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Sunday, May 5, 2024

Economist’s Forecast: We are losing competitiveness, and it is practically impossible to avoid a recession next year

By: N. Ž. (Nova24TV.si)

“We certainly have not had inflation this high since the late 1990s, when we seriously began the process of adopting the euro. What is happening here is a gradual loss of internal competitiveness compared to other EU member states with which we compete in the euro area,” explained Dr Igor Masten, a professor of economics, to Nova24TV. According to him, for the past 20 years, we have not experienced Slovenian inflation deviating so much from the EU average. “We have concerning developments in international trade, something we have not seen in 15 years.”

American stockbroker Peter Schiff is one of the few economists who correctly predicted the financial crisis in 2008. During the March meeting of the U.S. central bank, he warned about the economic crisis that would occur when inflation soared, inevitably causing a devaluation of the dollar. He predicted that the bubble would burst and also who would pay the highest price for it. Esteemed economist Schiff has spoken about the impending major economic crisis, which he believes will be greater than the one in 2008. According to him, the banking system is like a house of cards that is beginning to collapse. Schiff stated that what is happening now is that banks cannot handle a significant economic downturn combined with rising inflation. “So, if we have high inflation and a recession at the same time, banks will fail,” Schiff said, explaining that because inflation devalues everyone’s money, everyone will want to withdraw their money from banks. Of course, when people want to withdraw their money from banks and there is no money available, the only way people can get their money is for the banks to print it. However, if they do, they only destroy its value.

Regarding the dwindling economic growth in Slovenia and abroad, Professor of Economics Dr Igor Masten stated that this phenomenon is more limited to China and Europe than the United States. Especially in Europe, where we are facing a situation of persistent inflation, cost pressures, and negative geostrategic effects, partly due to the proximity of the war in Ukraine and some wrong strategic decisions in the energy sector that have made energy sources expensive. “By this, I also mean a suboptimal transition to renewable energy sources, which Germany is pursuing, and this is simply the expected result.”

Recession in 2024 is practically unavoidable

Especially regarding competitiveness in the field of adopting new technologies, according to Masten, we can see that Europe has lagged behind. “So, despite a strong labour market, practical economic growth has stalled. Now, if we consider the new geostrategic complications in Israel, which can destabilise the entire region and is an important source of energy for the whole of Europe, we can say that a recession in 2024 is practically unavoidable.” According to Masten, the recession will bring major concerns in the area of public finances. That means higher borrowing costs amid declining economic growth. “This means that the revenue growth for EU member state budgets will not be as we were used to in previous years. However, these revenues were essential for the level of spending and transfers, especially transfers that we got used to after the COVID crisis,” he explained.

Since Masten mentioned the misguided energy policy, he was asked about the expected prices of energy resources. Compared to what we saw last year, the natural gas sector may be the only one where prices could be better, otherwise prices are likely to be higher. “I am talking about electricity on average. When it comes to electricity, we need to abstract from those enormous spikes we experienced last autumn. Those will not happen again, but on average, prices will certainly be high for consumers,” he explained, because there will not be measures in place, as there were last year, reducing the tax burden on energy. Therefore, consumers will have to pay a higher final price. “The same applies to motor fuels. The already mentioned major military conflict in the Middle East at the beginning of the heating season implies higher energy prices.”

In connection with government debt, he explained that if we observe what is happening with borrowing costs across the Atlantic, in a country that theoretically has complete control over its own treasury and money printing, and yields have exceeded 4.5% on a ten-year U.S. government bond, the U.S. Treasury will face the challenge of refinancing nearly half of its debt in the next three to four years. “That will be a problem right there. Now compare this to many European countries that are even more heavily indebted and have much less macroeconomic manoeuvring room with similarly rising borrowing costs.” According to Masten, ensuring the public debt sustainability and smooth financing will be one of the key challenges for economic policy in the next two years.

We should start with fiscal discipline

When asked how Slovenia should act to alleviate the issues, Masten stated that we should simply start with fiscal discipline. “We know that we still have an attitude that could be described as ‘there are no limits’.” As he puts it, we see this only in the numbers associated with the Recovery and Resilience Facility after the flood. “Because we know that we have gone far beyond just recovery, and if we add to this the fact that we have already started with a structurally very unfavourable budget situation, I think it is finally necessary to start managing. To really examine which expenses we need to maintain economic growth. Revenues in the budget depend on it, and the elimination of public financial expenses that we do not need. Setting priorities is therefore more necessary now than ever,” he believes.

Poor macroeconomic management

When asked if he finds the estimate of 9 billion for flood recovery to be too high and how it will affect the country’s financial situation, he responded that realism will show that this will never happen. “I understand that we want to present very high numbers because it puts us in a better position to justify drawing from EU funds, but it will not happen. What I am saying now is that once we complete this phase, that is, in terms of the enormous costs, we draw as much as possible, then this kind of unserious assessment of what we should do in reconstruction must end because international credit rating agencies will assess this as part of their evaluation and assessment of macroeconomic management.” He emphasises that such events simply show that we are poorly managing macroeconomics.

If there is no will, knowledge, or even a sense of the need to manage within the budget, then it leads to tax increases

Because Golob’s government is raising taxes, Masten was asked about the role of taxes. “It is simple. Even before facing the costs after the disaster, we started with a very poor structural position of the Slovenian budget, and if there is no will, knowledge, or even a sense of the need to manage within the budget, then it leads to tax increases.” He emphasises that budget constraints catch up sooner or later regardless of the political colour in power. “At this moment, this government is in a position of increasing taxes, that is it.”

We certainly have not had inflation this high since the late nineties when we seriously started the process of adopting the euro. “What is happening here is a gradual loss of internal competitiveness compared to other member states we compete with in the euro area. We have not known this for the past 20 years, where Slovenian inflation deviates to such an extent from the EU average,” he explained. According to him, there are worrying developments in international trade, something we have not experienced for 15 years and so on. “Imagine Europe is facing this against the rest of the world, and within it, there are problems with raising inflation in Slovenia, which are even more severe and have somewhat wider consequences,” he concluded.

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