There is some evidence that inflation rates will fall in the coming months.
(Photo: IMAGO/Rupert Oberhäuser)
The OECD forecasts are not promising. For the period from 2020 to 2030, the club of industrialized countries expects only low growth rates. Adjusted for inflation, no more than one percent growth per year is realistic for the largest industrialized and emerging countries, due to low productivity gains and demographic developments. Distribution conflicts are therefore unavoidable in view of the rapidly increasing costs of an aging society.
It seems to be coming true what former US Treasury Secretary and economist Larry Summers predicted in a widely acclaimed speech back in 2013: the Western world is locked in “secular stagnation,” a long period of low growth. In short, the West is on the Japanese way.
In fact, in the past ten years, it has not been possible to return to the trend growth of the years before the financial crisis. Despite all the efforts of monetary policy – zero and even negative interest rates, massive purchase programs for securities – growth and inflation remained low.
Only the corona crisis brought about change: the newly created money no longer got stuck in the financial system, only to fuel ever larger asset price bubbles. It arrived in the real economy.
The government spending programs, financed almost entirely by the central banks, achieved the desired purpose: They stabilized demand while at the same time supply fell due to supply chain disruptions and plant closures. Inflation was the inevitable result.
There is some evidence that inflation rates will fall in the coming months. Money supply growth has slowed significantly and governments are likely to return to somewhat more solid spending policies. However, this threatens to continue the stagnation warn such prominent voices as Olivier Blanchard, the former chief economist of the International Monetary Fund.
Daniel Stelter is the founder of the discussion forum “beyond the obvious”, which specializes in strategy and macroeconomics, as well as a management consultant and author. Every Sunday his podcast goes online at www.think-bto.com.
(Photo: Robert Recker/ Berlin)
One does not have to be a prophet to conclude that this is a major test of endurance for Western societies and has the potential to trigger new crises for the euro zone. The only question is: what could economic policy do?
Three paths for economic policy
Three ways are possible. On the one hand, the central banks could stop halfway in their efforts to curb inflation and aim for inflation rates of four instead of two percent in the long term.
Such an adjustment of the target system was already being discussed before the corona shock, as supporters believe that it would make it easier for the central banks to keep the real interest rate – i.e. the rate minus the inflation rate – clearly in the negative range and thus stimulate the economy. Critics – including myself – fear a renewed inflation of the asset markets without any significant effect on the manufacturing economy.
The second way would be permanent government spending programs on credit, as Japan has been doing for over 20 years now. In Great Britain, however, a short but severe bond crisis last year made it clear that the capital markets do not always go along this route, especially not in countries that, unlike Japan, have a deficit in foreign trade. Even in the case of Japan, there are gradually indications that a state can go this way for a very long time, but not forever. Government spending can at best achieve something temporarily.
Reforms would be the only lever to unlock growth potential. Increasing labor force participation – more annual working hours and later retirement ages – and increasing productivity. But politicians are not only struggling with this in our partner countries. The same applies to Germany.
>> Read here: Japan’s new central bank chief wants to review monetary policy
In the end, only a combination of all three ways is likely to be promising: the states are incurring more debt – presumably hidden at EU level – the central bank tolerates higher inflation and keeps the real interest rate negative and the southern countries accept reforms because Germany has the first two levers tolerated and set a good example. It’s an unpopular package, but it’s definitely better than the alternatives.
Daniel Stelter is the founder of the discussion forum “beyond the obvious”, which specializes in strategy and macroeconomics, as well as a management consultant and author. Every Sunday his podcast goes online at www.think-bto.com.
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First publication: 03/03/2023, 1:51 p.m.