- Beyond the cost of living crisis, other trends are at play
- Demographics, geopolitics, environmental costs weigh in
- Monetary quick fixes are not enough; deeper reforms needed
LONDON, September 12 (Reuters) – When the Shannon family announced the closure of their garden center just off London’s busy South Circular Road this month after 33 years of trading, their message to shoppers tried to explain their difficult decision.
“We’re not getting any younger and our kids have careers of their own, ULEZ (a local emissions tax), Brexit, rising product costs, shortage of inventory, fewer visitors, hot weather, cold weather, hose bans and a looming recession are all contributors,” read the message in the social media.
While south Londoners need to look elsewhere for their investments, the greater concern is that the local troubles being spearheaded by the Shannons are just the sharp end of larger moves in the world economy that go well beyond today’s cost-of-living crisis.
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labor market shifts as baby boomers retire; disruption due to extreme weather; the cost of climate action; more volatile geopolitics and an uncertain future for world trade: these are the broader trends that some policymakers believe could lead to a permanently more expensive world.
“There is a lot of uncertainty about how the economy will evolve now that the tectonic plates are shifting,” International Monetary Fund executive director Kristalina Georgieva said at an event in Brussels this month, adding, “There will be pain.” .
How we got to this point was laid out for the world’s central bankers at their annual retreat in Wyoming last month by Agustin Carstens, head of the Bank for International Settlements (BIS), which effectively acts as the central banker.
According to Carstens, much of the world economy enjoyed three decades of solid growth and low inflation beginning in the 1990s, thanks to favorable tailwinds including stable geopolitics, technological advances, a surge in globalization, and an ample labor supply.
But instead of seizing the moment to make investments and reforms for the future, governments took on debt to generate even more growth. And while globalization has made a few people very wealthy, millions more have felt worse off.
The 2008-09 financial crisis, pandemic and war in Ukraine demonstrated the fragility of this growth fueled by cheap debt and just-in-time supply chains. Now the greater fear is that the tailwind that keeps everything in the air will turn into a headwind.
SHORT WORK
Take demographics. Baby boomers in the US born between the end of World War II and 1964 will all have retired by 2030, while in Europe the elderly will outnumber the young by 2:1 from 2060 onwards; in China, the proportion of people over 65 has tripled since the 1950s.
Economists Charles Goodhart and Manoj Pradhan’s theory of the “great demographic reversal” – that aging shrinks the workforce and thus proves inflationary – had attracted little attention before price pressures began to rise in 2020.
Now, however, the Federal Reserve is pointing out that half of the big drop in labor force participation since the pandemic is due to baby boomer retirements.
“I think you need to come back and ask yourself, are we heading into an environment where we’re going to be under-employed,” Federal Reserve Bank of Richmond President Thomas Barkin told Reuters in an August interview adding that in turn could require tighter monetary policy.
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ANTI-TRADE REFLEX
Some argue that the connection between demographics and inflation eventually resolves itself. The Bank of Korea, whose country is preparing for the fastest aging of any major economy, believes that an aging population ultimately cools demand in an economy, depressing wages and prices.
But that may depend on what happens to world trade, which has produced a stream of cheap and readily available consumer goods in the two decades since China’s rise.
While reports of the death of globalization may be exaggerated, there are clear signs of a retreat from the freewheeling days when it could count on keeping domestic prices in check everywhere.
The IMF’s Georgieva said global supply shortages due to the pandemic and now the Ukraine war have in some cases prompted companies to prioritize security of supply over lowest cost, a move that inevitably makes things more expensive.
Meanwhile, China’s economy is slowing and its leaders have shifted their focus from foreign trade to domestic reform; Europe’s export giant Germany now wants to reduce its dependence on Asia’s superpower. Continue reading
The perception that some have benefited more from globalization than others has left a category of voters feeling “left behind” – one of the complex factors that led to Brexit but has also influenced politics elsewhere.
According to Dartmouth College trade historian Douglas Irwin, there is now a bipartisan anti-trade reflex in US politics, and there has not been a truly pro-trade president in the White House since George W. Bush in 2009.
“In a situation like this, it’s very difficult to get out of this situation quickly,” he said at a Bruegel think tank event in Brussels.
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LOSE HEIGHT
Whether tackling climate change also pushes us into a more costly world will depend on how it is managed.
Doing nothing at all carries the risk of more frequent extreme weather events leading to resource shortages and reduced labor productivity – both inflationary. A disorderly move away from fossil fuels before other alternatives are available would lead to energy shortages – and thus also inflationary.
According to analysis by the group of central banks in the Network for Greening the Financial System (NGFS) released this month, “an immediate coordinated transition” to greener policies would be less costly in the long run than other scenarios.
What these demographic, trade and climate challenges have in common is that they all affect the supply side of the economy – be it the supply of labour, goods or commodities – which central bankers cannot fix with quick monetary policy action.
In such a world, only deeper and longer-term reforms can restore the balance: education and healthcare to strengthen human capital; energy transition to avert new shocks from fossil fuels; smart spending on innovation and infrastructure to secure new efficiencies.
“We are potentially approaching what is known in aviation as the ‘coffin corner,’ the tricky point where an aircraft decelerates below its stall speed and cannot generate enough lift to maintain its altitude,” said Carsten. “It takes skillful piloting to return the plane to a safer, more stable location.”
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Additional reporting by Howard Schneider in Washington; Choonsik Yoo in Seoul; Adaptation by Toby Chopra
Our standards: The Thomson Reuters Trust Principles.
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