Weekly Blogs

Blog Week 4 - January 2023 - 30-01-2023

The year ahead 2023 for Europe

Because it’s cool to make predictions at the begging of the year, here at MLI we propose to look back at what has happened in the past year and make suppositions on what will be the main drivers of 2023 in a series of four episodes called “The year ahead 2023”. We will look at business, politics and international relations of the main markets: China, United States of America and Europe. The last of the four episodes will concern our beloved country of Malta.

We cannot talk about the prospect for 2023 for Europe without a deep analysis of the energy shock as a consequence of the Russian war on Ukraine. Russia is using energy as a weapon for blackmail and therefore in any event whether it’s a partial cut-off of Russian gas or total cut-off of Russian gas, Europe needs to be ready.

We are in the middle of the greatest energy shock in fifty years, in fact 2023 marks the 50th anniversary of the original oil shocks of the early 1970s. This is a more powerful and potent shock because the world is much more interconnected and globalized. Europe had an energy crisis before Russia’s invasion of Ukraine. Last winter was a winter with already high energy prices. Europe’s energy markets were restructured and organized poorly and with excessive reliance on natural gas that crisis bill was made much worse and taken advantage of by Russia, using energy as a weapon and so in effect the small crisis in Europe has become a global crisis as Europe is now consuming a huge amount of liquefied natural gas.

Before the Ukraine invasion much of Russian gas came to Europe through North Stream 1 and North Stream 2 gas ducts. Liquefied natural gas (LNG) is gas cooled and pressured so it becomes liquid. Most of LNG commerce was done between US and Asian countries by huge ships. Those cargos were redirected at very high costs from US to Europe and that has sent global natural gas prices much higher. Thus, Europe is also depriving developing countries that had hoped to have that LNG, because they have been priced out by Europe. 

Overall, since the war began, the world has been burning more fossil fuels. On the short term, coal is enjoying a boost which is not great in terms of the climate, being the dirtiest of fossil fuels. Most recently The Global Carbon Project, which is an outfit of climate researchers and data analysts worldwide, came out with their annual report and it showed that in fact the global picture is not as grim as it might seem. 2022 is projected to see a 1% increase in CO2 emissions as a result of fossil fuel consumption. COVID made things a little bit messy: there was a drop of 5% in CO2 fossil emissions in 2020, that rebounded in equal measure in 2021, now this 1% increase compares to the average 3% increase that we have seen every year in the 2000s, so there is a slowdown.

The International Energy Agency is talking about fossil fuel emissions peaking in 2025, which looks plausible despite the fact that Europe are suddenly burning lots of this cheap dirty coal as a way to make up for the lack of Russian gas. What we’re seeing is a short-term response to the war in the energy crisis, but a long-term signal that is very much committed to decarbonization through what EU politicians call the Green Deal.

So far there is a mild winter in Europe and EU governments did a very good job of filling their storage units of natural gas. EU will not run out of gas this winter on all forecasts however that’s not good news because what this creates is a much bigger gap to fill for next winter should the war continue. Some smaller countries in Eastern Europe that are far away from where the liquefied natural gas facilities tend to be located on the western shores of Europe as well as the big countries like Germany and Italy which are heavily reliant on gas for their particularly industrial infrastructure, those are the most vulnerable. European governments have introduced subsidies, price caps, bailouts and other means of government coming into the marketplace to protect consumers and taxpayers from the high price of energy. EU governments have spent well over €500 billion already.

 

The mild winter also means Europe has used around 20% of gas that it used so far last year, well below its refuelling capacity. Gas like oil, has to be stored. If not consumed, gas units go full and the world demand goes down really quickly. This drives prices down. This January we [pare seeing prices of natural gas go below pre-invasion prices. The bad news is EU filled its tanks during last summer when prices were large, as seen in the figure.

One way to look at the war in Ukraine is that this might be a turning point in the way we consume energy, that this will accelerate the clean energy transition. This time, the calls aren’t just coming from climate activists or climate scientists, but the message for transition is backed up by politicians. There is also the economic reason to do it because it’s now cheaper to use renewable than fossil fuels and there is a geopolitical reason which is that even if Russia cuts prices, European don’t want to buy its gas anymore.

Now, let’s turn away from energy and let’s dive into EU’s trade relationship with US and China. “If you can’t beat them, join them!” This is the rhetoric that the US is using in its relation to China. China for the last twenty years has helped its businesses with government money and subsidies, a policy that US and EU have condemned continuously. In late last year, Joe Biden has signed the Inflation Reduction Act (IRA), a bill that does exactly what US governments have fought all these years: helps businesses that produce in US. IRA is the largest green bill US has had in its entire history. The bill subsidizes the production of electric batteries, new technologies for future fuels like hydrogen, but only if these are produced on American soil!  

So right now, both China and US are heavily subsidizing innovative industries. EU’s car manufacturers and renewable energy companies are lured by government money to open new production facilities away from Europe.  EU is left alone in this game and has no choice but to help its businesses fight this game. France’s president Macron has announced that EU will have to come up with a subsidizing bill of their own if they do not want to loose private investment to US. Maltese president of the European Parliament, Roberta Metsola calls this “EU’s first trade war with US”. Unless American politicians do not create exceptions for EU-produced products, in the following years we will see hundreds of billions of subsidies targeted towards companies on both sides of the Atlantic to lure them to produce and innovate on American and European soil. From an economic point of view this will be a zero-sum game, that will lead to waste, loss of competition and companies more dependent on politicians and government, in a nut shell – not good for business!

In the end, we would like to also point out some worrying long term trends that will continue to become worse in the following years. These are very complex subjects that need their own blog entries.

 

1.       Europe is getting older! Birth rates are at all times low across the EU. Absolutely in all countries of EU, people are getting married less and at older ages and they are making babies less at higher ages than ten years ago. This is putting a great weight on the population pyramid. As health care technology advances means older Europeans will live longer and the deficit of healthcare personnel and doctors will get deeper.  

2.       Europe is getting lonelier! A high incidence of single households is now a mark of a wealthy society. This is partly a consequence of avoiding or delaying marriage and childbirth, and of single housing becoming more affordable, but it has serious implications on mental health. 

Thank you for reading. We hope you enjoyed this week’s blog and we would like to hear your thoughts in the comments below.


Dr. Ovidiu Tieran – Lecturer MLI

Blog Week 3 - January 2023 - 23-01-2023

The year ahead 2023 for United States of America and the Dollar

Because it’s cool to make predictions at the begging of the year, here at MLI we propose to look back at what has happened in the past year and make suppositions on what will be the main drivers of 2023 in a series of four episodes called “The year ahead 2023”. We will look at business, politics and international relations of the main markets: China, United States of America and Europe. The last of the four episodes will concern our beloved country of Malta.

Politically speaking 2022 was an interesting year in the United States of America. In November, citizens went to the poles for the Midterms and ended the federal trifecta (a term used when one of the parties, in this case the Democratic Party, wins the presidency and has a majority in both House of Representatives and Senate), with now the House of Representatives in Republican narrow control. President Joe Biden has limited the losses of his party through some quite questionable policies. First the government tried to erase student debt, but it got stuck in courts. Secondly, the government fought high inflation by realising in the market the Federal Oil Reserves, to keep prices down at the pump. The much anticipated “red wave” (Republicans use the colour red and Democrats use blue) never came, Democrats still hold the Senate, but the Republicans won the House of Representatives. But Republicans are very divided among themselves; there is the moderate wing of the party and there’s the hard conservatives (mostly Trump loyalists), so the House needed an unprecedented 15 rounds of ballots to elect its speaker, to the delight of Democrats who brought popcorn to the House floor.

 

American politics is deeply divided and it will stay that way in 2023. Donald Trump announced he will run for president again, but he is involved in a personal scandal around his lack of transparency concerning his tax returns. Most of candidates he backed up in the Midterms lost the election and there’s a new star rising among the Republicans in the person of Governor of Florida Ron DeSantis. On the other side of the aisle, Joe Biden is also surrounded by controversy with some top-secret files found at a former office and his garage. He will have to work close with Republicans in the House to pass legislation, especially military help to Ukraine. The division at top level of government is also seen at state level, with more states than ever controlled by one party (state trifectas) and at individual level (attitudes towards discrimination or prejudice)

In terms of the economy, let’s start with the big picture: in 2022 central banks raised rates very aggressively and they’ve all been doing it at the same time and that’s unusual by the standards of recent years. Last year, 34 out of 37 of the largest economies’ central banks increased rates. China, Japan and Turkey did not.

Before the pandemic the world was in a situation where interest rates were at rock bottom for a long time and not going anywhere. The pandemic made things even worse. The fear of hard lockdowns and strong declines in consumption made governments flood the market with extremely cheap money, through close-to-zero interest, checks in the mailbox, subsidies for businesses. This concept is known in economics as “helicopter money” – as if the governor of the central bank was flying over Valletta and throwing money to citizens. Imagine that!

After 20 months of free money (March 2020 – January 2022) inflation picked up rapidly, ending 2022 at levels between 7 to 12% in most developed countries. Relative to how high inflation is though, it’s unusual how little central banks have managed to raise interest rates by historical standards. When you look back at the 1970s and 1980s what was done to fight inflation back then by the textbook rules that economists use, when thinking about how much you have to raise interest rates in 2022, rates haven’t gone up that much. In retrospect, the pandemic marked the end of an era of unusual low inflation and unusual low interest rates, so now central banks are back to their scheduled programming where they raise interest rates to slow inflation. But increasing interest rates makes money more expensive, which slows consumption and hurts business growth.

 

So, is it possible to bring inflation under control without causing a recession? Does this make recessions absolutely inevitable? Typically, the record of the Federal Reserve in America, which is the central bank that’s the most important globally, it that when it raised interest rates it did cause an economic downturn and often a recession. Historically there are other central banks achieving the so-called “soft landing” (increase of interest rates to slow inflation, but no recession), for example United Kingdom achieved this in the in the late 1990s. Unlike America, it didn’t have a recession then but it wasn’t starting from a point of high inflation like it is today.  What makes a recession likely in many places is the extent of the inflation problem, not just the fact that central banks are raising interest rates to the right extent. 

Will America have a recession in 2023? The truth is that we don’t know that we’ve been in a recession until months after the fact. First, we have to define the concept of recession. In UK and EU, the convention is that if we have two consecutive quarters of negative quarter on quarter growth that counts as a recession. In America, the National Bureau of Economic Research looks at a range of data from the economy and the labour market and then makes the decision that the economy went into recession and that judgment is made months after the start date of the recession itself. Then the convention about global recession is different as well; when GDP per capita growth is negative that’s when the world economy is in recession. The world just hit 8 billion and we’re expecting global population growth of about 1% in 2023, so global growth would have to be below 1% and that would count as a global recession. The World Bank estimated global GDP growth at 1.1% in 2023.

Economist forecast that in America the recession will be quite mild compared to the one in Europe. Besides the fact that the economy is incredibly hard to predict, at the moment America is in the stronger position than Europe because America doesn’t have the energy crisis. In America, the downturn will happen because of the extent of the inflation problem which is homegrown. This means the Federal Reserve has to slow the economy quite dramatically and the question is can it do that without causing a recession.

 

Households’ consumption is really strong because of the savings people built up during the pandemic because of the stimulus that was injected has left people’s personal finances in good shape and then secondly the labour market is starting from a position of strength. What we see today is the tightest labour market in decades in America; there are two open job openings for every one person on unemployment insurance right now. In 2023 there will be some balance being restored to the labour market not because the supply of workers is going to increase, but because the demand for them is going to decrease. 

The Federal Reserve has been very aggressive over the past year and raising interest rates. In 2023 we will begin to see a concrete downside from all that tightening and there’s already hints that consumption is beginning to slow. The property market has been hit pretty badly, but that will begin to spill over into the economy more generally and that will then lead to companies doing less hiring and potentially doing more firing. The big question is whether or not the job market will be able to come into balance without having a big increase in unemployment. The optimistic case is that because demand for workers right now exceeds supply, theoretically companies should reduce their hiring without the unemployment rate rising significantly. The pessimistic case is that the job market is much more complex than that, so the employees aren’t necessarily in the right places to do the jobs that need to be done and so when companies limit hiring that will translate into higher unemployment.

 The unemployment rate of 3.7% today might rise to roughly 4.5-4.7% by the end of next year that might sound like a relatively minor change, but in aggregate numbers that means a million to a million and a half Americans might lose their jobs next year. It’s less severe than previous recessions, but that is the reality of the central bank actively trying to cool the economy. Unfortunately, the theory states that inflation is negatively correlated to unemployment. We are already seeing the tech sector being hit by a wave of layoffs. Microsoft, Amazon, Meta, Twitter, Tesla and others have announced or already started laying of 60,000 jobs in the past six months. A lot of tech firms expanded very rapidly during the pandemic; there was lots of hope and huge amounts of growth coming from technology and IT.

In the title, we also added the “the Dollar” as increased interest rates in America have global implications. When the Federal Reserve keeps the interest rates close to zero, investors look all over the world to place their dollars in riskier assets with higher interest rates, for example bonds of emerging economies or frontier economies. When the Federal Reserve increase rates, there is a “drainage” of dollars back home as no economy is safer than America’s. That means there are fewer investors willing to risk their dollars for investing in emerging and frontier economies, which drives the cost of borrowing for these countries.

A strong dollar always impacts the emerging world. Their debt burden increases because their debt is either dollar nominated or linked to the dollar. Let’s say an emerging country has 20% of GDP in tax revenue (many emerging economies have much less than that), but needs to pay 10% in interest payments which used to be 5%, just because of a strong dollar and interest rates moving. In the pandemic the Federal Reserve kept interest rates at 0.25% and in March 2023 they will probably go up as high as 4.75%.

Higher rates in America makes the dollar more attractive to investors, so it gets stronger relative to other currencies, so if their debt is in dollars, this debt gets harder to repay. Over the past decade, a lot of middle-income countries become more robust to movements in currency markets because they have limited their borrowing towards local currencies rather than dollar denominated debts. The countries that are really vulnerable tend to be in the poor world especially in Africa and in 2022 countries like Zambia run into problems as it has less fiscal capacity to raise government income. Although these countries tend not to be systemically important for the global economy nonetheless, they’re running into economic trouble is causing a lot of human suffering.

Also, lots of agricultural commodities are denominated in the dollar and energy of course is denominated in the dollar, so cost of imports is growing up. People living in countries where food is being imported may have seen increases in 2022. If we add the energy shock to the mix, that’s when currency weakness starts to be a problem.

 

Next week we will talk about the energy crisis in Europe and more about a piece of legislation singed by Joe Biden into law that has profound implications for EU and China: The Inflation Reduction Act. We hope you enjoyed this week’s blog and we would like to hear your thoughts in the comments below.

 

Dr. Ovidiu Tieran – Lecturer MLI

Blog Week 2 - January 2023 - 16-01-2023

The year ahead 2023 for China

Because it’s cool to make predictions at the begging of the year, here at MLI we propose to look back at what has happened in the past year and make suppositions on what will be the main drivers of 2023 in a series of four episodes called “The year ahead 2023”. We will look at business, politics and international relations of the main markets: China, United States of America and Europe. The last of the four episodes will concern our beloved country of Malta.

China is the largest economy in Asia and the second largest in the world. China had a rather complicated year, it had to relax Covid restrictions and it faces slower economic growth and rising geopolitical tensions with US. As president Xi Jinping starts his third 5-year term the year 2023 looks uncertain for China. Will its healthcare system cope with a massive wave of Covid cases as a result of relaxing restrictions? Are China rapid days of economic catch-up over? How might the war in Ukraine change the way China thinks of Taiwan, the democratic island China declares it’s historically its own?

 

The Covid pandemic started in China in early 2020. For two years the government has enforced the Zero Covid policy which allowed China to have one of the smallest death rates among very populous countries as well as steady economic growth. They achieved this through intensive testing, travel restrictions and hard lockdowns when needed. The Zero Covid policy worked fine until Omicron variant came along. This very transmissible variant forced more and more individuals to be locked up into isolation centres or in their homes. Starting November, the frustrations towards Zero Covid turned into protests and then full-blown riots in some major cities. So, the government stepped down and relaxed the restrictions gradually although from a propaganda point of view this is a major drawback as the president himself stood behind the Zero Covid policy.

But experience from other countries that have exit from Zero Covid policies shows that a country needs months up to a year to prepare for such a shift in policy. China has rushed preparations into a matter of weeks. Second, China is not using mRNA (messenger RNA) vaccines as the countries in the West use. Although its vaccines do prevent hard cases and death, they are still not as efficient as mRNA vaccines.

The fact that China is stepping down from the Zero Covid policy will have the following implications for the region in 2023:

1.       Chinese tourists are very important for Thailand, Cambodia, Vietnam, and even more exclusive and expensive destinations like Japan and Australia

2.       Although there is optimism that relaxing restrictions will create more consumption and will stabilize the overstretched supply chains, a quick spread of Covid will cripple the Chinese economy and break down supply chains in manufacturing as we have seen in the beginning of 2020

3.       From a geopolitical point of view, there’s a weakening of Xi Jinping’s position right at the beginning of his third term, as he had to abandon Zero Covid. Usually when there is trouble at home, leaders seek to distract attention with ideas abroad and that may worry the countries in the region.

Zero Covid policy was not the only economic headache of the Chinese government. China faced other economic challenges; it’s dealing with a crisis in the property sector which accounts for a huge part of the economy around 20% of GDP that was precipitated by a crackdown on the excesses of the property industry and some of it was well-intentioned. It was an attempt to ensure that developers had healthier balance sheets, but it also forced a lot of them to stop borrowing and sell down assets and limited their ability to continue building. The slowing down of the real estate industry is also having an important toll on local budgets of municipalities. The number of land deals made between municipalities and real estate developers decreased by 25% in 2022.

Also, the government over the past couple of years has cracked down on the tech sector giants and it’s really gone after big names like Tencent which is a big gaming and social media company and Alibaba which is the largest ecommerce company. These companies were gold mines for investors for years and then suddenly the government was laying down these new blueprints to reshape their industries and that’s worrying external investors. The government is rewriting the rules for how the economy works and it has sketched out this vision for a more socialist state-controlled economy. The Communist Party will have more of a say in how businesses are run and this will continue to really dent the dynamism of the private sector.

Another important fact is the demographic challenge that China faces in 2023. India will probably overtake it as the most populous country in the world the more important point is that for years China’s workforce has been shrinking which is not great for economic growth and it puts a huge burden on young people. If one looks at the birth rate it’s well below what is needed to keep the population stable, and what is needed to have it growing again. India will probably become the most populated country in the world in April 2023 when each will have 1.4 billion inhabitants (2.8 billion out of 8 billion worldwide, that’s 35% of the whole population is just two countries!).

All of these factors that are slowing down Chinese growth have economists think that China’s economy may now never overtake America’s in size something that was once seen as inevitable. It is very unlikely that China would continue to grow at anywhere between five and ten percent per year while the population was declining. China also has a debt problem to contend with and that’s going to make things even more dicey, but even with growth of two to three percent a year China could still become the world’s largest economy, but this will happen much further into the future. Even if China does overtake America’s economy in this sense America would still be much more prosperous and productive on a per person basis. The openness of the American economy, the dominance of the dollar would likely mean that America will maintain more influence than China.

 It doesn’t even matter if or when China’s economy overtakes America’s in size, the problem with China’s rise and the reason why it causes so much alarm in the region and in the world is about how China wields its power. For twenty of so years China was growing at a remarkable pace and that was very good for the global economy. But now a days, the Chinese state has moved away from its past stance of fighting time and hiding their strength and they have come out to really use economic coercion to use this so called “wolf warrior diplomacy”, where they say “if you want do something that challenges what we consider our core interests, we’re going to use our economic strength to punish you for that”.

 When it comes to foreign policy one of the big questions is how Russia’s invasion of Ukraine might change China’s calculus on Taiwan. As China grows stronger, as it modernizes its military the risk increases but yet the war in Ukraine is obviously going to affect its calculus. The hope in America and Taiwan is that China will see how Ukraine has become this sort of unexpected surprise for Russia. Probably officials in Beijing will draw comparisons and think that taking Taiwan is a much riskier bet than they have thought. China’s generals already think it would be a pretty risky bet maintaining a maritime invasion across 160 kilometers of water (the Taiwan strait) isn’t an easy thing especially not if America gets involved. Joe Biden has promised that it would get involved and the generals in Washington really hope that the war in Ukraine sends the message to Taiwan to show a greater willingness to defend itself, to increase its military budget and adopt better strategies.

Taiwan is adopting a “porcupine” strategy that would make it hard for China to digest and that would involve it using more mobile and concealable defensive weapons especially missiles that could be used against ships and planes. But to this point Taiwanese generals seemed to prefer fancy jets, ships and submarines that would probably get blown up in the early stages of a war with China.

Politically speaking, China has changed over the past decade; it’s become a lot more nationalistic than it was ten years ago. The president craves unification and he has placed a great deal of emphasis on it as he sees Taiwan drifting away from the mainland Taiwan is a vibrant democracy led by a president from a party that favors independence. Taiwan is much more prosperous than the mainland on a per person basis and its people enjoy many more freedoms.

When the war in Ukraine started, there were questions about whether Taiwan would be the next Ukraine. If one looks at the public opinion polling there is very strong Taiwanese identity and only a tiny minority of people who are still pro unification, especially after seeing what happened to Hong Kong in 2019 and after seeing how the Communist Party has governed, one may believe public opinion in Taiwan is more resistant to Communist Party rule than ever.

In Taiwan there’s this sentiment that the chip industry is the silicon shield that protects the island. It makes Taiwan matter on the global stage and if people won’t fight for Taiwan’s democracy they will care about their iPhones. 90% of the most advanced chips in the world are being made in Taiwan. But, TSMC (Taiwan Semiconductor Manufacturing Company, the most valuable semiconductor company) is building factories in Arizona and is moving workers to America. A growing number of other Taiwanese companies are also moving to America to revitalize manufacturing after the Inflation Reduction Act, a piece of legislation that we will discuss next week when we talk about North America.

Taiwan is not the only international relations headache of China. It also shares a border with North Korea, the most isolated country on Earth, who’s leader has nuclear weapons ambitions.  If Kim Jong Un, the dictator of North Korea will test another nuclear weapon, the first since 2017 the question is what China would do about it. The odds are that it won’t do much and this will test relations between the US and China further more. In the East China Sea, China claims the Senkaku islands which are controlled by Japan and it also wants to dominate the South China Sea where it clashes with other island nations like the Philippines.  

Another leftover from history which actually goes back to the start of the 20th century is a disputed 3500-kilometer-long border between China and India and it’s certainly the case that neither side wants to see conflict there. President Xi Jinping has enough on his plate not to add another challenge or problem to his already significant pile meanwhile Prime Minister Narendra Modi of India knows that India would be outgunned up in the Himalayas. Nevertheless, incidents have a tendency to keep happening: in 2020 there was a deadly high-altitude brawl in which two dozen soldiers Chinese and Indians were killed above a river gorge not using guns but bats and rocks. The border is so sensitive that day-to-day soldiers are not armed. In early December 2022, there was a similar but less bloody incident.

 

Thank you for the patience to read this long analysis. We would like to hear your thoughts in the comments below and I hope to see you around and read the next episode on United States of America.

 

 Dr. Ovidiu Tieran – Lecturer MLI

Blog Week 1 - January 2023 - 4-01-2023

Erasmus+ visit from Lithuania

Smilte Juarite
Dr Smilte Juarite - Lecturer at University of Kaunas

 

This week, Malta Leadership Institute had the pleasure to welcome Dr. Smilte Juriate, Head of Marketing and Communication Division at University of Kaunas, Lithuania. The School of Business and Management already had seven Lithuanian students in the Erasmus program since September this year.

During the two day visit, Dr. Smilte Juriate together with the seven students had meetings at the Chamber of Commerce, SME Chamber and Malta Employers’ Association. These two meetings were very interesting as they gave insight to the students of the difficulties that Small-Medium Businesses were encountering. These visits were
part of the module that the students were undergoing on the same topic. They were accompanied by the Principal of the Institute and Lecturer, Mr Jesmond Friggieri. 

In the evening, Dr. Smilte Juriate and Dr Ovidiu Tierean, a full time lecturer at MLI, had a conjoint presentation entitled Personal Branding. Students and guests alike found out more about how  individuals can profile themselves compared to establisd businesses, how to craft their brand carefully in the very busy information environment and trends for personal branding in 2023.

Dr Ovidiu Tierean - Lecturer at MLI