Turkey’s economy is making a surprising comeback, Russia’s economy is overheating, Western workers are struggling to find a job again, Ethiopia gets an initial IMF bailout, and China presents new plans to reboot its struggling economy.
These are, in my opinion, the most important economic stories that we need to talk about in this economic update.
So, let’s dive into our first story right away, which is about
Turkey’s economic comeback,
A comeback that was made official when Turkey returned 5 billion US Dollars to Saudi Arabia because it felt it no longer needed that money to defend the value of the Lira.
This is a huge change from just over a year ago, when Erdogan lowered interest rates just before his re-election. At that time, the Turkish currency was doing so poorly that Erdogan had to rely on wealthy foreign backers like the UAE, Qatar and Saudi Arabia to keep the Lira from collapsing.
So, how did Erdogan go from that state of despair to returning 5 billion to the Saudis? And, is Turkey’s economic comeback sustainable, or is this just another temporary moment of relief before the Lira collapses again.
Well, as I talked about in my previous videos about Turkey, the two main reasons the Lira was losing value was that (1) Turkey was running a large trade deficit, and that (2) both Turks and international investors preferred to swap their Lira’s for foreign currencies, where they could earn a good interest rate with much less volatility.
So, if the Turkish government no longer needs foreign money to defend the Lira, it either has a better trade balance or more investments, or … both. If we look at the Turkish trade balance, we can see that, while it is still mostly negative, it has indeed improved somewhat. But, the most spectacular improvement comes from the investment side, where especially foreign investors bet big on the Lira, increasing their holdings of Turkish debt from 0.6% before last year’s election to a whopping 6.7% today.
But, why did all of this happen? Well, for now the answer simply seems to be that the new Turkish finance minister has raised interest rates by a lot from 8.5 last year to 50% today.
This made borrowing much more costly, reducing imports and thereby improving the trade balance. On top of that, it made the Lira more attractive to hold for both foreign and local investors.
However, this could be unsustainable for two reasons. First, while 50% interest rates seem extremely high, they can also be seen as very low if you consider that inflation is still around 70%. Not surprisingly, inflation is expected to remain extremely high for quite a big longer. Such a high inflation rate means that saving in Lira’s will remain unattractive. In turn, this means that Dollarization, and the volatility that comes with that will likely remain a big problem. The second reason why Turkey’s comeback may not be sustainable is that the increased foreign investments are mostly in the form of so called ‘hot-money’ investments, meaning that this money can leave quickly at the first sign of trouble, causing the Lira to collapse once more.
So, to summarize, yes returning Billions to the Saudis is good news for Turkey. But, as we have seen in Argentina, even high inflation countries may from time to time attract enough foreign investors to stabilize the currency. But, if inflation isn’t stamped out, the currency is likely to keep crashing again and again.
A state that Turkey’s regional rival Russia now also seems to be drifting towards as there are now more and more signs that
Russia’s economy is overheating
The most important signs is that Russia’s central bank recently increased its interest rate to 18% in an effort to stop inflation rising further above it s current rate of 9%, which is far above the 4% target. Luckily for ordinary Russians, this inflation has not been very painful because wages have risen much faster than prices. As a result, Russia’s economy currently finds itself in a massive spending boom. This is of course a completely different scenario than what Western politicians had in mind when they imposed sanctions on Russia after i t invaded Ukraine.
So, how did Russia go from recession to such a massive consumer boom that it is causing inflation, a phenomena known in economics as overheating.
According to Russia’s central bank the spending boom is mostly caused by t wo types of government spending. Firstly, Russia’s government is borrowing a lot to recruit more and more soldiers to fight in Ukraine. Increased wages for soldiers are in turn pushing up wages in the private sector. Secondly, Russia’s government has stimulated key sectors like agriculture, heavy industry, but also real estate by subsidizing loans. Therefore, interest rates in these sectors as well mortgage rates are well below the 18% interest rate set by the central bank.
As a consequence, Russian workers are spending like there is no tomorrow, and property prices are surging, both contributing to inflation.
So, could Russia be going the way of Turkey, with ever increasing inflation? Or will Russia’s conservative central bank counter government spending with ever higher interest rates and thereby creating a recession?
We’ll have to see. But, for now, a recession looks unlikely, as ordinary Russians are profiting from a super tight job market and all the perks that come with that.
Something that stands in stark contrast to Western countries where
Workers are increasingly struggling to find work
because while unemployment is still relatively low, it is now again rising in Europe, Australia, and t he United States. Other signs that, the balance of power is again shifting back from job seekers to bosses is that in the UK stock prices of major recruitment firms are tanking, UK companies are not advertising as many jobs anymore, and even in the US workers stopped quitting their jobs as much, to look for better ones.
This means that the unique situation after the pandemic, in which there were fewer workers available and demand was high thanks to government stimulus and low interest rates, which meant that workers felt that they were able to switch jobs, and ask for better working conditions, may now be over.
So, are bosses back in control for good?
Well, I’m not so sure. On the one hand, interest rates are still high, and many government spending programs have come to and end. On the other hand, we have now entered an era of dropping populations and potentially increased defense and industrial spending. This is why major central banks, such as the ECB think it is increasingly likely that Western countries find themselves in a higher spending and higher inflation scenario. A scenario that, while far less extreme, may share some characteristics with the situation in Russia, where workers are in short supply.
But, of course, it could be that both governments and Western central banks act strongly to avoid that because they want to avoid a scenario such as the following in which
Ethiopia just received a mini IMF bailout
Specifically, it got a loan package worth around 3.4 billion Dollars from the IMF because it was running out of foreign currency. However, it only got this after promising to let the value of its currency be determined by the market, after which the Ethiopian Birr promptly dropped by around 30% compared to the Dollar.
This will likely increase inflation in Africa’s fifth largest economy. An economy that was up until just a few years ago frequently compared to East Asian tiger economies thanks to its rapid economic industrialization and growth. But, after the countries brief civil war in its northern Tigray region ended in 2022, Ethiopia’s economy has struggled with foreign currency shortages as it imports way more than it exports and both investments and foreign aid dried up.
So, is this IMF bailout enough to relaunch Ethiopia’s economy?
Probably not. Sadly, Ethiopia’s problems are so big, that it will likely burn through these 3.4 Billion dollars in just a few years. Therefore, this mini-bailout should be seen a first step in the country’s ambition to secure a larger 10 Billion Dollar bailout from the IMF. But, for that package to be unlocked the IMF demands that Ethiopia reforms its economy more in the direction of a market economy.
But, structural reforms like that are very difficult, as one of Ethiopia’s role models demonstrated once more when
China presented new reforms
during and after the Chinese Communist Party’s so called third plenum meeting.
The announced reforms include both good and bad news. But, overall the conclusion of many economists and journalists was that the bad news dominated.
Now, before we get to the announced reforms, I just want to clarify that I define good news as proposed reforms that help China’s economy to rebalance towards more sustainable growth by increasing domestic demand. As I discussed in my previous video, China suffers from a chronic demand shortage because it has suppressed household incomes to power its growth miracle. Such a strategy can only work for so long. But, if China can now increase household income and thereby consumption, it can increase its own Chinese economic growth, while simultaneously helping the world, which is struggling with increased Chinese exports and reduced Chinese imports.
The good news is that at the third plenum meeting the CCP recognized the problem of low demand and in response announced measures ranging from more baby subsidies, lower interest rates, better access to social security for rural workers, and increased pensions. All of this could help the Chinese consumer and rebalance China’s economy. However, the bad news is that the CCP did not focus on these reforms but rather on reforms that will push exports even higher, such as China’s drive to become increasingly self-sufficient when it comes to making everything at home.
On top of that, China’s leaders have promised for decades now that they wanted to increase the power of the Chinese consumer. But, so far, it has been a lot of bark and hardly any bite.
Therefore, I think it still very likely that China’s economy will continue to slow down while the world continues to struggle with a country that is too big to export its way out of trouble, but will try to do so anyway.
Which brings us to the end of this economic update, a format that I’m currently experimenting with. If you want to see more of it, please consider supporting the channel on patreon.com/moneymacro or by becoming a member using the button below.