Podcast: Winter is coming. Global recession, too?

TRANSCRIPT: Winter is coming. Global recession, too?

Kristalina Georgieva:

Well, you look at the emissions going up, even when the economy is slowing down. So we have lost time. And the question is, are we eager to move to catch up? And that is something that we have to press very hard for, Ian, because time is not our friend.

Ian Bremmer:

Hello, and welcome to the GZERO World Podcast. This is where you'll find extended interviews with the newsmakers I talk with every week on my public television show. I'm Ian Bremmer, and today we check under the hood of the international economy. And let's just say it's time to bring the car to the shop. I'm from Boston, you know. Luckily, both my guests today are leading global efforts to get inflation under control, to lift tens of millions out of extreme poverty, and to prevent the next global recession. Whether they'll succeed is very much an open question. I'm talking first with Kristalina Georgieva. She's managing director of the International Monetary Fund. And later with David Malpass, president of the World Bank. Let's get to it.

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In a world upended by disruptive international events, how can we rebuild? On season two of Global Reboot, a foreign policy podcast in partnership with the Doha Forum, FP editor-in-chief Ravi Agrawal engages with world leaders and policy experts to look at old problems in new ways and identify solutions to our world's greatest challenges. Listen to season two of Global Reboot, wherever you get your podcasts.

Ian Bremmer:

Kristalina Georgieva, thanks so much for joining us on GZERO World.

Kristalina Georgieva:

Thank you for having me.

Ian Bremmer:

I want to start, of course, with the fact that the global economy seems to be getting worse. That's true if you look at. It's also true if you watch the IMF. I see all these downgrades. And every time you and I talk, it seems to be getting only a bit more dire. Is a global recession now inevitable in your view? And if so, why?

Kristalina Georgieva:

Well, the risks of global recession have gone up, and the reasons are three. One, we have all large economies slowing down at the same time. Eurozone, because of Russia's invasion and high gas prices. China, because of Omicron disruptions and the housing sector, the real estate sector in trouble. US, still holding relatively better, but the momentum is towards slowdown as well. And that takes me to the second reason. Inflation. High inflation means tightening financial conditions, and higher interest rates are a drag on consumer demand, they're a drag on investment, making the slowdown more likely. And the third reason we are a bit more concerned about the future is fragmentation. The world economy is finding it harder to have solutions to common problems in this environment.

Ian Bremmer:

Now, usually, at least when we talk about China historically, when things go badly, the ability of the Chinese government to throw a lot of money at the problem, kick it down the road and ensure that there's growth and stimulus, we often see that. We certainly saw it coming out of 2008. First of all, do the Chinese have that capacity this time around? And secondly, are you starting to feel more optimistic for 2023 about them finally getting out of this zero COVID stop-start, stop-start?

Kristalina Georgieva:

The answer to the first question is yes, China does have policy space, and we have seen very recently that they are deploying 85 billion for their property sector. But if you look at history, you would notice that China has three drivers to increase growth. The first one is the real estate sector, which even with the support it is getting today, cannot be the same potent force. The second one is infrastructure financing. China has done a lot in infrastructure, and municipalities are now under more debt than they were before. And the third one is export. But export in a fragmented world has less potential than it had before.

To your second question, I cannot predict how China is going to moderate its COVID policy. What I can say is that it is right for any country and every country to revisit how it is approaching dealing with COVID as the pandemic moves from one stage to another. We are clearly in a very different stage. Vaccines are available everywhere. And even when COVID spikes, it does not have the same potent force that it used to have before we came up with pandemics and treatment. So let's see whether China would take a step towards reevaluating what is right to do for their own economy, and of course for the regional economy and the world.

Ian Bremmer:

Okay, so that's China. When we look at the Europeans, certainly when I look at the electricity bills, my God. 5X, sometimes 10X what they were a year ago. I also have the Europeans telling me they expect it's going to be a lot worse in 2023 than it is this winter. Is that your sense?

Kristalina Georgieva:

Yes. Unfortunately, this is correct. This winter, the reduction in gas supplies has caused this spike in energy prices. And of course, oil has also been on the highest end of the price spectrum. But Europe did have reserves, and Europe has been able to cushion itself against massive reduction and actually stopping gas supplies from Russia. Would that be the case next winter? Very likely that Russia would continue to use gas as a factor of response to what has been understandably a very, very strong reaction from the global community to a senseless war. And that therefore we may see next winter to be even harder for Europe.

But the silver lining here is that Europe is going to accelerate its green transition. This is so clear. And for the world, this is really good news. It means new technologies, accelerating the deployment of existing technologies. And if we are to take a brave step towards making it easier for private capital to go into emerging markets with these technologies, we may have a chance to buffer ourselves against the climate crisis.

Ian Bremmer:

Now, you bring me to the developing world, and certainly everything seems to roll downhill at them. Whether we're talking about inflation, whether we're talking about the pandemic, whether we're talking about the Russian invasion, everything's hitting them the hardest. I was talking to our friend Antonio the other evening, and he said that they're still having a hard time actually getting fertilizer out of Russia, getting that deal actually implemented. How challenging do you see the food crisis, the fertilizer crisis for the developing world in the coming 12 months? Also, how much is indebtedness and interest rates hitting them? Do you expect crises? Do you expect literally that there's going to have to be dramatic intervention or we're going to see some financial collapse?

Kristalina Georgieva:

You are so right. It is a cost of living crisis in so many places. Hardest for emerging markets and developing economies, for people there. And when you look at the shocks that have been hitting them, they exhausted their fiscal space. And now countries have to deal with this new shock of high energy and food prices from a very difficult position. And don't forget, when we talk about tightening of financial conditions for emerging markets and developing economies, this includes both interest rates going up, but also the dollar going up; depreciation of their currencies. It translates into importing more inflation, making lives of people even more difficult.

So in this environment, you are also right to concentrate on food security, because this is where the devastation for especially low income countries is so dramatic. We have identified 48 countries that are suffering from food insecurity, and I think next year may be even harder. Why? Because this year we had natural disasters, climatic disasters on all continents. That is affecting agricultural productivity. And we have prices of fertilizers going through the roof. That makes it so hard for farmers in these countries to produce what is necessary. At the IMF, we have taken this to heart. We have created a new food shock window in our emergency financing so we can be a line of defense for these countries. We estimate that for the 48 countries I mentioned, the balance of payment shortfall is $9 billion. We will be there for countries.

And let me make my last point on the issue of supporting emerging markets. At the IMF, we still have about $700 billion lending capacity. We are seeing an increase in demand for IMF financing. Since the war started, we have funded 18 programs or augmented programs. This is about $90 billion just in this short period of time. And right now, we have about 28 requests that may not turn into programs, but there may be more requests coming because of this combination of tight financial conditions, strong dollar, and debt that has gone up during the pandemic to levels that are, for low income countries, for 60% of them, beyond their repayment capacity. They are in debt distress or near debt distress. That means, as your question points to, we have to brace for more shocks to come, anticipate them, be ready, act early.

Ian Bremmer:

Okay, last question for you, and it can be a quick one. I saw you give a speech recently at Georgetown. You said that we can survive recession, we can survive inflation, we cannot survive unabated climate crisis. Kristalina, how much progress have we lost over the last year? How much progress have we lost because of these crises, particularly the Russian invasion, in responding to climate?

Kristalina Georgieva:

Well, you look at the emissions going up even when the economy is slowing down. You look at the emissions that came out of just one case of blowing up a gas pipeline bringing gas to Russia. So we have lost time. And the question is, are we eager to move to catch up? And that is something that we have to press very hard for, Ian, because time is not our friend. If we don't take the turn towards lower carbon intensity by the end of this decade, it doesn't matter what promises we make for 2050, because we would not be able to meet them.

Now, I want to finish on a positive note. We have created at the IMF a new vehicle to support the green transition. It is called Resilience and Sustainability Trust. We promised to have it operational by this annual meeting. We kept our promise. $40 billion committed for it. Already three countries crossing the finish line on their way to our board of directors; Barbados, Costa Rica, Rwanda. And what gives me great joy is that the interest is very high. That means emerging markets, developing countries, they know they have to deal with the climate crisis before it becomes a devastation.

Ian Bremmer:

Kristalina Georgieva at the IMF, thank you so much. And of course, wishing you a very successful annual meeting.

Kristalina Georgieva:

Thank you.

Ian Bremmer:

My next guest recently found himself in hot water over questions about the cause of a rapidly warming climate. So I asked World Bank president, David Malpass about that, and also the road ahead on both climate financing and our global economy.

David Malpass, president of the World Bank. Thanks for joining us on GZERO World.

David Malpass:

Hi, Ian. Good to see you again.

Ian Bremmer:

Thank you. So I've got to start with the elephant in the room.

David Malpass:

I don't even know. I'm not a scientist, and that is not a question. I don't know why it stays on the stage. What we need to do is move forward with impactful projects.

Ian Bremmer:

Can you just clarify that you are not a climate change denier?

David Malpass:

Sure. I'm not. It's clear that greenhouse gas emissions from human activity are causing global warming. The World Bank is in the middle of many of the most important issues in climate change, and staff are working all over the World Bank. Massive effort, massive financing. The World Bank is the biggest worker on climate change now. That means more financing than other sources in the world. That also means more diagnostics, which are really important as people try to focus their priorities. We're pushing hard on reduction of greenhouse gas emissions. As you think about it, the impact, actually how people do that is the biggest challenge, and what a lot of people are trying to duck. I really want to get us from the conference mode to the actual project mode and impact as far as reducing greenhouse gas emissions.

Ian Bremmer:

You and I have known each other for a long time, and the fact that you just said that is not in any way news to me. Were you just irritated on the day? I was just wondering what was going on.

David Malpass:

Yeah, I'm not into name-calling. I'm not very good at that game. And I was there to talk about impact on climate, and for whatever reason, that was the start of that event. So best is to move on and also not distract attention of the world from the actual task at hand. So that's where we are at the World Bank. We have people working all over the bank really hard on it. Fast deadlines. And so I want to keep that work going on.

Ian Bremmer:

So let's talk about projects. And this year, of course, we are seeing considerably higher carbon emissions than we saw last year. And a big piece of that is because of the massive disruptions that we've had from the Russian invasion into Ukraine. I am also seeing that banks are increasingly moving back into fossil fuels because they can get short-term returns and because a lot of countries just need energy desperately. How bad is that situation? How much of a reversion are we seeing, and how do we address it?

David Malpass:

This is a real concern. It's happening right now. So more and more countries are reopening coal-fired power plants. Europe is scouring really the world for coal and for more natural gas. And that has consequences, because the natural gas is a critical input to fertilizer and to food. And so there's consequences and trade-offs being made really every day as they fill their winter storage with natural gas.

I want people to look ahead to next year and the following year as well. There has to be a better way to have fertilizer production. One of the concerns is it looks as if Europe is moving away from producing fertilizer in Europe, and instead buying it, which creates shortages elsewhere in the world. So these are very real topics and massive problems, and we're looking specifically at fertilizer and ways to address the food insecurity.

World Bank has really 20 years, a lot of experience in helping countries identify the problems early and then helping with the financing that's needed for basic necessities. We launched in April a $30 billion food insecurity program in conjunction with Germany as president of the G7. So it's a big coordinated effort to have triage to identify countries that are in very severe conditions. So we, World Bank, have already done operations in Lebanon, in Egypt, in Tunisia, in East Africa. And so the World Bank is acting very quickly, and I think that's what's needed during emergencies. But the immediate problem right now is shortage of natural gas means there's a shortage of fertilizer and a shortage of next year's crops.

Ian Bremmer:

Yeah. This year we have enough food, but it's not well distributed. Next year, we're looking at an actual food shortage. Give us your best sense right now, and I understand this is an imperfect science, of what kind of a shortfall you think we could be expecting in 2023 and what that will mean for global hunger, compared to a typical year.

David Malpass:

There are a lot of variables. One is some countries have massive storage. So if they decide to release or reduce somewhat their storage, China and India are two, and the United States has storage, that will be enough to smooth or to help smooth conditions next year. So that's one variable. Another big variable is the weather in various parts of the world. South America's had a drought that reduced their production, and they're one of the swing producers in the world. And a big, big variable is the US itself, because it's the world's biggest economy. So the actions taken in the US to create either more energy or more foodstuffs are material in the world. So it's very hard to say, one year from now, where the shortages will be.

I want to come back to Ukraine itself. I met with President Zelensky in Munich. We moved very fast in March and April with World Bank resources for Ukraine to keep the administrative functions of their government running, and then quickly used all of our various tools within the World Bank group to make available channels for other countries to support Ukraine. So we've been the biggest conduit for the support coming in from the United States, from the UK, from the European Union, from Japan and others in making resources available. We've dispersed, just since those initial March and April disbursements, we've dispersed $11 billion to the various functions of the Ukraine government, with more every week.

And so this is a big effort. It's made possible by the relationships and the legal documentation and so on that's available to the World Bank, and we've been pleased to do that. We have our annual meetings next week, and one important meeting at that will be with the Ukraine-focused meeting with donors in looking at the rebuilding effort. The bank did a major assessment of the damage in Ukraine, which came out last week, showing some $350 billion of damage already, plus $150 billion of ongoing needs in Ukraine. So we're working hard with all the partners, and it will be important for the world community that's interested in rebuilding Ukraine to come together in a structured format to do that. I think people are trying to put that together, but there's a lot of different threads going on.

Ian Bremmer:

Now, we've talked so far mostly about hangover from this continuing Russian invasion and war in Ukraine. We haven't mentioned, I haven't mentioned yet, COVID. But Biden says the pandemic is over, but of course in China that's certainly not true. How much is the reality of the pandemic still impacting global supply chain resource availability for the poorest countries? And how's the World Bank responding?

David Malpass:

We know China really had very strict lockdowns in the second quarter, so their GDP on a quarter over quarter basis, annual rate, went negative 2%. So that's a sizable shrinkage that disrupted global supply chains. They've loosened that somewhat, but there's still lockdowns going on. So that's one of the big impacts, is the world's second biggest economy has had a later cycle with COVID than the rest of the world. They're looking at vaccination techniques, and I'm optimistic that the fourth quarter, later this year and into next year, their supplies will be increasing. Also, the world is diversifying from China as the critical supplier in so many areas, and so that gives some prospects going forward. Rest of the world I think is still suffering rippling outbreaks of COVID that are disruptive and should be taken very seriously. We've set up at the World Bank, with leadership from the US and other countries, a major new trust fund called the PPRFIF. That's the Pandemic Preparedness and Response Financial Intermediary Fund. And the reason I give you the name for that is you'll be hearing about it. It's large, and it will be trying to work with countries so they prepare better for future crises.

Ian Bremmer:

Okay. Well, thanks for humoring me on hitting COVID for a bit. We'll go back to Ukraine. So there's no question, Ukraine is getting an enormous amount of attention, and increasingly getting an awful lot of money. I want to ask you honestly, when there's this much attention to a conflict that is this damaging, does it take a lot of the air out of the room? Does it make it harder to get the kind of funding that you need for all the other challenges that aren't driving the headlines right now in developing countries?

David Malpass:

There is some of that, but not as much as you might think. For one, the bank is large and staff are working on lots of areas continuously. And so I don't feel at all that we've taken eye off of the food crisis in Africa, of the climate change crisis going on around the world. I would put more emphasis, Ian, on that problems are still coming off of the Ukraine war. It means Europe, for example, is probably in recession, and it's hard to dig out of that. So the impacts on the rest of the world are coming from the deep slowdown that still is underway. We're worried about it turning into a world recession next year because of the combination of inflation rate hikes, supply chain disruptions, and the actual cutoff of resources from Russia. All of that goes into concern about 2023.

Ian Bremmer:

Well, at this point, would you say that you think it is more likely than not that the world will be in recession in 2023?

David Malpass:

I'd say 50/50 right now. One of the strengths is from the US, and that's important, because it's the biggest economy. If China comes out of its People's Congress, which is occurring now or in October, with strength, they will be having some degree of COVID rebound. Remember when most of the world did that in 2021? And it's conceivable China will be going through some of that in 2022. And those two are enough to pull global growth.

But the bigger focus that I have and the worry I have is development itself. Development is in crisis. Many of the countries, whether middle income countries or the poorest countries, are moving backwards in so many areas; in terms of education and health and food insecurity, but also in terms of capital flows. There's a capital outflow. One big number is the payment on debt by the IDA countries. That's the 75 poorest countries in the world that are the recipients of large World Bank grants. Their outflows, their payments on debt are $44 billion this year, which is more than all the world's development assistance resources. And so-

Ian Bremmer:

So they're moving backwards. They're literally moving backwards at this point.

David Malpass:

They're moving backwards in terms of cash on hand, in terms of new investment and the infrastructure maintenance that's so critical to keep things operating. And that's a big concern, because there's not really a world direction on how to deal with that. I've spoken and written about things that I think should be done, but I'm really worried about that situation.

Ian Bremmer:

So David, is it fair to say, yeah, China's getting a little better, Europe is getting a little, maybe significantly worse, but if we look at COVID and we look now at Russia/Ukraine, overwhelmingly the pain and hardship that comes from these global crises is being borne on the backs of the poorest countries in the world.

David Malpass:

That's right. That's multifaceted. That's the general inequality of the world, meaning most of the capital goes to the higher income countries. It's the adaptation problem. Many of the poorer countries are in areas hard hit by climate change, by drought and by flooding. And it's also the inequality or the difficulties that we saw in the distribution of vaccines. Recall the advanced economies wanted to be sure they had one vaccine for everybody. Actually, two vaccines, and then it was three, and then it was four, just in case they needed multiple vaccines. And it was very hard for us to get the vaccines to the developing countries. And so it's multifaceted, and my conclusion, or where I think we are at right now, is we have such a crisis in development that we need to be thinking about new pathways out. That means changes in global capital flows that will work better for new businesses, for weaker countries within the capital flow structure. But that also means rule of law that will work better for the countries themselves.

Ian Bremmer:

David Malpass, thank you very much.

David Malpass:

Thanks, Ian.

Ian Bremmer:

That's it for today's edition of the GZERO World Podcast. Like what you've heard? Come check us out at gzeromedia.com and sign up for our newsletter, Signal.

Announcer:

The GZERO World Podcast is brought to you by our founding sponsor, First Republic. First Republic, a private bank and wealth management company, places clients' needs first by providing responsive, relevant, and customized solutions. Visit firstrepublic.com to learn more.

In a world upended by disruptive international events, how can we rebuild? On season two of Global Reboot, a foreign policy podcast in partnership with the Doha Forum, FP editor-in-chief, Ravi Agrawal engages with world leaders and policy experts to look at old problems in new ways and identify solutions to our world's greatest challenges. Listen to season two of Global Reboot wherever you get your podcasts.