slow recovery from the Great Recession. And a number of them had been part of the Obama administration. So here they had the opportunity, which they didn't have under Obama, to have a massive fiscal stimulus. And they did it and they did it not thinking about, or perhaps with the benefit of hindsight, what are the implications of that for the inflation rate? And I think right now, look, there's a lot of research going on in the United States right now and around the world. What is the extent to which the unlocking of inflation was demand driven because of that fiscal stimulus, along with an ongoing accommodative monetary policy? Okay. And to what extent was a supply chain disruptions and the kind of COVID effect which no-one could really predict?

John Defterios: Great. I need you to wrap it up.

Laura Tyson: Okay. So I'm saying I think there's going to be an ongoing debate about this. I personally would have put my foot on the throttle. And I think that, you know, now we have to deal with the unexpected, perhaps lingering, effects of the inflation. I also want to say that I support what the Fed is doing. I don't think the Fed is saying, I think it's much more complicated than the than the view of I think it was Paul. So I support what the Fed is trying to do.

John Defterios: Oh, interesting. Paul, Greg, I see you want to weigh in? Since you were pointed out there, you might as well jump into the debate.

Laura Tyson: And I think Janet Yellen, by the way, would have done exactly the same thing. So somebody said the Powell was different. Janet would have done the same thing.

Paul Donovan: So I think that previous Fed chairs would have paused more frequently. I mean, we had in June of last year, the policy errors in June, Powell comes out and says, 'We surprised the markets. We raised more than expected because inflation expectations are out of control.' Less than two weeks later, they revised down the inflation expectations number, because the data's not reliable. And so, this relentless maniacal hike, hike, hike, I think has done damage. And I think we're seeing that in the banking sector. And the deregulation in 2008 has done damage as well. Absolutely. It's not fair to blame the Fed for all of this, but they didn't help. And I think just stopping every once in a while to, you know, smell the roses, see what's going on in the world, wouldn't have been a bad idea, frankly.

Svenja Gudell: Leave it to the economists.

John Defterios: Sandra Oh, great.

Paul Donovan: Yeah, that's good.

Sandra Phlippen: Maybe one thing that adds to to Paul's argument is that, I think today or yesterday, the bank lending survey came out in Europe and it basically is really clearly showing that indeed sometimes pausing might be a good idea. Because what you're seeing now is that the tightening on on credit standards, loan demand for firms and households, it's really going down the drain quite fast. So basically that could be banking crisis related. So the banking crisis and the tightening coming from that is doing some of the work for, at least for the ECB. And that combined with also the inflation figures that came out yesterday, I think that is pointing in to the direction that that the cooling is really coming down.

John Defterios: No rush to do it yet again. Greg, do you want to weigh in quickly then I'll go back to the floor?

Gregory Daco: I think it's important to think of all of the fiscal and monetary policy stimulus that took place as a risk management approach. Because as Laura was saying, we were in an environment back then when there was tremendous uncertainty as to the pandemic, as to the economic outlook. And so what do you do in that environment? You stimulate a lot, especially after the lessons learned of of 2008/2009, when there was very slow stimulus. On the monetary policy front, late reaction probably, but also reacting to an environment that was unusual on the fiscal stimulus front. Now, I think is the time to pause. And the key question, in my opinion, comes back to the cost of capital going forward. There is not yet an adaptation from the private sector to a higher cost of capital environment and the types of developments that we're seeing again and again throughout the world – unforeseen the pension funds issues last October, the SVB collapse, now First Republic. These are all examples of an environment where balance sheets are not adapted to a higher cost of capital environment. After four decades of generally low interest rates and moderate inflation, there is not that adaptation yet. That is, in my opinion, the big risk. And I think that's to some extent why Paul is saying, you know, this view of hike, hike, hike is probably not adapted to the world that we're going in.

John Defterios: Very interesting. Svanja, go ahead.

Svenja Gudell: I just think we don't have enough time to discuss this, but I think it's worth a mention that in all of this, you know, given my history, I think about housing a whole lot as well. And it's very important that we at least think about the impacts on housing on all of this as well, because mortgage rates are incredibly high and have seen a tremendous hike up. And housing prices were already very expensive in the US and now they're even more expensive, and they haven't come down enough to actually make up for the increases in mortgage rates. And I think that's an important mind to keep or point to keep in mind, particularly as we're dealing with affordability issues on for sale housing. And that's a large part of the economy as well.

John Defterios: Good. Is that going to be the straw that breaks the camel's back here? The housing crunch? There was a couple of pieces out recently... you don't see a great shock coming, Paul?

Paul Donovan: The problem with housing, and I'm probably biased in the UK perspective where everybody wants to live in their own Downton Abbey and all the rest of it, but we have a cult of housing in the UK, which is certainly is not replicated in continental Europe. But there has been real disruption with the move to flexible working, 44% of the UK population work flexibly now. Yet London house prices have underperformed the rest of the country for three years. This has not happened in history, at least not since the bubonic plague, so we've now got real shifts going on and I think it's tricky. Now, we were really hit by the Truss debacle and that really shocks people with the housing market implications of that. Our mortgage rates have then come back down again, but I think we are we're going to be seeing a very fluid situation in housing. So I agree. I think particularly in the States, where you've got a more direct impact with new buyers, there's a more negative effects in the UK. It's a highly localized situation in almost district by district in London, you're getting the variations in house prices come through.

John Defterios: Good. Sorry. Thanks for your patience. Just identify yourself, please. Thank you.

JJ from Japan: JJ from Japan. It might be a bit odd question from the micro company point of view. I think these days companies are getting more and more pressure to include intangible values, especially the social values with so on and so on in their business activity. And then this is a bridging question from micro to macro. So from an economist's point of view, how do you include this kind of the non-monetary value of social activity and so on in your evaluation?

John Defterios: Go ahead. Who wants to jump in on that? Sandra?

Sandra Phlippen: Yeah, so I think it is an important aspect and it is on on a very broad spectrum, right under the whole as ESG spectrum firms are kind of being held to account. And I think that if you just look at the narrow element of emissions, at the end of the day, if you previously lived in a world where all the externalities from production were basically carried by by the rest of the world, and then in the new world, all the externalities from production are carried by the firm itself, that's a huge cost increase. And that is exactly what a carbon tax for example is is looking to do. But I do think that it raises to a bigger point that, you know, we're talking about the Growth Summit here and what we economists typically do is that we have a like one or two year ahead, a forecast horizon and we try to think about how can we, what is growth going to look like and what can what can policy do to maximise that? But if you if you look at the climate scenarios, it basically means that maximizing growth now in the short run, assuming that we haven't found a way to decouple that from emissions, it basically means that it's going to put us on a trajectory of a massive GDP decline in the future. And somehow I feel that, you know, when we talk about climate change and the future like humanitarian but also economic costs of that, then we do that in separate rooms. And then when we go back to our kind of nice and neoclassical economics, then we like to stay within the next two years. So I do think it's an important question as to who's going to pay that cost of that transition and how are we going to do that in the most equitable. wasy

John Defterios: It's interesting though, you're saying the costs of the climate crisis. And I was thinking in the spirit of Ursula van der Leyen when she opened up Davos this year and she talked about the security net zero boost. When do we get a kick from all this green tech investment and needing to accelerate the transition? When does that factor in?

Sandra Phlippen: All kinds of great green growth fairytales out there, but I think, at the end of the day, is a matter of internalizing a cost that was previously externalized. So I think when we get to the to the fairytale world really is when we have made the transition. Because in the world where we made the transition, energy is basically going to be abundant and for free, and that is the biggest source for, the reason why we all need to be efficient in everything. And I think there's massive growth potential once we once we get that done. But until we get there, I don't think it's realistic to think that it's going to be a growth story.

John Defterios: That's interesting. There's a lot of stimulus in the markets today. Paul, do you want to weigh in?

Paul Donovan: So I wanted to give a plug...

John Defterios: We have to be careful with our time as we have a minute left. Thanks.

Paul Donovan: So UBS put out a white paper to coincide with the conference this morning on the impact economy. The idea being that what are economists for? Well, obviously, economists are here to allocate finite resources amongst infinite desires. That is the raison d'etre for the economics profession, that's why we exist. And the problem is, that ever since 1950, infinite desires equals GDP. You know, everybody has to have the latest smartphone; it's all measurable output. But that isn't the world today. The world today is actually we want air that we can breathe, water that we can drink, and diversity and inclusion would be nice too, thank you. So we now have a set of needs that the economics profession should fill and GDP does not cut it. So we need to evolve the economics profession as we've done in the past.

John Defterios: Yeah. And the other thing, Svenja was saying, I'm surprised that the data is not really good in a world when information moves so quickly and people empty their bank accounts on their apps very fast when their banks are under threat. Greg, 15 seconds to wrap.

Gregory Daco: Yeah, generally, yeah. No, I think there is a lot of optimism in terms of the potential that we have to address some of the challenges that we're currently facing – whether it's on the climate change front, on the gender front, on the diversity front – these are all opportunities for growth. Perhaps not growth in the way we measure it or we've measured it, but growth in the sense of welfare. And I think that's potentially as important, if not more important, for the global economy.

John Defterios: Okay. You plugged a report. I have to plug the Chief Economist Outlook Report one more time, if we can bring it on the screen. There's a QR code for those of us in the audience, but those importantly watching from different corners of the world. You can read the different debates they had about whether it's a recession or not. I think the consensus is there's no surprise shock. There's also a different way to look at things ... is that we're really resilient as a global population today, right, with what's been thrown at us since the global financial crisis and Russia, Ukraine and an energy crisis, and a pandemic, and supply chain disruption. The fact we're having this conversation and nothing's burning at this stage, we're doing pretty damn well, I'd say, right? Can we give a nice round of applause to the audience? Thank you very much.