Look Forward | Episode 15: IMF Insights: Economic Resilience and AI's Impact

View Full Transcript

Andrew Critchlow: [00:00:00] Hello, my name's Andy Critchlow. I'm head of news at S&P Global Commodity Insights, and welcome to the Look Forward Podcast from S&P Global. In today's rapidly shifting Markets success depends on anticipating what's next. The professionals who excel are those who can spot emerging trends before they fully materialize.

The Look Forward podcast delivers exactly that insights to help you prepare for tomorrow's opportunities and challenges. We bring you expert perspectives on macroeconomic trends, capital markets, energy transition, and global trade. With a sharp focus on what these developments mean for the decisions that will shape your tomorrow.

This podcast connects you with S&P global's Look Forward council bringing cutting edge research on long-term trends and transformative [00:01:00] market shifts. Together we are committed to providing the forward-looking intelligence you need to navigate uncertainty with confidence. Welcome to this episode of the Look Forward Podcast.

My name's Andy Critchlow. I'm head of news at S&P Global Commodity Insights, and I'm delighted to be joined today by Paul Gruenwald. Chief Economist at, S&P Global Ratings, and S&P Global, um, our chief thinker in actual fact on all things economics. And, Paul, you've been at the IMF meetings, um, recently.

Um, I've been at a few things in the city of London recently, and, and everyone. Who, who was there? They were all saying, well, we heard this at the IMF meetings, and we heard that at the IMF meetings, and I, like many of our listeners, was not there. So I'm relying on you to shed a little bit of light. What was the big theme that you took away from that?

Paul Gruenwald: Yeah, well the big, let's remember, this happens every six months. So there's a spring meeting [00:02:00] in April and there's the fall meeting or the big annual meetings in October. So our main takeaway was a sense of relief that the economic impact of the tariffs, was smaller, at least so far than we had previously expected.

Let's remember back in April that was. Right after the so-called Liberation Day tariffs had been announced. There was a huge amount of policy uncertainty coming out of the us. There were tariff rates we hadn't seen in, you know, since the depression or even, the late 19th century economists were marking down their forecasts.

We were less extreme than others. We didn't have a recession, but certainly. We were seeing lower growth, lower spending, lower confidence. And as it turned out, um, economists have been, economies have been pretty resilient. Consumers are still spending the impact of the tariffs, which is still feeding through, wasn't quite as bad, as we thought.

But I think the big takeaway for us was the, [00:03:00] the sense of relief that, you know, the system held better than most of us thought.

Andrew Critchlow: What does that relief actually look like in numbers? You know, where are you percentage wise, wise on growth this year?

Paul Gruenwald: Yeah. I'll use, I'll use the US an example. As an example.

The US is A, is a 2% economy. That's the sustainable growth rate. We came in, let's remember, we came into this year. A little bit hot. Growth was 2.9 in or 2023 and 2.8 last year, so we thought we'd be slowing to two. The first quarter, GDP actually tanked in the US but that's because we had a lot of front running for imports.

And imports are a negative number in GDP, we had a big bounce back in Q2, so first half of the year roughly came out at one and a half. Which is kind of the slowdown we were expecting. Anyway, it looks like the third quarter was another strong quarter, although the government has stopped producing data, so we don't have the final, word on that one.

But again, [00:04:00] it was, a little bit slower than we, than we, um, had last year, but certainly not the kind of devastation we were looking for. And then globally. Kind of think of a global growth rate. Three and a quarter to three and a half is where we've been for the last decade or so, and we're kind of around three years.

So moderate slowdown, but again, certainly not the, the deep recession that some people were looking for at the start of the trade war.

Andrew Critchlow: Where does China fit into that picture?

Paul Gruenwald: Yeah, well, China's still, um, numerically the largest contributor to global growth. Even though the days of 7-8% growth are behind us, it's now kind of a 4 or 5% story.

China alone is contributing more to global GDP than any other, countries. I guess there's a mixed story for China. I'm gonna do my, on the one hand, on the other hand thing. Now, I think the, the negative story is the. The property overhang and the structural overinvestment [00:05:00] model that China's never really managed to, shake.

It's still a, it's still a centralized model with, state banks, state enterprises, local governments, that whole nexus in, property. There's been some overbuilding and, um, pretty high youth unemployment and some weak, consumption. The good story for China is, uh. Their world beating EV industry, their world, beating battery industry, quicker, decarbonization of the economy and something that's very important.

We published a paper back in August. The credit team, actually led on this. Was the reorientation of Chinese trade away from the Americans and the Europeans toward the global south. So that's not just Southeast Asia, it's the Middle East, it's Latin America. it's Africa. So, China's trade to those regions is booming. Um, that's obviously keeping China's, um, economy afloat. It's allowing those countries in [00:06:00] the global south to, um, um, electrify and decarbonize faster because it's got a big, clean tech, component. I think the challenge there is China is so efficient at manufacturing partly because of the talent and partly because of the subsidies.

They're just. Potentially gonna devastate anybody they trade with. I think Southeast Asia's in the crosshairs there. But, um, bottom line, we're continuing to see China, slow a bit, but still a big contributor to global growth. We're probably, you know, going down from five to four, four and a half the next, next couple of years.

Andrew Critchlow: Yeah, we spoke to the team behind that report and, it's very interesting how China's really doubled down on investment in Africa, on trade with Africa. It's kind of been. Almost a response to tariffs. I think that at the same time you had the US introducing tariffs internationally to various countries.

You know, you had China actually cutting tariffs to, um, trade with Africa at that time. So it's an interesting [00:07:00] developing, story. Um, how much do you think that this sort of, I guess, soft landing for global economics and, and markets is also down to, um, markets getting more comfortable with Trump? You know, Trump, he says a lot and you know, does a lot.

But also, you know, some of those words and some of that rhetoric doesn't actually turn into action. I think people have called it, you know, the TACO. Trump always chickens out. you know, are people more comfortable kind of predicting his next move now?

Paul Gruenwald: Um, well he's, I think he's by design unpredictable, so that might be a bit of a mugs game.

But I think you're right. The, I think the model, to the extent we knew the model from the Trump first Trump administration, this is, maybe a slightly more energetic model, if that's the way, to put it. But we know that the, uh. The initial announcements on things like tariffs, even though they're quite shocking [00:08:00] to, you know, sober bureaucratic types, these are seen as negotiating, tactics and we eventually settle down, to something that's more digestible, a world without tariffs in a world without policy uncertainty coming out of the US is in my humble opinion, a better world than the one we're in now. But I think, um, markets kind of get this, you know, countries are, you know, they're risk adjusting their supply chains and financial flows, et cetera. We've seen moves out of the dollar to gold. We've seen countries, you know, pivoting their exports, um, that ranges from Canada all the way to, to Southeast Asia.

So I think the, the, the world economy's getting a little bit more, comfortable. So the downside scenario is, uh. Probably off the table for the time being. I know we're gonna talk about AI in a bit, Andy, but, you know, this AI investment boom is also masking some weakness in the global economy. So, although the headline numbers that we've been discussing are pretty good, [00:09:00] again, look at the US, the labor market is only really producing jobs in one sector, which is healthcare.

The investment part of the economy is only producing, you know, new CapEx expending in one sector, which is data centers. And then the top 10% or so of consumers are driving at least half of consumption. So I think we need to look past, some of the headline numbers, which again, aren't bad, and looking at, look at the foundation of, growth these days.

And it's, it's actually quite narrow.

Andrew Critchlow: So on that subject of ai, I read your report following the, the IMF meetings and the, the, the, the, um, you've attributed quite a chunky number for AI's contribution to growth now, right? Globally.

Paul Gruenwald: Yeah, well, it's mainly a US story so far. Well, it's also a China story, but we don't have the data, from China.

So we have a paper coming up, as you know, for the look forward journal on, the macro effects of AI. but we did do a little summary for the [00:10:00] recap of Washington Week. There's a bunch of, I guess factors or components to the AI story? It's physically building the data centers, which is showing up as business, construction and the national accounts, but also you've got the equipment, which is the racks and the, you know, the servers and everything else, which is the, which is the hardware.

And then you've got the software running, the large language models. You've got the energy components. We don't have a, we don't have an agreed all in measure on the, um, contribution of AI and, data center related spending to growth, but most people are putting this between one half and a full percentage point contribution to growth.

So think about that for the US right? The US is a very sophisticated, broad base, $30 trillion economy, and we're basically saying that if you flatline everything except data centers. You're still gonna get GDP growth of close to 1%. So that's a bit mind-boggling. The way I try to think about it is maybe, um, maybe, [00:11:00] recall the building of the US interstate highway system in the 1950s.

This is the digital version of that being done by a handful of hyperscalers, but it's really moving the needle of the CapEx story is running, I think, ahead of where most, um, most, analysts put it. In recent years, and it's gonna last for a few years, and then the rest of the world. Um, my colleague, Silvan Voer in, um, in Frankfurt, who's our Chief EMEA economist, he's been noting that the, um, you know, the exports of tech related goods from Europe is, adding to growth there.

They're not building the data centers, but they're supplying some of the, some of the inputs, into data centers. So it's not just a US story, we're getting kind of, you know, ancillary benefits even in places like, europe. But, definitely a tailwind maybe for the next couple of years.

Andrew Critchlow: Although it's a tailwind, there's also some challenges.

I guess this AI boom also brings with it inflation in terms of higher energy. Is that a factor? [00:12:00]

Paul Gruenwald: Um, well, we've been, we've been, supposedly in a world of a savings glut for the last couple of decades. The other way to say that is we've been in investment shortfall. So this is pushing investment up. It's pushing, at least, sort of structurally, real estate's higher because, or sorry, real interest rates higher because of, of, investment demand.

Yes, it's pushing up energy prices. There's some distributional issues there. So those are all happening in the short term. What we're actually starting to focus on is what happens after all of these things are built out, built out? Are they gonna generate the, the profits and the earnings that are into some of the equity prices?

Right? The, the PE ratios for some of these hyperscalers are quite high. That's the financial story. Who's ultimately holding the risk if that goes, bad. And then on the macro story is AI and, data centers and everything related. Is that going to deliver the productivity gains? And maybe we get a windfall of, you know, economists are [00:13:00] thinking half a decade of, above trend growth.

Estimates are pretty, pretty broad, but, we might be getting a growth windfall, out of AI as well. And how do we spend that? So this is the very beginning of the story, the kind of the CapEx and the build out phase. And then we've got the, you know, the financial payback phase and then the, macro productivity phase.

So I think we're gonna be talking about this as a. Needle moving, needle moving part of the macro story for years to come.

Andrew Critchlow: Were there any policy makers at the meetings that were expressing some reservations or concerns about ultimately what it could mean for employment? Because you know that if you're a politician, that's the thing that really moves the dial for you in a, in a bad way, right?

Paul Gruenwald: Yeah, that was, that was a subject of some of the panels and, um, I think we're already seeing some of this to be frank. Some of the, you know, some of the larger firms are announcing, layoffs or slower hirings due to the effects of, [00:14:00] AI. I think we know Andy, that on impact we're probably gonna have a negative impact.

On the, a negative effect on the labor market, but as we go forward, we're gonna find new products and new applications for AI. So the good story, and we're not there yet, but the good story is yes, we take a hit to employment, at, you know, a year zero, and then as. As we build out and look at the capabilities of AI and the new, the new possibilities and the labor force can hopefully adjust, adjust, we get a better story.

You know, electricity, sometimes people, compare AI to electricity and on impact, electricity, put the candle lighters and other folks out of business as we electrified the economy. But then we discovered we could use this stuff for, you know, assembly lines and things like that, and the whole economy.

Restructured. So this is a huge thing, and it's gonna take years, but, employment impact was, front and center for, a lot of people, including here in the us. We're already starting to see some impacts on the, um, on the labor [00:15:00] market.

Andrew Critchlow: The, the, the ancient, um, ever constant tale of markets.

There's winners and, and losers. Um, de-dollarization, that was another subject, um, that you flagged. Um, getting a lot of attention at the moment, especially with gold where it went. Recently, we were above $4,000 a Troy ounce. It's come off a little bit, but you've had, you know, this kind of. You know, percolating chatter around de-dollarization, um, you know, used maybe as a, as an excuse or a justification for, for capital going into alternative assets, gold, maybe side, um, crypto.

How serious should we take it?

Paul Gruenwald: Yeah. Well, I mean the, I think the starting point there is the, you know, the global economy has been, um, has been, become more broad based over the last couple of decades. We've now got US, Europe, and China, roughly 20% of global GDP, [00:16:00] but the dollar still reigns supreme, right?

It's almost 60% of assets on the balance sheets of central banks. It's even higher for that. For a lot of international, transaction and the, you know, the US administration is, rethinking the benefits of globalization and these, institutions that, the US helped to build after the end of the second World War.

You know, IMF World Bank and what eventually became the WTO, the US seems to be pulling back from some of its, commitments there, but yet we're still in a dollar world. So this issue comes up a lot. What's gonna happen to the, dollar? We've got this apparent mismatch between the financial world, which is very dollarized and the, let's call it the real economy world, which is much more diverse.

The bottom line is there's no substitute for the US dollar and the global economy, right? it's not just the dollar, it's the treasury market. It's the deepest, most liquid, most sophisticated financial market in the world. And if you wanna hold. Foreign assets. If you're [00:17:00] outside the US you probably want to do that, in US dollars, yes, we've seen a gradual movement away from dollars, but as you said, it's toward gold and not other currencies.

And, um, the Euro market just doesn't have the depth and breadth and sophistication of the US and china is an economic powerhouse, but still kind of a financial, underdeveloped economy, very bank-centric and very kind of plain vanilla. So, you know, for this foreseeable future, we are in a dollar world, even though we've got all this geopolitics, happening and the US at least this administration kind of trying to pull back a bit from some of the, you know, historical things that the US did as the benevolent hegemon after the, after the second World War,

Andrew Critchlow: um, Glen Stevens, um, after.

Former mutual friend at the RBA in Australia, I think once described it to me that all of the co currencies are bobbing, bobbing, like corks, bobbing on a, a, a dollar, a dollar ocean. Um, which I think is,

Paul Gruenwald: I like that metaphor by the way.

Andrew Critchlow: [00:18:00] That's, um, um, so you know. Geopolitics hasn't really had the, the impact that we all feared it would at the beginning of the year.

And I guess where I'm going with this are people talking about a potential peace dividend on the upside here. So we had Gaza, you know, we've now got peace there. People didn't see that things are starting to maybe cool down in the Middle East. Um, but the next big. Geopolitical change in the mood could be around Russia and Ukraine.

Can Trump broke a, a peace deal there now that potentially if it could be done, you know, that would move the dial for, for forecasts for GDP growth by the end of the year, potentially? No?

Paul Gruenwald: Yeah, well, well if we dial back a few years, um, those events didn't move the macro needle as much as we originally thought.

Obviously, if you're in Ukraine, you've got a huge, impact. But, Europe weathered that, um, [00:19:00] energy supply shock pretty well, and in the Middle East, growth is holding up in most places that are. Are not directly affected by the, hostilities there. So maybe we get a bit of a boost on the, the market sentiment of those two conflicts, are resolved, which obviously would be a great thing.

And, I think, you know, we might, I could. I can't say for sure. We might bump the forecast up a bit in those regions. I'm not sure it would move the dial very much globally, but, you know, the beginning of your question, Andy, was, you know, this, you know, deglobalization hasn't moved the needle yet very much.

And I think, um, a lot of people I wouldn't. Sort of jump into this view that it's gonna cause a recession. I was, I would look at the longer term, right? So, um, are we getting an, the same amount of investment? Are we getting the same amount of innovation? Is labor going to where it's gonna be most productive?

The US is thinking of, you know, putting a high fee on H1b [00:20:00] visas. Are we losing some of the dynamism because of the geopolitics? So this might be a story where. Not over the next one or two years, but over the next one or two decades, we just kind of take global growth down a couple of notches.

We all know globalization was about efficiency and free flow of capital and free movement of labor and, production moving to where it was, most efficient. But. Now that we've got this geopolitical overhang that's gonna be, that's gonna be dialed back. And I think populism is probably with us for the foreseeable future.

So for me, that's just a less dynamic, slightly more expensive and a slower growing world. So again, um, I wouldn't sort of look at it as a short term, you know, short, short term cyclical risk of a recession, let's say maybe a, a longer term decline in trend growth.

Andrew Critchlow: So tariffs aren't going away. Um, no de deglobalization.

It isn't necessarily going away, but it, it hasn't been as bad as anyone [00:21:00] thought. Um, the dollar's not going away. Um, um, AI centers are definitely here to stay and we're likely to get more of them. Um, and actually we're, we're we, you know, 2025, we could all end up finishing the year smiling. Ultimately, it's not been as bad as people feared.

Paul Gruenwald: Yeah, I think that's right. And I think you listed all the things that, are, um, helping. And I would add to that maybe low, lower global global oil prices. Um, those are obviously not great for the producers, but for consumers. Particularly in emerging markets where you've got a big chunk of their spending on energy.

That's another tailwind to growth. And then financial conditions, which we follow quite closely in the ratings division. Um, you know, medium term, you know, 5, 7, 10 year US treasury yields are pretty low. They're at or below 4%. The spreads on top of those are pretty tight. People have got nice, equity [00:22:00] portfolios because of the rise in the various indices.

And, housing prices are still pretty elevated, so the financial conditions as well, are pretty accommodative. So we've got some tailwinds to growth with AI and, oil prices and, uh. Financial conditions. So we're gonna end the year probably with some decent momentum. And again, I would focus on more on the medium term, but the short term, you know, we've, we've revised our forecast up, for the past two quarters and, 2026, looks a bit better than we thought earlier in the year.

So yeah, short term, looks like the damage hasn't been as, um. As bad as fear.

Andrew Critchlow: Well, as a professional pessimist, you've made me feel quite good about things. So, um, Paul, that's mission accomplished. Um, thank you very much for joining us.

Paul Gruenwald: Well, maybe end by quoting Madeline Albright, our former Secretary of State.

She said, I'm not a pessimist, I'm an optimist who worries a lot, so that.

Andrew Critchlow: It is absolutely, yeah. The, the way to be certainly in financial markets. Um, Paul Greenwald, chief Economist at S&P [00:23:00] Global, thank you so much for joining us, taking us through those meetings that you attended. Um, this month.

Um, we look forward to having you again on the podcast, um, maybe into the beginning of next year now. And to our listeners, you can download this episode and future episodes on, Spotify Apple Podcast store and our website spglobal.com. Thank you very much.