“The wars in Ukraine or Gaza have little impact on the economy” – L’Express

The wars in Ukraine or Gaza have little impact on

A war has been raging on European soil for more than two years, the Middle East is at risk of conflagration and globalization is turned upside down, called into question in particular by the tense relations between the United States and China. However, the global economy is holding up, notes Samy Chaar. The chief economist of the Swiss private bank Lombard Odier delivers his analysis to L’Express.

L’Express: Conflicts in Ukraine and the Middle East, trade wars… Should we be worried about the global economy?

Samy Chaar: Let’s start with the facts. Geopolitical risks are likely to be transmitted to the economy through two channels: energy markets on the one hand, and value chains on the other. However, today, the former are not sending a negative signal – oil prices are not soaring – and the value chains are operational, whether to produce goods or transport them. The situation is certainly not perfect, given the disruptions in the Panama Canal or the Red Sea, but overall goods arrive without too much delay to consumers, and at a price which remains competitive. It is also quite incredible that such significant conflicts in the world ultimately have so little impact on the economy and finance. And the reason lies in the fact that these two transmission channels, ultimately, were little affected.

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How do you explain that the energy markets are not reacting more?

Something has fundamentally changed in the last ten years compared to the oil shocks of the 1970s, when geopolitics had a huge impact on these markets: the Americans have become the largest producer on the planet. They went from 6 million barrels per day around fifteen years ago to 13 million today, due to the exploitation of shale gas and oil. Obviously, this raises a lot of questions on an ecological level, but in terms of economic efficiency, it is very powerful. The Americans anticipated that energy markets would be disrupted by geopolitics one day or another.

Today they are preparing for another disruption: technology and microprocessors. The United States is repatriating this industry to its soil and spending a lot of money to achieve this with the Chips Act and the IRA, which the financial markets welcome.

At the same time, the Europeans are finding other sources of energy to secure their energy supply. Historical producers – the Gulf, Russia, etc. – therefore find themselves not only shaken up by new entrants but also by low-carbon, renewable and nuclear energies, whose capacities are increasing. Energy markets are therefore less disrupted by geopolitical reality. And these factors are lasting. Americans have the capacity to produce more in the years to come. And ideally, Europe should invest much more massively in carbon-free energy.

You still have to have the means. Isn’t public debt a major obstacle to this ambition?

The last three decades have been marked by multilateralism and a form of budgetary discipline, although sometimes transgressed. My feeling is that given this new geopolitical reality, we are moving into a world where it is necessary to protect our domestic market. Achieving this requires investment, and therefore a certain amount of budgetary flexibility. The last to recognize this paradigm shift and to act are the Europeans. The Chinese and Americans have already pivoted. Can Europeans afford to be the last to believe in liberalism and budgetary dogmatism? This is the big question, because once again, protecting your domestic market requires reorganizing value chains, repatriating strategic industries, in the pharmaceutical or microprocessor sectors. In Europe, we tend to think that we have no room for maneuver, due to high deficit levels, whereas in the United States this parameter is less overestimated. And the markets reward those who make long-term investments.

READ ALSO: American protectionism: “China is in total denial”

Freight prices have risen sharply since 2023. Is this a cause for concern?

Note that we are very far from the shock experienced three years ago, when the price of transporting a 40-foot container, the normal price of which is around $2,000, rose to $16,000 with the crisis. of Covid. By the end of 2022, it had fallen back to $2,000. It is currently hovering around $4,000. It must be said that ships can no longer pass through the Red Sea and the Suez Canal, and must transit through the Cape of Good Hope. That’s ten days more transport, a little more oil, and that is reflected in the prices.

Looking more closely, we see above all that the increase in the cost of freight from Chinese ports is faster than that observed in Europe or the United States. It is possible that Chinese exporters are anticipating the increase in customs tariffs that will occur if Donald Trump is elected. It would therefore be one-off, but the hypothesis needs to be verified.

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Is Trump’s return to the White House likely to change the balance you describe?

We tend to pit Biden and Trump against each other a lot. Above all, I find that there are blatant similarities between them, particularly in terms of these two elements: the desire to maintain this narrative of bloc logic, Beijing being the identified economic enemy, and the absence of intention to reduce deficits. In fact, on these two key elements, the styles are different, but the result will be quite similar. With Biden, we would be in continuity with chamber music in the background, with Trump, we would also be in a form of continuity, but with heavy metal. There is ultimately an American identity that transcends these two parties and these two styles. They also meet on the subject of energy.

That’s to say ?

We see that Biden, through the IRA, was not completely unfavorable to traditional American energy, that is to say shale. The system offers facilities for investing in extraction, because the question of energy independence is important for both camps. Republican states are also big beneficiaries of Biden’s investment plans.

READ ALSO: Raphaël Gallardo, economist: “Joe Biden’s results are excellent”

So what separates the two candidates?

There are big societal differences between them. Economically, the biggest – and ultimately the subject on which the election is played out today – is immigration. Trump has a restrictive migration policy, a factor in potential tensions on the labor market, because the American economy needs this available and cheap labor force. Biden does not completely hinder these flows. However, immigration policy has an impact on wage growth, and therefore ultimately, on inflation.

The United States is seeing its productivity increase, unlike Europe. What is missing from the Old Continent?

It is true that the Americans show greater economic velocity than what we can see in Europe. Structurally, we still observe the same obstacles to European development: lack of ambition in public investment, demography. Improving productivity requires more productive investments to develop capabilities in technology, energy and defense. If tomorrow Europe decided to double or triple its NextGenEU recovery fund, considering that it can be a public investment platform, the market would welcome it. But there is no political consensus today in Europe to move in this direction. There is a missed opportunity in not promoting more public investment.

But 2024 looks better than 2023. Inflation has fallen significantly in Europe, households will regain some purchasing power. All of this seems favorable to me in the short term for European dynamics.

But isn’t Germany slowing down this dynamic?

Germany has lost its business model, which relied on cheap energy, automobile production and the Chinese export market. Look at the British economy, which relied on the sale of financial services to Europe: since Brexit, they have been in a bit of a fog. This is exactly what is happening to Germany today. We hope it won’t take ten years to reinvent itself. Because during this time, it weighs on European decisions. What seems frustrating to us is that Germany would have the budgetary room to act.

READ ALSO: Can Europe create the next Nvidia? The chip industry is still looking for its strategy

Is this a dogmatic position?

When we are lost, we stick to what we know, in this case the levers which have made German success over the last 25 years. But this period is over, we must now make ambitious public investment plans. We can no longer seek to be an export champion when China and the United States are protecting their domestic markets.

Is China on the defensive?

She gets trapped a bit in this American narrative of block logic. But it must be remembered that the underlying agreement when China entered the World Trade Organization was to give it time to become an economic power while supplying the rest of the world with goods. cheap, before moving up the added value ladder and opening its domestic market to Western companies. But the Chinese had difficulty complying with the rules of the game. The Americans grew tired of this lack of reciprocity. Why would Huawei have the right to operate in the United States while Apple would not have access to the Chinese market? So relations have become strained and we find ourselves in a real trade war. However, supply is highly adaptable – American companies are developing production capacities in India, Mexico, Poland, the Gulf, etc. – while demand is much less so. It will be more difficult for China to diversify its sources of demand than for the Americans to diversify their sources of supply.

READ ALSO: Real estate in China: “There are still a lot of corpses in the cupboards”

What indicators do you particularly monitor?

In terms of economic performance, there are three simple indicators: unemployment, corporate profit growth, and current accounts – which include the public and private sectors. Compared to 2008, most major Western economies, including France, are either in current account balance or in surplus. So, yes, some States are perhaps not virtuous on the budgetary level, but this laxity is compensated, at the national level, by private economic agents – households and businesses – who are themselves very surplus in savings. We do not default when we have a balanced current account.

Everything can change tomorrow, but today, it is clear that the unemployment rate is at its lowest in thirty years in Europe and not far from the floor in the United States. The year 2024 looks better than 2023. Inflation has fallen significantly in Europe, households will regain some purchasing power. All of this seems favorable to me, in the short term, for European dynamics. We are also coming out of a season of rather favorable results for businesses. As for stress on the debt markets, it does not seem to me to be in sight.

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