This transcript was automatically generated
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Daniel
Hello and welcome to The Dip, your essential briefing on money stories across borders. I'm Daniel, and I'm flying solo this week because Kassandra is off on the Isle of Wight cosplaying Queen Victoria something. But she will be back next week. Coming up, will the US food prices ever come down? Prices in supermarkets and restaurants keep rising and we'll find out why.
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Daniel
From the supermarket guru himself, he's retail analyst Phil Lempert. Plus, Harvey Milk gets a big thumbs up for his economic plans, but it could mean more pain in the short term. But first, the US and China have struck a deal after trading insults and threats for months. Let's find out more from our China analyst Clifford Coonan, who joins me in the studio.
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Daniel
So, Clifford, what's going on? What what is this deal that we've seen from the US and China?
00:00:49:10 - 00:01:07:01
Clifford
Well, this is we're trying to work out at the moment whether it is a deal or not. It's maybe a stage in the process. Certainly. I think, and, obviously there's a lot of very, very overblown rhetoric about, you know, a 12 out of ten. And you know, how it's a it's a great deal. And, you know, the visuals were very important.
00:01:07:01 - 00:01:25:05
Clifford
We had pictures of XI Jinping shaking hands with with Trump, and they were clearly warm. There was a sort of a warmth there. They've always actually had a bit of a connection. And Trump does like his fellow authoritarians, you know, but, it's Yeah. So but in terms of actual substance, this is all about the theater.
00:01:25:05 - 00:01:37:02
Clifford
It's political more than economics. So, you know that there was a focus on fentanyl because he's playing to his domestic audience, and he knows that fentanyl and opioids, that that resonates with, with American voters was.
00:01:37:02 - 00:01:53:00
Daniel
The whole reasoning initially behind introducing these tariffs. Also on on China and not just on China was on Canada. And Mexico was saying that we want to reduce the fentanyl, fentanyl or fentanyl precursors that are coming across the borders. So he's still banging on that drama saying.
00:01:53:01 - 00:02:07:04
Clifford
Yeah, yeah, because it seems to resonate. Well, what I think he didn't really anticipate was that, one of the spin offs of the trade war would be that the Chinese stopped buying soybeans, which is hitting farmers, which are a key constituency for for Trump.
00:02:07:07 - 00:02:11:14
Daniel
That means billions less in income for US farmers. Just the soybeans alone.
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Clifford
Right. And it's in the US heartland. You know, this is core Trump territory. So I think he wasn't anticipating that. And then the other thing that that was a big problem was the rare earths, the way the Chinese control most of the rare earths and critical minerals that are needed for cell phones, cars, all kinds of tech, submarines.
00:02:29:13 - 00:03:02:01
Clifford
For example, a submarine needs four tons of, of rare earths, you know? So I think that kind of wrongfooted Trump to a certain extent. And now they've come up with a deal which is basically just kicking it down the road for another year. So what we're seeing, though, are all these different stages happening. I think a big focus is going to be on April, when Trump is going to go to Beijing, because there's an opportunity for him to present a thing on a global stage, very much on his terms, as, as a kind of a conquering trade hero.
00:03:02:03 - 00:03:20:23
Clifford
I think that's possibly what's going to happen. There's a slight sidebar in that he also announced that, which isn't really related to the economy, but it is related to the overall trade negotiations because he announced he wanted to resume nuclear testing, which they haven't really done since 1992. And that kind of I think that I don't know if this is a negotiation tactic or not.
00:03:20:23 - 00:03:43:24
Clifford
People are trying to decode what that is. But it definitely it probably wrongfooted the Chinese because it did provide a sort of a sour note into things, but it wasn't really reflected, though, in the handshake. So maybe the Chinese were were aware of it beforehand. And so I was just looking I mean, you know, the, The New York Times, Nicholas Kristof in the New York Times says that that Trump has lost the trade war that he started.
00:03:44:01 - 00:04:04:08
Clifford
Now, the New York Times is always going to say that. But, at the same time, though, it does point out that, in some ways, the Chinese have just kind of matched things quite calmly in a way, and it's definitely hit their economy. But, I think that they've, at the same time, they've, they seem to play things reasonably well.
00:04:04:10 - 00:04:21:20
Daniel
I mean, we talked about it, in a recent episode when we were saying that there was this good cop bad cop routine coming from the US, but that they were actually playing into what China was doing as well, and that China's long use these kinds of routines and so that they did match each other's energy in that way.
00:04:21:20 - 00:04:43:13
Daniel
Sometimes they were aggressive and then they they got aggressive response. And then sometimes they're more conciliatory and got the matching response, as well. So it seems that China has played it in the right way here is that that's fair to say first of all. And then second of all, how hard is it their side? We talked about how much, how hard it hit, the US, but how how does it hit China, this trade war?
00:04:43:15 - 00:05:03:23
Clifford
Well, I think, I think those two answers are kind of connected. I mean, they presented themselves as victims at times. They presented themselves centers as, they've done nothing at times, which is also a tactic. And, so that they're very much, you know, so they've, they've come there's an old saying that, you know, China's always talking about win win situations, which means China wins twice.
00:05:04:00 - 00:05:29:04
Clifford
And there is an element to that actually. But on the other hand, this has hit the Chinese economy. It's hit exports. Now, they've managed to shift these exports from the US to other countries. Particularly their neighbors in Southeast Asia. And, and then a lot, you know, to Russia and, and various other markets at the same time that's going to eat into goodwill because these, you know, they're kind of flooding the market with Chinese goods that people don't want it.
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Clifford
It's just the Chinese just want are basically, you know, dumping them there. So that that would be a problem. But, I think that they've, the fact that exports have gone down and they have been hit and that it's the only really positive thing in the Chinese economy right now, there's no, you know, the property sector is still in trouble.
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Clifford
There's no investment. Youth unemployment is very high that the economy's growing, but it's sluggish.
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Daniel
Because they've seen for a while that they were to dependent on exports. And part of that was dependent on exports to the US. Yeah. And they've been trying to stimulate, domestic consumption in order to kind of balance things out a bit, not to put all of their eggs in one basket. Yeah. And that hasn't been the runaway success that they wanted it to be so far.
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Clifford
Yeah. And I think want another. On that note, self-sufficiency is a big issue here. What we're seeing now is one of the things that the US has actually done is assigned all these deals to get rare earths from other countries. You know, you're going to see a lot of this now. I mean, whatever happens with the trade deal trade, the global global trade has been reset.
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Clifford
It's not like it was.
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Daniel
It's China knows that you can't be self-sufficient. You can't be an autarky and be the exporter to the world.
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Clifford
Yeah, it does, but it's basically yeah, it needs to it needs to stimulate domestic demand. It doesn't really know how to do that. To do that, it would require the kind of political reforms that, that, that the Communist Party just can't really allow. You know, they need to open up their capital accounts. They need to know, you know, they need to internationalize the remnant, which is impossible because it's got so many controls.
00:07:01:20 - 00:07:21:06
Clifford
I mean, a certain amount to a certain extent it's possible, but not it's not. It's never going to compete with the dollar. And in its current form. So it's got a lot of challenges. And so I think this has been one of the, you know, this with this trade reset, it's going to provide. We're obviously focusing very much on, you know, like Nicholas Kristof on on what Trump has done.
00:07:21:06 - 00:07:38:08
Clifford
But it's also going to have it's going to mean a lot of changes for, for China too. And and maybe that could be destabilizing. We'll have to see how it how it plays out. But but they have been able to absorb a lot of pain because it's you know, it's a it's a communist government. They don't have to they don't have to have to go to the polls every four years.
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Daniel
So what you're saying is we can't necessarily be sure that this is going to be the start of a beautiful friendship between the US and China.
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Clifford
No, I mean, I think I think that's that'll be the visual element that we get that the theater element that Trump so loves. But but in terms of there's a lot of issues that have been raised here now that it just won't probably won't go away.
00:07:55:17 - 00:08:03:07
Daniel
Okay. And in other news, you've, spent some time interviewing a Nobel Prize winner this week. What did you find out?
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Clifford
Well, that was very interesting, because, Phillip. Asian is that, he's a French economist, and, he, and I interviewed him in his beautiful apartment in Paris, which was spectacular. His mother was the founder of Chloé, the DM fashion fashion brand. And his father was worked with the Surrealists, and he was an art dealer and who was friendly with all the surrealist, art movement in 1920s Paris.
00:08:33:00 - 00:08:50:03
Clifford
And he believed they're both revolutionaries and they're both innovators. And his thing is innovation. He's really he thinks innovation is really, really important. And it's interesting because it ties in with the US-China thing, because he said that if Europe is to compete with the US and China, it's going to have to reform, because only that way can it innovate.
00:08:50:03 - 00:09:07:16
Clifford
And we've had this report on innovation in the EU from Mario Draghi, which he said is a good thing but hasn't really been implemented. And, you know, he said, I mean, that was the main thing. He said he was he was interested in what's in what was happening in Germany. He said he thought Marty's heart was in the right place.
00:09:07:18 - 00:09:27:10
Clifford
He said that Keir Starmer, who had just been over with in in the UK, he said he seems to want to get back with Europe, which he saw as a very positive thing. Unusual for the French to be so glowing about the but the English. But, yeah. So that was but the innovation thing was very interesting.
00:09:27:10 - 00:09:40:02
Clifford
You know, he, he says really, you know, Europe does really need to reform if it's going to have a role to play when so much is happening with the US and China and, and Europe is being left behind. And so that's really his essential message, I think.
00:09:40:02 - 00:09:53:20
Daniel
And it's a message that we keep hearing time and time again. And so it's interesting to see how we'll get to the point of the those reforms, because you got to get so many countries to agree with each other. That's the difficult thing about the EU. So where can we see this interview in full.
00:09:53:22 - 00:10:13:09
Clifford
Well, this would be on the news channel, so you'll be able to see it there and yeah. And you'll also get a glimpse out of his beautiful apartment in the, in the, in the background. You know, he had all these beautiful paintings. And, I know I'm shouldn't be focusing so much on on the, on the background, but it was really, it was a very French experience somehow.
00:10:13:11 - 00:10:36:07
Daniel
Okay, well, Clifford, thank you very much for that. Now, let's move on. Have you noticed how expensive everything is these days, including for basic necessities like groceries? Well, it's not just you. The data bears it out. Food prices have rocketed. Is it down to the tariffs that we just heard about? Or is it more about greedy supermarkets that just want to take a slice?
00:10:36:09 - 00:10:48:22
Daniel
And will things get better, and when will they get better if they get better? Well, I spoke to retail analyst. He's known as the supermarket guru, Phil Lempert, asking him how bad the situation is right now.
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Phil
So the reality is, since the pandemic, food prices here in the US are up over 24%. Now, if you take this year's increase, which is going to be about 3 or 4% on top of that, 24%. And if we look to the future in 2026, I would predict that we're going to see another 5 to 10% increases. So the American consumer is really struggling with food prices and making a lot of, you know, behavioral changes as a result.
00:11:18:15 - 00:11:30:08
Daniel
Okay. And so we've heard from a lot of farmers lately saying that they're being hit hard by the tariffs. How big a factor is that in food price inflation or the factors are playing into it here as well.
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Phil
Well, there are some other factors, but certainly tariffs have a major factor. There's two things here in the US. One is tariffs. And that's everything from on manure and feed for animals. Obviously with machinery parts. And then also let's not forget the ice detention rates. Where in California especially, we're seeing a lot of farm workers not even showing up for work.
00:11:56:16 - 00:12:04:09
Phil
They're afraid to. So we have a lot of food that's rotting in the field. And obviously that increases our prices as well.
00:12:04:11 - 00:12:22:18
Daniel
Okay. And then looking at the trade you pointed out in your recent Forbes article that the US imports about $200 billion in food, beverages and animal feed from Canada, Mexico and China combined. You've tracked food trends and policies for for decades. Have you ever seen this kind of volatility in trade policies you're seeing now?
00:12:22:20 - 00:12:57:19
Phil
Absolutely not. And you know, it's more than just trade policy. The problem that whether you're a farmer or, you know, a food manufacturer or a retailer, it's the uncertainty, not knowing what's going to happen tomorrow. So we have tariffs today. We don't have tariffs tomorrow. We have tariffs on this. You know what we have just the other day, is the Senate passed a resolution to take away the tariffs from Brazil because Brazil, frankly, when it comes to beef, when it comes to coffee, is a major exporter to the US.
00:12:57:21 - 00:13:21:19
Phil
And we know that, you know, the house is closed here. So as a result, it's not going to pass. Who knows if it will pass. But it's really the uncertainty, for the food world that that needs to plan. We need to plan years ahead what crops are going to be, you know, planted in the ground. We need to, you know, plan ahead for imports and all that has been taken away.
00:13:21:21 - 00:13:41:05
Daniel
Okay. There is also some potential volatility on the kind of upside as well. So there's been a bit of reconciling action we've seen this week between the US and China. And while we're recording it looks like a deal could be struck between them to significantly lower the tariffs in some areas. Would that be enough to reverse the impact on farmers and consumers?
00:13:41:05 - 00:13:50:07
Daniel
I'm thinking, for example, about how China has cut all of its purchases of, US grown soybeans, for example, and how farmers have been severely hit by that.
00:13:50:09 - 00:14:09:13
Phil
Well, in fact, this morning, they announced that China has done the first order of soybeans. So maybe we're going to see it. But again, we don't know how long it's going to last. Look at what happened with Canada that, you know, everything seemed to be on target with Canada. And then all of a sudden, you know, more tariffs on Canada.
00:14:09:19 - 00:14:33:01
Phil
So we just don't know. It's really the uncertainty. What I can tell you is a lot of goods, from, from China have been affected already. If we look at, you know, Halloween costumes and Halloween coming up later this week here in the US, you know, the price of costumes have gone up 20 to 40% because most of those have come from China.
00:14:33:01 - 00:14:39:00
Phil
So we're still seeing the effects of it. And the question is how long will last?
00:14:39:02 - 00:14:50:22
Daniel
So it looks like some Americans might have to go back to making their own Halloween costumes at home. Perhaps, but actually feeds into an important question, which is how are consumers changing their buying habits? With all of these prices rising?
00:14:50:24 - 00:15:18:04
Phil
Well, certainly in the supermarket, when it comes to food, we've seen a major shift to store brands, where people can save money. And at the same time, which really good in-store brands probably over the past five years have increased their quality. So that's been a positive shift. The other thing is people are heading to the frozen food case, whether it's for beef, whether it's for seafood, whether it's for vegetables, because those are less expensive.
00:15:18:06 - 00:15:33:22
Phil
Third, and probably the most important aspect is people are stopping to waste food. Here in the US, about 40% of all of our foods are wasted, a lot of that at home. So people are just being really smart about not wasting food.
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Daniel
You mentioned the increase in quality. So what is it at the moment that companies are doing to adapt to these this changing environment and changing consumer expectations as well?
00:15:45:00 - 00:16:11:01
Phil
People are people are copying Aldi and Trader Joe's and Lidl. That is what they're doing. They saw that these, three retailers have really up the game, increased quality. And by doing that, they've been able to attract a generation Z and millennials who really care about a lot of food quality as well as value. So now every chain is following suit.
00:16:11:01 - 00:16:37:06
Phil
In fact, just the other day, Kroger announced a new line, a protein line. Again, tapping into that whole, you know, protein, phenomenon that's taking place, whether it's because of people on GLP ones or people just wanting more protein. So retailers are curating, if you would, their store offerings, more than we've ever seen. And that's great news for the shopper.
00:16:37:08 - 00:16:59:05
Daniel
There's a lot of accusations out there that, the supermarkets are being greedy. So when we look at wal mart and we see 56% growth in net income in the previous quarter, a lot of people would say, well, the price increases are just the supermarkets, taking more for themselves. On the other hand, as you know, supermarket have traditionally run on very thin margins.
00:16:59:07 - 00:17:12:04
Daniel
So what is your assessment. Are we seeing greed here from the supermarkets or a companies wal mart just at such a scale that of course any little tweaks here and there are going to lead to massive, outcomes for them.
00:17:12:06 - 00:17:34:05
Phil
All of the above. So if we take a look pre-pandemic, the average supermarket netted about 1.5% net profit. Now, that might not sound like a lot, but if you've got a couple thousand stores and stores are doing about a million bucks a week, you know that amounts to a lot of money. Now, during the pandemic, yes, they did get greedy.
00:17:34:20 - 00:18:05:11
Phil
That went up from about 1.5% to just under 3% since the pandemic. It has come down. But keep in mind, during the pandemic, they had increased their costs, whether it's, you know, more cleaning of shopping carts or those plexiglass barriers, all of those kinds of things did increase the expense for a retailer. So when we look at Walmart in particular, Walmart is one of the most efficient chains that there is.
00:18:05:22 - 00:18:24:13
Phil
So they can take a lot of waste out of the system. What we're now seeing here in the US, and I think it's a short term strategy that's going to fail. We're seeing a lot of retailers from Walmart, target, just about everyone laying off a lot of people. A lot of those are not at store level.
00:18:24:22 - 00:18:45:15
Phil
A lot of those are corporate level, but you can't lay off, you know, 10,000 people and not have some kind of effect. And also at the same time, you know, nobody wakes up in the morning and says, I want to go work in a supermarket. As a result, they've had to raise the minimum wage, that hourly wage to attract people.
00:18:45:17 - 00:18:57:24
Phil
Most supermarkets have a labor shortage right now, which is why we're also seeing new technologies like electronic shelf labels being instituted in stores to be able to save labor.
00:18:58:01 - 00:19:24:18
Daniel
That we've seen. For example, if I think about, Amazon and its automated supermarkets that it launched in the UK, it's now exited that market. Very quickly. I've seen that some of these kind of technology bets at supermarkets have been made, aren't paying off the way that they, they thought they would. And of course, at the moment there is a lot of buzz around AI and how that can make processes more efficient for supermarkets.
00:19:25:13 - 00:19:35:22
Daniel
Are we actually going to see any efficiencies realized here, do you think, or is a lot of it kind of bluster and will require a lot of experimentation before we actually see any results?
00:19:35:24 - 00:19:55:22
Phil
While supermarkets, as a result of the pandemic, again through stupid money, had stupid ideas. And if you take a look at Amazon, go, the problem is that when people shop for food, it's very primal. People want to have a great experience. They want to talk to Bob the Butcher and Betty the Baker. Food is should be fun.
00:19:55:22 - 00:20:19:12
Phil
And it and it should be very, you know, primal. You know, Amazon got away from that. However, I will tell you that what we've seen in the past few years, Jason Bushnell, who was CEO of Whole Foods, now, the head of Amazon Grocery Global, he brought Whole Foods back into the food business. And I think we're going to see that across all of the Amazon.
00:20:19:14 - 00:20:41:24
Phil
If you take a look at Whole Foods new format, which is called Daily Shop, smaller store between 5 and 10,000 square foot, lots of fresh food. You know, they're using automation, smart AI, self-checkout, certainly back room, certainly. But you know, from you and I as a consumer standpoint, we want to smell food. We want to see food.
00:20:41:24 - 00:21:04:02
Phil
We want to enjoy our food. And, you know, the Amazon Fresh stores, what they have is you would walk in and you'd see all the electronics that turned off people. People turned around and they walked out. They want food. So when I think about AI, I believe that there's a major use of AI, for people who shop online.
00:21:04:04 - 00:21:25:16
Phil
So I can go in, to the, to the chat box and I can say, I'm going to have a picnic for ten people. Two people have diabetes. One person is gluten free, one person wants high protein. I don't want to spend more than six bucks a person. I want, you know, craft beer, on and on and on.
00:21:25:18 - 00:21:49:01
Phil
And, you know, in a couple seconds, it prints out, you know, whatever recipes I need. And it prints out the shopping list for me. That's a good use. That, from a consumer standpoint, is good. I think that using AI for predictive, where, you know, supermarkets look at, you know, what weather conditions are going to affect what products on sale.
00:21:49:06 - 00:22:03:02
Phil
Sure. But we we have to remember it's still food. And I think the more AI and the more technology that we use in the back room, that's great. Front of house. Not so much.
00:22:03:04 - 00:22:25:18
Daniel
Okay. I imagine also that the the rise in price in food is, is also hitting restaurants. But at the same time, if people's your pockets are being squeezed in, they're less likely to go into to restaurants. Are Morgan going to cook at home? So how is the situation at the moment for restaurants and also the consumer packaged goods companies that make some of these products that people know and love.
00:22:25:20 - 00:22:49:04
Phil
So restaurants are hurting? There's no question. In fact, just this morning, a report came out that found that about a third of restaurants are now having their food being taken out. So we're eating at home. We're eating at home for a bunch of reasons. Number one, we don't have to tip, number two, we can have our own wine, so we don't have to pay those expensive prices for wine.
00:22:49:15 - 00:23:08:24
Phil
Number three, you know, we just want to be at home. We we don't like going out. I mean, the world has changed dramatically. And for a lot of people, whether it's going into a supermarket or going into a restaurant, they're apprehensive. They want to, you know, they want to have personal security, if you would. As creepy as that.
00:23:08:24 - 00:23:45:07
Phil
That might sound. As far as restaurants, what they're doing is they're raising prices, no question about it. They're reducing their portion size. No question about that. They also have a labor shortage. So they're trying to attract as many people as they can to work in the restaurant. But I think we're going to see a lot more restaurant failures than we ever have, especially those small independent restaurants, those mom and pops who are really struggling because they don't have the buying power of a Cisco of these chain restaurants that can, you know, forge ahead.
00:23:45:09 - 00:24:06:08
Phil
I mean, if you look at Starbucks with coffee, the reason they haven't increase the price of coffee and a lot of independents do, they, you know, they get coffee futures years in advance. The little coffee shop can't afford to do that. Doesn't even know how to do that. So for restaurants, it's a really tough time.
00:24:06:10 - 00:24:23:00
Daniel
Okay, so where does this all go next? What can we expect in the coming months and years? You touched on it a bit earlier, but, are we going to see, bills kind of, getting easier to pay, you know, the cost of food going down or is it just going to get worse?
00:24:23:02 - 00:24:52:15
Phil
I don't think the price of food is ever going to come down for a variety of reasons. Number one, every product in a supermarket, 40,000 products, they all started in the ground. Even a hostess Twinkie you had, it had roots in agriculture. And because of climate change, we've seen it with West Africa, with the price of cocoa for, you know, chocolate, here at Halloween, you know, the chocolate bars are now 10 to 15% smaller.
00:24:53:01 - 00:25:14:18
Phil
The price is about 20% higher. So we have that. We have Brazil with our coffee prices, again, because of climate change going through the roof. We have a lot of crops that used to be able to be grown in California, that have had to move to Central and Latin America, because the, the growing conditions just aren't here in California anymore.
00:25:14:20 - 00:25:38:19
Phil
So as a result of all that, I think that until we can really harness climate change or move a lot more to indoor farming, prices are going to continue to go up. Also, as I mentioned, labor shortage on the farm. We we have that as a reality. We have labor shortages in food factories, for those CPG companies, so they have to pay higher wages.
00:25:38:24 - 00:26:05:05
Phil
We've got higher transportation costs. We actually have a shortage here in the US of about 120,000 long haul truck drivers who, you know, bring our food to market. And they now have higher wages. They, they're getting bonuses, sign up bonuses of 25 to $50,000 to become a truck driver. The money has to come from somewhere. And unfortunately, it comes to you and I.
00:26:05:10 - 00:26:25:24
Phil
And then we've got the tariffs on top of it. And again, it's been reported that about 37% of the price of tariffs is being passed on to consumers. So what I think we're going to see here in the US is a lot of supermarkets having huge displays as you walk in the store saying made in America, no tariffs.
00:26:26:09 - 00:26:36:15
Phil
And those imports, whether it's olive oil, whether it's wine, whether it's those great cheeses from Italy and France, you know, those are going to get hurt.
00:26:36:17 - 00:26:56:19
Daniel
Thanks very much to Phil for that. Well, it looks like it's a lose lose situation for a lot of people out there right now. I mean, he pointed out, for example, the small restaurants, the mom and pop businesses, food businesses of all kinds, the cost of food is rising, the cost of labor is rising. So cost these companies put up their prices, which mean that people go, they're less.
00:26:56:19 - 00:27:14:24
Daniel
They just decide to stay at home and eat there instead, which eats away these restaurants profits. So they have to pump prices some more. And it's a vicious circle. No wonder so many of these small businesses are going out of business, because it looks like consumers are fighting back, essentially switching brands, buying less premium products, hunting for discounts.
00:27:15:01 - 00:27:48:12
Daniel
But the big supermarkets, you know, they're doing okay. I mean, what are you going to do? You're going to go and plant your own food like it's 1929? Of course not. What are you going to go your Walmarts and your Kroger's. Sure. They're in a business that's defined by razor thin margins, but when you tweak at the margins just by, an increase of like point one of a percent, then that means billions for them in terms of an increase in their bottom line, because they have something which many businesses are jealous of and that is scale, especially Walmart.
00:27:48:12 - 00:28:06:13
Daniel
They are just so huge that even if they're making a razor thin margin, that could mean billions for their bottom line. And you know, this is why everyone is saying on TikTok and on Reddit that things are looking really bad right now because it's not just the food prices, but it's a huge spillover effect as well into the rest of people's lives.
00:28:06:13 - 00:28:24:10
Daniel
Because you spend more on food, you have less to spend on other things in your life. And people wonder why young people don't go out these days. I mean, they don't go to bars, they don't go to restaurants, they don't go to clubs. And it's right there in front of you next to housing. The rise in food prices is a massive concern as well.
00:28:24:16 - 00:28:47:04
Daniel
Year on year, grocery price inflation is around 5.3%, according to one tracker. So you're spending on average $363 per person per month just on food. And if you add into that, the average rent, which is well over one and a half K tax, health insurance, all of these other costs that you have to have, these are essential costs.
00:28:47:06 - 00:29:12:23
Daniel
Your money is evaporated before you even really get to it. And that's what's driving the big paradox in the US economy right now. I think that if consumer spending weakens sharply, which it could at the moment it seems all right. I think we could end up seeing a plateau or a weakening. The fed could be pushed to cut interest rates sooner than it once, even if inflation isn't yet tamed.
00:29:13:00 - 00:29:35:08
Daniel
And then we're entering more of a danger zone for the US economy, a weakening of the US economy. And that's a nightmare scenario that nobody wants because it's in the end, it's not going to help anyone. Right now, we're switching up topics to talk about. Argentina. President Javier Melaye won a convincing victory in the midterms, giving him the green light to continue with his tough economic medicine.
00:29:35:08 - 00:29:59:01
Daniel
And it seems so far that it's working. Inflation has fallen sharply and economic growth is looking fairly decent having come out of this many decades of financial crisis. But the currency still looks shaky and the government has a huge debt bill that it's going to have to pay down soon. And that's why Donald Trump has pledged to support Argentina to prop up its economy.
00:29:59:05 - 00:30:09:19
Daniel
But many citizens say they aren't getting the basic support from the government that they need. So to dig deep on this, I spoke to our correspondent in the Argentine capital, Buenos Aires, Jules. Gisela.
00:30:09:21 - 00:30:34:18
Jules
I think what is important to understand here and we need to go back a bit to the elections two years ago to understand this, where when Malay came to, let's say, the broader political stage, because he's been around for a couple of years, but nobody really cared about him. And when he came on the broader political stage in 2023, we saw a soaring inflation rate of 211%.
00:30:34:23 - 00:31:00:22
Jules
So the country was in an absolute crisis mode. And we need to understand this, that there is a collective trauma involved in the country where people are like, okay, we had a prime minister government for 18 years and it borders to this crisis. We cannot continue like this. So people knew that I need harsh austerity measures to actually come out of this crisis.
00:31:00:24 - 00:31:25:10
Jules
This is how he got elected in the first place. And also he was an outsider and not part of the elite. So two years now down the line, he won because of three reasons. We can see that, he brought inflation down to 32% annually. What is still, from a German perspective, a lot, but from an Argentine perspective it's not.
00:31:25:12 - 00:31:51:17
Jules
So it kind of stabilized economy in this sense. On the other hand, we could see a middle class actually, feeling that they could enter again, an economic crisis. And this is why I explained before why people voted for him in the first place, because people are afraid that with another economic tragic three, the country would maybe go back to old times and they would see a heavy devaluation of the peso.
00:31:51:17 - 00:32:12:06
Jules
So it was fear that played a happy role there too. And we could see also, just him. 67% of the overall electorate actually went to vote, meaning that we've seen the lowest voter turnout in the last 40 years since Argentina come back to democracy.
00:32:12:06 - 00:32:14:11
Daniel
Voting is compulsory in Argentina, isn't it?
00:32:14:15 - 00:32:37:18
Jules
It is, it is, but on the right. Also here we need to take into consideration it is compulsory, but there is not really a follow up. So yes, they say you need to pay a fine defined as between like 50 and 500 USD, but you do not really have a follow up to it. So it's not that people actually go after people didn't have the means to do so either.
00:32:37:18 - 00:32:57:23
Jules
So, and it kind of is that people are tired at the moment. So people who do not agree with me lies politics, but also do not see a viable alternative at the moment. They did not go to vote. And and I think one more point there, maybe just quickly, is that also the overall electorate now is younger.
00:32:58:00 - 00:33:12:07
Jules
So we're talking about people. So it's about 39 years old. These are people who grew up in absolute crisis mode since in 2001 the whole economy collapsed. So they they grew up with this and they're afraid to go back to it.
00:33:12:09 - 00:33:27:03
Daniel
Okay. So maybe for people who aren't following what's going on in Argentina, what was their reaction to his win, not just from the the public, but also from financial markets and economists and, and analysts.
00:33:27:05 - 00:33:46:17
Jules
If we look at the markets, there's been a very euphoric reaction to his win because it's like undoubtedly it was a win, even if we look at the numbers and 40% is a lot. And also he won over point A sideways what is a lot because usually it's a parent, a stronghold. So markets have been very euphoric.
00:33:46:23 - 00:34:13:06
Jules
We can say that pesos, bonds and also Argentinian stocks have been all been strengthening in the last few days. And just to give you a couple of numbers. So the peso $3 exchange, what is can be seen as like Argentina's most famous rates to see how healthy they are an economic is it plunged up to 7% what is a lot.
00:34:13:08 - 00:34:37:23
Jules
And this means that now Argentines can get cheaper dollars. What is really important, an expert said it the other day. It's like you can kind of even say like the cheap dollar can be seen as a drunk in Argentina and people really trying to get, head of dollars and like as a hard currency. On the other hand, we could see that Argentine stocks on Wall Street went up to 48%.
00:34:38:02 - 00:35:01:16
Jules
That is a lot. We could also see that the country risk risk index. So the measures that measures the likelihood of a debt default plummeted to 652 points. It should be between 3 and 400 basis points. But also seeing that where Argentina is coming from from like over a thousand points, 650 is the lowest level since June.
00:35:01:18 - 00:35:09:12
Jules
So we do see that markets overall reacted very positively to, to these election results.
00:35:09:14 - 00:35:39:05
Daniel
Okay. And it seems that, that is a vote of confidence in his economic reform program and the fact that that's going to continue. So where is the status of his reform plans? We remember two years ago, him coming out with, the chainsaw and saying how he's going to slash, public spending. And it seems that although he's been quite a populist in his rhetoric, that his stance to actually carrying out the cuts that were necessary was a bit more technocratic.
00:35:39:05 - 00:35:46:02
Daniel
Although maybe you disagree with that. Where where are we at in the the Malay agenda?
00:35:46:04 - 00:36:11:07
Jules
Ticket question. So yes, he kind of had with the chainsaw and he started with a chainsaw if we look at public spending. So I think also de we need to see like he come out with very strong rhetoric throughout. But public spending he really cut by over 35% like he went in he degraded certain ministries over tens of thousands of public employees lost their jobs.
00:36:11:13 - 00:36:44:17
Jules
So this were like, we talk about hard cuts, especially targeting education, health care, transport. So he cut also so many subsidies. And this is how he and he, for the first time also in over 14 years with this, he actually achieved a fiscal surplus. What the country has not seen. So reform wise, yes, he did manage to what he went in with a chainsaw cut all these public spending drastically.
00:36:44:17 - 00:37:07:09
Jules
Pensions were covered. You've seen protests also in the last two years with people taking to the streets. We've been reporting on this, at the same time, what he did not touch and he called himself an AI narco capitalist. Right. So he said, like, we cannot be at all for free markets and no intervention at all. But it's not really true because he did not really touch the peso.
00:37:07:11 - 00:37:39:09
Jules
So he started off with devaluing it because it was absolutely overvalued. It was like 360, pesos for a euro. And if you even like, I was here two years ago where you could see that changing euros or dollars for pesos, even at like official exchange shops and, and studios, you would not get the official rate. You would always have the dollar blue or Euro blue, right.
00:37:39:15 - 00:38:05:17
Jules
Well, it was like three times less. So you got for a euro, you got $1,000 at the end, so where you could see like the, the actual value of the person was not that. So he did not touch that. It kind of devalued it for like of about 50%. But he kind of stabilized it. What was also important because he had one big promise and it was we keep inflation down.
00:38:05:19 - 00:38:26:07
Jules
We're going to manage that. The inflation rate stays here and goes further down. So he needed kind of a stable peso to make this work. But in order to do so he had to use up quite a bit of the national dollar reserves to keep it there. So anyway, forms this is where we see, we're still waiting for tax reforms.
00:38:26:20 - 00:38:44:05
Jules
He said he would privatize so many companies. He could not because he did not have the majorities in Congress. Nieto in the Senate. So he did not have a veto power in this sense. What might change now, looking ahead for the next two years? Let's see that.
00:38:44:07 - 00:39:07:17
Daniel
Okay. And yeah, it's quite clear that even now people think that the peso is still overvalued. And what it looks like is, as you mentioned, the government is going to have to build up its, stocks of foreign reserves in order to pay down this $18 billion of debt repayments, which are due in 2026. And buying those dollars should help to bring the peso down anyway without some sort of dramatic reform.
00:39:07:17 - 00:39:28:06
Daniel
I mean, this is the kind of course, that people think they might take is more this kind of rational course, rather than a big sledgehammer blow when it comes to the peso, when it comes to the average person on the street, they have been hit by the original economic problems that existed before Melaye that he's trying to reform.
00:39:28:08 - 00:39:43:03
Daniel
Some people were worried that the medicine is going to be worse than the disease. So how are they taking the current state of the economy, whether it's due to how it was or whether it's due to these tough reforms?
00:39:43:05 - 00:40:11:03
Jules
I think one thing I noticed, especially in the last week, talking to many people on the streets, is, you see, people are tired. He said that there is a certain fatigue considering his austerity measures. But at the same time there is this sentiment of like, yeah, but okay, we're in there. We're trying. You could see that ordinary Argentines have been hit hard.
00:40:11:05 - 00:40:39:12
Jules
So if we're talking about middle class and working class, these are the two groups that have been hit hard, right. We could see at the beginning also that through all his austerity measures that especially, so small companies and kind of medium companies had to shut down. They could not take it. The price hikes economy has been stagnating in the last months heavily.
00:40:39:18 - 00:41:05:15
Jules
He also one of his reforms was to liberalize the, rental market. One on one hand, was hired as like, okay, yes. Now you do have more, flats on the market because people would actually put them back on the market because now they can get the rent they want, but at the same time, this meant for many people that even if you see, like rents went down, they did not really go down.
00:41:05:15 - 00:41:29:01
Jules
And because also you have like every three months now in this contract where the landlord can just raise, the rent and nobody knows to what extent. So this is the problem with this. So you have like ordinary Argentines scrambling to make ends meet. And there is this famous sentence, it's like Argentines live 20 out of 30 and it's like the last ten days of a month.
00:41:29:07 - 00:41:55:04
Jules
People are really struggling and not having enough money to actually live. So you do see this. You do see it also that you have less people going out. Yes. It is inherited in the culture that people still try to live and go out and enjoy life. And I think this is something really important culturally speaking. At the same time, you see people do it less and there is this tendency if people can get always, they try to save them.
00:41:55:04 - 00:42:22:19
Jules
Now, if people have pesos, they spend because it's still like very much present for them that, I don't know, maybe tomorrow it's not worth anything anymore. There is a certain stabilization, but we also need to see that as stabilization on a very high level. So if we look at prices and everything, it is shocking to see if you go to a supermarket now because you also cut subsidies for, prices for some products where prices were very stable for years.
00:42:23:16 - 00:42:47:20
Jules
And this is all different. So people go to supermarket, they like they have more planning stability because inflation is a bit down, but at the same time it is at such a high level that even me being here as a European with a European salary, it's like, yeah, the prices are high and you could compare them to Germany, but the income you cannot.
00:42:48:17 - 00:43:15:06
Daniel
Yes. I want to touch on a couple of things, before we finish off here. And that is the US connection, because obviously have you MLA been a bit of inspiration for, for Donald Trump in a way. And they seem to be quite close ideologically in some senses at least. And the US announced an economic stabilization deal, as they called it, with Argentina.
00:43:15:08 - 00:43:20:17
Daniel
How important is this factoring into Malays economic plans?
00:43:20:19 - 00:43:55:24
Jules
This came at an absolute crucial point, and this was a lifeline for the Argentine economy and also formulated trajectory looking forward, because, as I mentioned before, Malay, in order to stabilize the peso at a certain level, he used up the dollar reserves the country had. So we that Argentina was really close to entering a new currency crisis. And taking this into consideration, this came absolutely at a time when we needed all the support and Argentina needed this money.
00:43:56:01 - 00:44:19:01
Jules
But also looking forward here now, yes, it helps him and also helps him now to planning with the blocking minority he now his party now has in Congress. He can continue with his economic overhaul because his presidential veto now cannot be overturned. So the other parties cannot decide on like spending more because he still can block it.
00:44:19:03 - 00:44:48:23
Jules
But in order to really get more reforms in, especially when it comes to taxes and having more international investments coming in, he needs to forge broader alliances with other parties. And here we need to see now if he manages to change his course from like being very radical and very against all the others, or if he now goes, like comes back to the table and like, hey, let's negotiate.
00:44:49:08 - 00:45:15:02
Jules
And can we actually build something here together? But there's so many things that factor into this. Yes, it comes in lifeline, but it really is going to be important to see if Irene Tina is able to repay its debt, as you mentioned, to 18 billion next year or if they do not manage, because if not, it's just like a short term incentive that's not going to go anywhere, but it's just going to build up more debts.
00:45:15:02 - 00:45:55:05
Jules
And this is what some experts are worried about, that it just might be the last little lifeline before the economy is going to crash. And this is where experts have very different opinions about this. But I think at all of these, where we can see a common ground is that they say we need to observe the next two years and see what's going to happen, if it actually is something that's going to stabilize in the long term, or if we can see what we've seen in the 90s before, it collapsed completely, like, okay, it goes up, it kind of stabilizes, and then it crashes completely and we see a massive devaluation of the peso.
00:45:55:05 - 00:46:18:01
Jules
What people actually also thought is going to happen now that we going to see a devaluation. But the finance minister, Caputo, said, no, it's not going to happen. But the question is how much longer can it stay like this? And are we going to see economic incentives and more investments coming in, who can actually back up this whole plan and stabilize the economy in the long term?
00:46:18:03 - 00:46:37:02
Daniel
Thanks very much to Jules for speaking to me there. I mean, it looks like a typical austerity stability gambit, right? So the formula is that you take fiscal discipline, add in some deregulation and then some foreign spending as well, some foreign capital coming into the country. And then you get the economic revival coming out at the other end.
00:46:37:02 - 00:46:59:13
Daniel
At least that's the plan. But that is hampered unless you have social cohesion and that the credibility of the government and Argentine institutions like the big banks still hold. And that's why these midterms were so important and why you saw a boost in the markets. Because people are seeing investors are seeing that there is some sort of cohesion around having the plan.
00:46:59:13 - 00:47:21:05
Daniel
There is some sort of buy in around it which will allow him to continue the reform plans, even though they have been disruptive and they have been painful. And it's the kind of shock liberalization model that you saw in Israel in 1985. Right? So you had sky high inflation there for years and kind of spending money that they didn't really have, and they took this whole shock therapy route.
00:47:21:05 - 00:47:49:18
Daniel
So freezing wages and prices, cutting spending rapidly. And it was painful. But for them it worked because it meant that they they could go from snap 400% inflation to just 20% in the space of a year, and GDP rebounded the next year as well. It's not saying that it's going to be exactly the same with Argentina, but it is the similar kind of philosophy of this shock therapy route to get into a better economic footing.
00:47:49:20 - 00:48:15:10
Daniel
And that's the name of the game, right? Short term pain for long term gain. And Israel proved that you can do all of this shock therapy democratically, because that was what some of the worry around malaise was. And it's what and a route that other countries have gone down is to have some sort of authoritarian crackdown. But this was a democratic movement.
00:48:15:12 - 00:48:41:18
Daniel
Melaye got, approval from the people. And if you can get elites and unions and voters to agree that the old model is dead, then you're able to crush that inflation democratically. Argentina hasn't necessarily reached as broad a consensus yet. In Israel it was a cross party initiative where they were all in and they all agreed that something has got to change.
00:48:41:18 - 00:49:08:05
Daniel
Something's got to give. In Argentina, there isn't necessarily as broad a base as Melaye might want of support, and that's the big risk here that he loses political legitimacy. But for the sustainable part of the recovery kicks in and Melaye is showing some success here with those elections. And it's why the markets have responded so well. But Argentina is not out of the woods yet.
00:49:08:07 - 00:49:28:12
Daniel
And now it's time to wrap things up because that's it for this edition of The Dip. But if you want to send in some questions for our Q&A edition, which comes out every Tuesday, then send them to the dip at dw dot com or go to this episode on YouTube and just leave them in the comments and we'll put them to the biggest experts in the field.
00:49:28:12 - 00:49:37:14
Daniel
We'll put it to our network of global correspondents to get you the answer that you want. But until next time, thank you very much for listening to the Dip.