The global economy makes everyone guess

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Although governments provided stimulus measures in 2008, they were relatively moderate and quickly brought it under control as the threat of a financial system implosion faded, paving the way for fairly slow growth – and at minimal inflation – in developed economies over the next decade.

Last year, perhaps because they were responding to a pandemic of frightening proportions with dire implications for real economic activity and ordinary individuals rather than a threat to the financial system generated by excessive risk-taking by banks (no government is keen to bail out banks from the consequences of their bad decisions) governments have reacted quite differently.

US Federal Reserve Chairman Jerome Powell. The Fed continues to downplay inflation fears. Credit:The New York Times

They paid money directly to households and businesses. The International Monetary Fund has estimated that advanced economies spent, on average, around 6% of their GDP on aid programs.

What would have been unthinkable in the previous decade was made acceptable, not only by the nature of the threat, but by the fact that the cost of financing the additional public debt incurred was, thanks to central banks, minimal.

In the United States, that spending in response to the pandemic is now tracked by the unprecedented infrastructure and spending program Congress wants, pursued by the Biden administration.

In the developed world – thanks to relief spending, ultra-low interest rates and the impact of COVID-19 on travel, hospitality and leisure activities – household savings rates are higher. higher than they were before the pandemic.

Just as governments’ responses to the pandemic have created structural changes in their fiscal parameters, it is entirely conceivable that there will be lasting societal impacts. Between them, they imply a recovery that is very different from last year’s recessions than that experienced after 2008 or previous economic downturns.

There have also been – again thanks to ultra-low rates and the huge amounts of central bank-provided liquidity flowing through financial systems – vast amounts of wealth created, at least on paper, by the boom in financial markets.

So there is a lot of latent consumption that could contribute to a recovery that is already unique in the speed at which the developed world has gone from an economic collapse to an economic boom.

Whether the fiscal madness behind this remarkable rebound – most developed economies will end up this year larger than they were before the pandemic – ends well or not, depends on what happens to inflation and corporate rates. ‘interest.

If the course of events follows the scenarios expected by the Fed and other key central banks, economic growth and inflation rates will stabilize as the impacts of the pandemic wear off and budget spending is reduced.

The quantitative easing programs (purchases of bonds and mortgages) launched by the Fed, the European Central Bank, the Bank of Japan and others, including the Reserve Bank, will start to be “declining” either to the end of this year, or sometime in 2022. By the end of 2023, or 2024, interest rates will start to rise, modestly.

The pandemic has shaken the global economy, and countries are rebounding at different speeds.

The pandemic has shaken the global economy, and countries are rebounding at different speeds.Credit:PA

It is possible. It is also conceivable, however, that central banks are not quite right with their timing or that the higher inflation rates are not transient and exceed the “2% on average” that now appears to be the consensus goal for the central banks and strengthens the hand.

It would be unpleasant for households, businesses and governments, all of which have historically high levels of debt and indebtedness.

What is not yet clear is whether the post-pandemic economy will be the same, or at least very similar, to the economy before the pandemic.

Will some of the changes in the way people work and businesses operate that the pandemic has forced on will be permanent, or at least long-lasting enough?

How long will it take before normal levels of pre-pandemic travel are possible? Will people still go to the movies, theater, or restaurant, or shop in stores, or return to city offices with their pre-pandemic numbers? The drift from cities to territories – which has undermined the economic lever resulting from population density, will it be reversed? Will the demand for cars and public transport be significantly affected if more people work from home?

Just as governments’ responses to the pandemic have created structural changes in their fiscal parameters, it is entirely conceivable that there will be lasting societal impacts. Between them, they imply a recovery that is very different from last year’s recessions than that experienced after 2008 or previous economic downturns.

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A figure or two on inflation does not give a clear indication of the future of developed economies, but it is these figures, along with the employment data, that will ultimately tell us whether the future is different from the past, with all of this might imply – reassuring or frightening – for inflation, interest rates, government budgets and the housing and securities markets.

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