Analysis: This could hurt: the tectonic plates of the global economy shift

  • Beyond the cost-of-living crisis, broader trends are at play
  • Demography, geopolitics, environmental costs weigh on
  • Monetary quick fixes are not enough; deeper reforms needed

LONDON, Sep 12 (Reuters) – When the Shannon family announced the closure of their garden center just off London’s busy South Circular Road after 33 years in business this month, the message to customers tried to explain their difficult decision. .

“We are not getting any younger and our children have their careers, ULEZ (a local tax on emissions), Brexit, rising cost of products, shortage of stocks, less influx, hot, cold weather, hose ban and looming recession. they are all collaborators “, reads the message on social media.

While South Londoners will have to go elsewhere for their plants, the major concern is that the local hardships cited by the Shannons are just the abrupt end of larger movements in the global economy that go far beyond today’s cost of living crisis.

Register now for FREE unlimited access to Reuters.com

The job market changes as baby boomers retire; disruption caused by extreme weather conditions; the cost of climate action; a more volatile geopolitics and an uncertain future for world trade: these are the broader trends that some politicians say could create a permanently more expensive world.

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

Just how we got to this point was explained to the world’s central bankers during their annual retreat in Wyoming last month by Agustin Carstens, head of the Bank for International Settlements (BIS) who effectively serves as central banker.

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

But instead of seizing the moment to invest and reform for the future, governments went into debt to chase even more growth. And while globalization has made some people very rich, it has left millions of people in worse shape.

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

SHORT WORK

Get the demographics. US baby boomers born between the end of World War II and 1964 will all retire by 2030, while in Europe the elderly will outnumber the young by 2: 1 by 2060; in China, the percentage of people over 65 has tripled since the 1950s.

Economists Charles Goodhart and Manoj Pradhan’s “great demographic reversal” theory – that aging will shrink the workforce and thus prove inflationary – had attracted little attention before price pressures began to rise in 2020.

Now, however, the US Federal Reserve points out that half of the large decline in labor force participation seen by the pandemic is due to the withdrawal of baby boomers.

“I think you need to come back and ask the question if we are heading towards an environment where we will have little manpower,” Federal Reserve Bank of Richmond chairman Thomas Barkin told Reuters in an August interview, adding that it may take. a more restrictive monetary policy.

Reuters graphics
Reuters graphics Reuters graphics

ANTI-TRADE REFLECTION

Some argue that the link between demographics and inflation eventually resolves itself. The Bank of Korea, whose country is bracing for the fastest aging rate in any major economy, believes that an elderly population will eventually cool demand in an economy and thereby push down wages and prices.

This, however, may depend on what happens with world trade which in the two decades following the rise of China has generated a flow of cheap and readily available consumer goods.

While reports of the demise of globalization may be exaggerated, there are clear signs of a retreat from the freewheeling days that could be relied upon to keep domestic prices in check everywhere.

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

Meanwhile, China’s economy is slowing and its leaders have shifted their gaze from foreign trade to domestic reform; European export giant Germany now wants to reduce its dependence on the Asian superpower. Read more

The perception that globalization has benefited some more than others has led a category of voters to feel “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 reflection in US politics and a genuinely pro-trade president hasn’t sat 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.

Reuters graphics

LOSE FEE

Whether, on top of all this, tackling climate change pushes us into a more expensive world will depend on how it is managed.

Doing nothing runs the risk of more frequent extreme weather conditions causing outcomes such as resource shortages and lower labor productivity, both of which are inflationary. A disorderly move away from fossil fuels before other alternatives are put in place would create energy shortages and therefore would also be inflationary.

According to analysis by the Network for Greening the Financial System (NGFS) central banking group released 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 block the supply side of the economy – be it labor, goods, or commodities – that central bankers cannot solve with quick monetary policy blows.

In such a world, only deeper and longer-term reforms restore the balance: education and health care to increase human capital; energy transition to avoid new fossil fuel shocks; wise spending on innovation and infrastructure to ensure new efficiencies.

“We may be approaching what in aviation is called the ‘coffin corner’, the tricky point where a plane slows below its stall speed and can’t generate enough lift to maintain its altitude,” Carsten said. “It takes an experienced pilot to get the plane back to a safer and more stable place.”

Register now for FREE unlimited access to Reuters.com

Additional reports by Howard Schneider in Washington; Choonsik Yoo in Seoul; Editing by Toby Chopra

Our Standards: Thomson Reuters Trust Principles.

    .

Leave a Reply

%d bloggers like this: