It Could Hurt: The Global Economy’s Tectonic Plates Are Shifting

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When the Shannon family announced the closure of their garden center just off the busy South Circular road in London after 33 years in business this month, their message to customers was aimed at explaining their difficult decision.

“We are not getting any younger and our children have their own careers, ULEZ (a local emissions tax), Brexit, rising product costs, stock outs, falling footfall, hot weather, the cold weather, garden hose bans and the impending recession are all contributors,” the social media post read.

While south Londoners will have to go elsewhere for their factories, the biggest worry is that the local difficulties cited by the Shannons are just the net end of bigger moves in the global economy that go far beyond the crisis current cost of living.

The labor market is changing as baby boomers retire; disruptions caused by extreme weather conditions; the cost of climate action; more volatile geopolitics and an uncertain future for global trade: these are the megatrends that policymakers say could create a permanently more expensive world.

“There is enormous uncertainty about how the economy will shape up now that the tectonic plates are shifting,” International Monetary Fund Managing Director Kristalina Georgieva said at an event in Brussels this month. ci, adding: “There will be pain”.

How we got here was explained to the world’s central bankers at their annual retreat in Wyoming last month by Agustin Carstens, director of the Bank for International Settlements (BIS), who effectively serves as the central banks’ banker. .

According to Carstens, much of the global economy of the 1990s enjoyed three decades of solid, low-inflation growth due to benign tailwinds, including stable geopolitics, technological advances, a surge in globalization and a large pool. labor.

But instead of seizing the moment to make investments and reforms for the future, governments have gone into debt to chase even more growth. And while globalization made a few people very rich, it left millions of others feeling worse off.

The 2008/09 financial crisis, pandemic and war in Ukraine revealed the fragility of this growth fueled by cheap debt and just-in-time supply chains. Now the biggest fear is that those tailwinds that keep everything up in the air will turn into headwinds.

SHORT WORK
Take demographics. American baby boomers born between the end of the Second World War and 1964 will all have retired by 2030, while in Europe the elderly will outnumber the young by twice as many from 2060; in China, the proportion of people over 65 has tripled since the 1950s.

The “great demographic reversal” theory of economists Charles Goodhart and Manoj Pradhan – that aging will shrink the labor force and therefore prove inflationary – had attracted little attention before price pressures began to soar in 2020.

Now, however, the US Federal Reserve is pointing out that half of the sharp drop in labor force participation seen since the pandemic is due to the retirement of baby boomers.

“I think you have to come back and ask the question of whether we’re heading into an environment where we’re going to be short of manpower,” Federal Reserve Bank of Richmond Chairman Thomas Barkin told Reuters in a statement. an interview in August, adding that in turn may require a tightening of monetary policy.

ANTI-TRADE REFLEX
Some argue that the link between demographics and inflation ultimately takes care of itself. The Bank of Korea, whose country is preparing for the fastest rate of aging of any major economy, believes that an older population eventually cools demand in an economy and therefore drives down wages and prices.

However, that may depend on what happens with global trade, which in the two decades since China’s rise has spawned a flow of cheap and readily available consumer goods.

While reports of the death of globalization may be exaggerated, there are clear signs of a rollback from the days of freewheeling when it could be relied upon to maintain a ceiling on domestic prices everywhere.

IMF’s Georgieva said global supply difficulties due to the pandemic and now war in Ukraine have prompted companies in some cases to prioritize security of supply over lowest cost , a move that inevitably makes things more expensive.

Meanwhile, the Chinese economy is slowing and its leaders have turned their gaze from foreign trade to domestic reform; The European export giant, Germany, now wants to reduce its dependence on the Asian superpower.

The perception that globalization has benefited some more than others has led to a class of voters feeling ‘left behind’ – one of the complex mix of factors that led to Brexit but also influenced politics elsewhere.

According to trade historian Douglas Irwin of Dartmouth College, there is now a bipartisan anti-trade knee-jerk in American politics and a genuinely pro-trade president has not served in the White House since George W. Bush in 2009.

“In such a situation, it is very difficult to get out of it quickly,” he said at a Bruegel think tank event in Brussels.

LOSE ALTITUDE

Whether, on top of all that, the fight against climate change pushes us towards a costlier world will depend on how it is managed.

Doing nothing at all runs the risk of more frequent extreme weather events leading to consequences such as resource shortages and lower labor productivity – both inflationary. A disorderly move away from fossil fuels before other alternatives are in place would create energy shortages – and therefore also be inflationary.

According to analyzes by the Network for Greening the Financial System (NGFS) group of central banks published this month, “an immediate coordinated transition” to greener policies would be less costly than other long-term scenarios.

What these demographic, trade and climate challenges have in common is that they all impede the supply side of the economy – whether it is the supply of labour, goods or commodities – that central bankers cannot solve with quick moves in monetary policy.

In such a world, only deeper and longer-term reforms will rebalance the balance: education and health to boost human capital; the energy transition to avoid new fossil shocks; smart spending on innovation and infrastructure to ensure new efficiencies.

“We may be approaching what aviation calls a ‘coffin corner,’ the tricky spot where an aircraft slows below its stall speed and cannot generate enough lift to maintain altitude,” he said. Carsten said. “It takes skilled piloting to bring the plane back to a safer and more stable place.”
Source: Reuters (additional reporting by Howard Schneider in Washington; Choonsik Yoo in Seoul; editing by Toby Chopra)

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