[New Year Interview] iConGreen "This Year's Global Economic Risks Are US-China Conflict and Trump's Re-election"

2024 Economic Diagnosis Expert Interview ①
Barry Eichengreen, UC Berkeley Professor
Geopolitical Conflict Risks... "Disaster" if Trump Wins
US-EU Soft Landing Probability Two-Thirds... Inflation Cooling
Korea Must Strengthen Loan Regulations to Solve Household Debt
China Faces Costs from Real Estate and Debt... 4% Growth Rate

"The biggest risk to the global economy this year will be the geopolitical conflict between the U.S. and China and whether Donald Trump is re-elected as president."

Barry Eichengreen, a distinguished scholar in international economics and finance at UC Berkeley, stated in a written interview with this publication on the 3rd, "The geopolitical conflict between the U.S. and China will have serious and unpredictable effects on the global economy." He identified the deepening rift in U.S.-China relations as the greatest risk, over the possibility of recessions in the U.S. and Europe.

He also pointed to the outcome of the upcoming U.S. presidential election in November, specifically whether former President Trump is elected, as a key variable that will determine the direction of the global economy. He expressed concern that a second Trump administration would be "a disaster for the U.S. and the world economy."

Professor Eichengreen also cited the debt crisis as one of the global economic risk factors. He particularly expressed concern about developing countries facing economic difficulties due to rapidly increasing debt repayment burdens amid high interest rates, emphasizing the need for swift resolution. Although advanced countries have seen rising debt ratios following the COVID-19 pandemic, he believes there is still time to address these issues before they escalate into fiscal crises.

As a prominent Korea expert economist, he suggested that the only option to address the rapid increase in Korean household debt is "to prevent further growth in household debt through regulation."

We asked Professor Eichengreen about his outlook on the U.S. and global economy this year.

- What is the biggest risk facing the global economy in 2024?

▲ The most significant risk to the global economy this year is geopolitical conflict. Major geopolitical disputes between the U.S. and China will be another problem. These will have far more serious and unpredictable impacts than recessions in the U.S. and Europe. There is also the U.S. presidential election this year. I believe a second Trump term would be a disaster for the global economy.

- How do you view the possibility of a recession in the U.S. this year?

▲ I estimate the probability of a recession occurring in the U.S. and Europe this year at one-third, with a two-thirds chance of a soft landing. The world can survive a downturn. Inflation is gradually cooling down. Currently, it is around 3%, still above the Fed’s target of 2%, but it appears to be moving slowly in the right (downward) direction. The labor market is also slightly cooling, reducing the likelihood of wage-driven inflation becoming a problem. New job creation remains above 150,000 per month, consistent with a soft landing scenario (According to the U.S. Department of Labor, nonfarm payrolls increased by 199,000 in November last year compared to the previous month).

- When and by how much do you expect the Fed to cut interest rates?

▲ The Fed will be patient and wait until it has more evidence that inflation is continuing to decline. However, if a recession occurs in mid-year, the Fed will cut rates earlier and faster.

- There is an opinion that the Fed should raise its inflation target from the current 2% to 3%. What do you think?

▲ When inflation exceeds the target, it is not the time to revise the target. If we were setting the inflation target for the first time, setting it at 3-4% could give central banks more room to ease monetary policy during recessions. But since we already have a 2% target, we should maintain the current target to preserve the central bank’s credibility.

- How do you assess the growing global debt risk?

▲ High debt is an immediate and urgent problem for more than 40 low-income countries suffering from debt pressures. It will eventually become the most important issue for middle- and high-income countries as well. Currently, high-income countries have real interest rates and real growth rates that are nearly equal, so debt does not significantly hinder growth. However, if growth slows and real interest rates rise, high-income countries will also face immediate problems. That said, real interest rates are expected to fall back to pre-pandemic levels. Advanced countries still have time to properly manage their fiscal conditions.

- Korea’s household debt is at an all-time high. How should the government respond?

▲ The only viable option is to continue tightening regulations on household loans by banks to prevent further increases in household debt.

- What is the biggest risk to the Chinese economy?

▲ In the short term, China’s national debt and real estate problems will impose significant costs on the central government. The Chinese government must resolve bad real estate companies and recapitalize troubled banks. These measures require substantial resources, reducing funds available for productive public investment. In the long term, China must address structural imbalances in its economy. It needs to rebalance spending from investment to consumption and from exports to household spending. China has a "dual circulation" strategy aimed at reducing external dependence and increasing domestic demand, which it must implement.

- There are high concerns that China will fall into a recession. What is your outlook?

▲ China’s economy is sufficiently controlled for the government to manage a slowdown in growth. China’s economic growth rate will slow to 4% this year. Chinese monetary and fiscal authorities are taking various limited measures to support growth, which should keep the growth rate in the 4% range.

- How do you evaluate the U.S.-China high-tech supremacy battle?

▲ I do not think the U.S. can completely prevent China from continuously developing advanced semiconductors and other high-tech products and services design and production capabilities. However, by restricting China’s access to advanced semiconductors from U.S. Nvidia and advanced semiconductor equipment from the Netherlands’ ASML, the U.S. can slow China’s development pace. How much and how long China’s progress will be delayed remains to be seen.

About Professor Barry Eichengreen

Barry Eichengreen, professor of economics at the University of California, Berkeley (UC Berkeley), is recognized as a leading scholar in global monetary and financial systems. His research on the Great Depression is known to have significantly influenced former Fed Chairman Ben Bernanke’s monetary policy. He is also a prominent Korea expert economist. During the 1997-1998 Asian financial crisis, he served as the IMF’s senior policy advisor and co-authored "The Korean Economy: From Miracle to Sustainable Growth" in 2012.

◆ B.A. in Economics from UC Santa Cruz ▲ M.A. and Ph.D. in Economics from Yale University ▲ Professor of Economics at UC Berkeley ▲ Former Senior Policy Advisor at the International Monetary Fund (IMF) ▲ Research Fellow at the National Bureau of Economic Research (NBER) ▲ Chair of Advisory Board at the Peterson Institute for International Economics ▲ Recipient of the Schumpeter Prize from the International Schumpeter Society (2010) ▲ Named one of the "100 Most Influential Global Intellectuals" by Foreign Policy (2011)

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