Irish version Inflation and the Strongest Recovery since WW2

Inflation is rearing its ugly head again, especially with soaring commodity prices. Inflation was very high in the 1970s and 1980s but it was both destabilising and often adversely affected incomes for millions.

Rapid price rises meant big pay rises in the 1970s and 1980s. But there was illusion too. A fat pay rise may seem good, but in the years of hyperinflation trade unions saw that inflation is not the worker's friend because even with big pay rises but higher inflation, real pay fell.

EU growth and inflation forecasts

Inflation in the EU is now forecast at 1.9% in 2021 and 1.5% in 2022. For the euro area, inflation is forecast at 1.7% in 2021 and 1.3% in 2022.

The EU projects that the EU economy will expand by 4.2% in 2021 and by 4.4% in 2022. The euro area economy is forecast to grow by 4.3% this year and 4.4% next year. The EU economy in contrast had contracted by 6.1% and the euro area economy by 6.6% in 2020 so this is a big turnaround and recovery.

IMF growth Forecasts

 The IMF forecast is for the recovery to be quite strong, soaring from negative growth last year to strong figures this year and also next year in many countries and regions. For example, World output which fell in 2020 by -3.3% will rise to 6% this year and a further 4.4 next year. The United States saw similar growth and the Euro area will see a jump from a fall of -6.6% in 2020 to 4.4 this year and further 3.8% in 2022. China did not have a fall in output last year but this year will see a rise of 8.4% followed by 5.6% in 2022.

The IMF also see a strong if uneven rebound in economic output. It says "The strength of the recovery will depend in no small measure on a rapid rollout of effective vaccines worldwide." And with its new focus on inequality (at long last) the IMF says "Much remains to be done to beat back the pandemic and avoid persistent increases in inequality within countries and divergence in income per capita across economies."

OECD Economic Forecast

OECD says Global economic growth is now expected to be 5.8% this year, a sharp upwards revision from its December 2020 forecast. It says that some countries are recovering much faster than others. "Korea and the United States are reaching pre-pandemic per capita income levels after about 18 months. Much of Europe is expected to take nearly 3 years to recover. In Mexico and South Africa, it could take between 3 and 5 years."

The vaccine rollout is the key driver in the world's economic recovery, but as OECD rightly warns "while vaccination rates are progressing well in many advanced economies, poorer and emerging-market countries are being left behind. Unless everyone is protected, no one is protected.

What is driving Inflation?

One reason is that the world is bouncing out a world recession caused by Covid 19 thanks to the vaccine rollout. This will be the strongest recovery since 1945 (measured by the rise in world output from the bottom of the recession), beating previous fast recoveries, for example, those in 1945/6, 1982 or 1991. Such a strong recovery will boost prices.

Another reason for the strength of the recovery is that Governments borrowed and invested massively and subsidised private sectors to an unprecedented degree to maintain private businesses and taxpayers financially supported vast numbers of private sector workers so that once the recovery began, businesses would remain to start again. It was the world's biggest socialisation ever and it is the basis on which recovery has begun in all countries.

We Irish had thought that the Irish government's rescue of the private property "market" and all the private banks was the biggest state rescue ever after the neo-liberal, policy-induced crash of 2008. But it happened again and on a much bigger in scale in just over a decade. It too was made happen by policy decisions.

Another driver of inflation is commodity prices which are soaring internationally. Contributing to this rise in such prices is the demand for clean energy. In the Republic of Congo, high-grade copper is booming because it is used in wind turbines and electrical vehicles. The energy future is electricity and copper wire is at its core - lots and lots of it!

Governments' investment programs are focusing on shifting to environmental sustainability and this too is boosting the demand for commodities such as copper, lithium, nickel and cobalt and other minerals used in environmentally sustainable products. Copper, iron ore, palladium and timber have also hit record highs in May and agricultural commodities - grains, oilseeds,  sugar and dairy have also jumped in price.

Another driver contributing to the rise in the world inflation is China's voracious demand for commodities and other products too. China was largely outside the world market in the 1970s and 1980s but is fully integrated today.

The huge glut in savings because people could not spend during the pandemic will also help to boost demand and thus many prices too.

Finally, the Covid pandemic accelerated a big shift towards digitalisation and automation, including through a huge growth in e-commerce and in remote working. This will boost productively substantially. It is unlikely for these trends will be reversed, helping to sustain the recovery. The investment in this means the productivity rewards will flow to the investors to the owners of capital. This means displaced workers must be supported retrained and the international efforts to tax capital adequately must succeed if states are to recover the costs of the Pandemic supports endowed on private business and workers.

So it's the rebound from the very deep Covid-induced recession, turbocharged by major, synchronised government investment programs, which are much more focused on environmental investment and sustainability and then there is the pent-up private demand due to major savings.

The rising inflation could be "modest and also temporary" according to the US Federal reserve. If the Fed raises interest rates too fast and high, it could cause another recession in the US according to some.

Larry Summers, Bill Clinton's Treasury Secretary and an influential right-wing Democrat is highly critical of Biden's investment program arguing that it will lead to high inflation and worse. He says the stimulus is 14% of US GDP in the first round, accompanied by extraordinary monetary measures and a huge savings overhang, which could mean "we are away over-doing the requisite response" he argues.

A major recovery can be and is  expected to boost prices in the short run, but the last word goes to Joe Stiglitz -  "whether those peddling inflation fears are pursuing their own agenda or simply jumping the gun, they should not be heeded."

Conclusion

So are we facing roaring inflation again? I do not expect it, though there probably will be a little inflation. That is not a bad thing because it helps oil the wheels of the economy and business.

We are witnessing the strongest recovery in the world since the Second World War. The  reasons for this were outlined above. They include the vaccine rollout in many but not all countries; the vast support given by governments in the biggest socialisation program ever in the history of the world in support of the private sector and millions of workers displaced by the pandemic; the big recovery investment programmes being launched by the EU and by most states; the unleashing of the glut in savings; and the automation and digitalisation accelerated by the Lockdowns, which will give a long-term boost on productivity.

It is also important in this new world that governments in Europe and the world support workers who were displaced by the accelerated changes which the panic pandemic induced. Further, no subsidies should ever be given again and on such vast scale to private firms by governments without explicit and defined returns for the long suffering taxpayer.

Finally, the public sphere, the state, has shown itself to be the dominant force in the new world order. It leaders must recognise this with a new "can do attitude" which has been missing from politics with the diminution of the state under the neo-liberal era. They  must negotiate and plan with this "can do, must do" political ambition paramount, to ensure inequality is reduced and climate repair is rapidly addressed, just as Covid19 was.

Posted in: Banking and finance • Economics

Paul Sweeney     @paulsweeneyman

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions. He was a President of the Statistical and Social Enquiry Society of Ireland, former member of the Economic Committee of the ETUC, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.