The Global Snapshot: Implications to Banks, Businesses, and Households - By Dr. David Kohl

By Dr. David Kohl

After decades of being an educator, I recall many inspiring moments and those that make me scratch my head in bewilderment. One such occasion occurred recently while I was reading evaluation results from the Graduate School of Banking at Louisiana State University where I have spent four decades instructing Agricultural and Rural Lending and two decades teaching Interpreting Economic Change classes. A recent course evaluation from the Interpreting Economic Change class really presented a punch in the solar plexus. In abbreviated terms, the student indicated that the course was a complete waste of time because the material was on such a high global economic level that 90 percent of the class was not impactful for their community bank and their customers.

I respectfully disagree with this student’s thought that global economics does not impact their bank or their customers. In fact, the impact of global economics on local economies has been a real motivator for my 2023 and 2024 speeches, seminars, and articles. My co-instructor and I may have not articulated this message in a meaningful way, so let's give the student the benefit of the doubt. Thinking globally and acting locally has never been more appropriate.

China

If this student thinks that global economics is irrelevant to the fortunes of banking and business, let's take the first stop in China. In 1990, China’s economy represented about three percent of global gross domestic product (GDP). China is now the second largest economy in the world with approximately 17 percent of global GDP. China is U.S. agriculture's biggest trading partner and is very important to the manufacturing and technology sectors. China grew rapidly at over 10 percent GDP growth early in this century and at over 6 percent growth in the second decade. China is currently experiencing growth pains as a result of a convergence of events.

China has a demographic issue spurred on by the one-child policy. India recently surpassed China as the largest population in the world. For businesses that depend on exporting products to China, such as cotton, soybeans, pork, dairy, technology, and manufacturing, their demographic challenges will continue to be an issue and could suppress profits. Also, the U.S. hog industry is in the doldrums, in part, because the Chinese pork industry has rebuilt the herd after several disease-ridden years and is now suppressing China’s pork imports.

Next, China's economy is in a slow growth mode. Chinese citizens have socked away $2.4 trillion during the three-year COVID-19 lockdowns. Leadership surmised that the citizens would spend this money on goods and services and increase consumption in their economy from 35 percent to 50 to 60 percent, similar to Western nations. Instead, the leery populace is very concerned about the future as the manufacturing sector and exports have declined due to Western nations in North America and Europe seeking alternative markets. Chinese citizens are prepaying on their collective $6 trillion worth of home mortgages, which are structured on variable interest rates. The unemployment rate for young Chinese citizens is above 20 percent, even for those with college degrees, as demand for college graduates and technology workers is being hindered by the government’s crackdown on technology and less demand from Western nations as they decouple from China on manufacturing and technology.

China consumes 10 to 15 percent of the oil and energy in the world. Lower fuel and fertilizer prices can be linked back to a slowing Chinese economy, which has implications to my banker friend and to the businesses to which they provide financial services. Next, China has reduced interest rates to stimulate the economy, and the U.S. dollar's strength is making U.S. exports more expensive. This impacts any business that is in the export market.

China's total debt to GDP ratio is 295 percent with household debt to GDP at 110 percent, which is similar to the level of U.S. household debt during the 2008 Great Recession. All these factors combined have created years of slower growth potential for the second largest economy in the world, which will ripple through many businesses and banks here in the United States.

India

In recent months, India is being touted as a replacement for Chinese economic growth. As previously mentioned, India is now the most populous nation in the world and has just become the fifth largest economy in the world, moving past Great Britain. By the end of the decade, India could move into the third spot. India has just restricted rice exports and they are the second largest rice producer globally behind China. This has caused an increase in worldwide rice prices, which is a staple in the world diet and has influenced prices throughout the entire grain market. India will have difficulty becoming a stalwart in the world economy because the country’s economy is very fragmented with a lack of federal control. Next, only three-fourths of the Indian population is literate and only 23 percent of the workforce is female, which is less than Western economic powers and China at approximately 60 percent.

Europe

The next stop is Europe, which is about 20 percent of the world economy. The Euro sector and Germany, the fourth largest economy in the world, have been in a recession. Despite positive economic growth this quarter, high inflation of 5 to 7 percent has prompted the central bank to continue to raise interest rates. In the European region one needs to observe next winter’s weather, climate, social issues, and interest rate increases. There has been some resistance to the general population supporting farmers concerning climate and social change in some countries. NATO and European unity are being challenged by Russia and China, who are in a long game strategy regarding the war. These elements could ripple through any bank and business in the United States. Some of the stimulus dollars parked in banks are being spent by U.S. tourists in Europe, which has helped to maintain some stability in European economics.

U.S. dollar versus a new world currency

My recent graduate of the Graduate School of Banking and their business and household could be disrupted and impacted by a potential new currency developed by the New Development Bank and lending and investing in local currencies by the Asian Infrastructure Investment Bank. These banks exist as alternatives to trading in U.S. dollars, which is the dominant world reserve currency. Currently, 58 percent of world trade is in U.S. dollars, followed by the euro, which is around 20 percent.

The New Development Bank, a multilateral development bank established by the BRICS nations (Brazil, Russia, India, China, and South Africa) and headquartered in Shanghai, is lurking in the shadows if resistance to the dollar was to occur. Membership is being sought from Saudi Arabia, Argentina, and Honduras, which would help to solidify this potential currency. Possible storm clouds on the horizon for this bank are that Russia comes into a tenure of leadership this year, a position that is bizarre and probably will increase the cost of newly issued debt because of the political, military, and economic uncertainty.

The other alternative is the Asian Infrastructure Investment Bank, which has financed much of China's Belt and Road initiative with over $1.3 trillion dollars spent in 68 countries since 2013. Again, this bank was designed to reduce the dependence on the dollar, and it is funded by many Western countries that are members. Of course, de-globalization and potential uses of these currencies is being discussed which could result in direct relationships with major competitors of the United States, such as Brazil. The ability of the U.S. central bank to utilize tools such as quantitative easing and interest rate changes to keep the economy on track could be impacted by these new initiatives.

Epilogue

Perhaps the banking school graduate needs to rise up out of the “silo” of internal thinking. The global snapshot presents an evolving economic, social, geopolitical, and demographic environment which sometimes can be overwhelming. Let's bring it down locally.

● The prices you pay at the gas station and for natural gas and fertilizer are affected by many factors such as China’s demand and OPEC’s supply. Understanding price changes requires a global analysis.

● Supply chains, from the manufacturing to technology sectors, can impact business and household competitive strategies and inflation status.

● The economic health of global economic engines can impact the value of currencies, which filters through prices, input costs, and interest rates on both loans and deposits.

The opposing strategies on fossil fuel initiatives impacts every citizen in the United States and globally. Europe and many Western nations are full steam ahead on green energy. However, China and India are still building fossil fuel plants for economic survival. This impacts economic volatility, inflation scenarios, and interest rates.

Stances on artificial intelligence (AI), gene technology, delivery of education, and banking services are impacted by global economic initiatives. In the future, this banker and this individual's children and grandchildren will be in an environment of accelerated change. Their ability to be educated and to think globally and act locally will be critical.