THE International Monetary Fund (IMF) and several senior economists predict that global growth will slow down in the coming 12 months as inflation abates.
There is, however, a vocal minority out there who believe that this view is sanguine; that the combined shock from the coronavirus pandemic, energy crisis and supply logjams could cause an inflationary recession.
Goldman Sachs chief economist Jan Hatzius observes an “unfriendly mix of higher inflation and slower growth across the global economy”.
The “nasty twist” from energy supply shortages could especially hurt Europe and China if the winter is extremely cold, he said.
But Hatzius still believes there will be growth in 2022, albeit at a slower pace. As things stand, Goldman Sachs has reduced its forecast for global gross domestic product (GDP) growth in 2021 from 7 per cent to 6 per cent.
The investment bank estimates that global growth will decline to 4.6 per cent next year, and fall further to 3.5 per cent in 2023. This is closely in line with the IMF’s estimates as well as predictions of other economists.
“The positive growth impulses from vaccines, pent-up saving, and purchase of inventories are all relatively short-term in nature,” said Hatzius.
Beyond early-2022, economies will struggle to counter the strain of higher taxes and lower spending.
Hoisington more pessmistic
Lacy Hunt, economist at Hoisington, a US fund that specialises in US Treasury securities, is far more pessimistic. He believes that the economies of the US, Europe, Japan and China are much weaker than most economists and bankers are prepared to admit.
“The unprecedented debt financed stimulus measures since the spring of 2020 have only produced transitory spurts in economic growth,” he said. “Excessive indebtedness acts as a tax on future growth so that it is swiftly dissipated”.
Indeed, the relative underperformance of Japan and the eurozone confirm that massive debt overhangs are detrimental to economies, said Hunt.
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There is also an ongoing debate on this within the IMF itself.
Despite the economists’ view that growth will continue, albeit at a lower level, Tobias Adrian, director of the IMF’s monetary and capital markets department, and other fiscal department senior officials are clearly worried that economies will perform worse than expected.
“Amid the prolonged and painful pandemic, risks to global financial stability have remained contained so far,” said Adrian. “But with economic optimism fading, and with financial vulnerabilities intensifying, this is a time for careful policy calibration.”
Adrian, a former senior vice-president at the Federal Reserve Bank of New York, fears the consequences of a possible stock market slide.
“The sense of optimism that had propelled markets in the first half of the year is at risk of fading,” he said. “Overly stretched asset valuations” and speculation in crypto currencies and other financial assets “could increase downside risks”.
“The pandemic will leave a lasting mark on inequality, poverty, and government finances,” said a group of officials from the IMF’s fiscal department.
Global Debt Mountain a threat
“During 2020, global debt rose by 14 per cent to a record $226 trillion. This figure includes global public debt of US$88 trillion, which is more than the world’s GDP,” they said.
Brendan Brown, a financial historian and a director of Macro Hedge Advisors, said that unexpected financial asset deflation caused by a stock market tumble could cause recession.
He disagrees with the currently fashionable view that present economic conditions are similar to the stagflation in the 1970s.
Instead, a better historical comparison is the aftermath of World War II, said Brown. In 1946 and 1947, inflation surged and began to fall in 1948 when shortages subsided. Then followed a recession in 1950 and consumer prices fell during a brief period of deflation.
© copyright Neil Behrmann.(https://neilbehrmann.net) This article was first published in The Business Times Singapore . For other Asian and global articles try https://subscribe.sph.com.sg/publications-bt/