Towards a new standard of structurally moderate growth and persistent, albeit declining, inflation. As system complexity rises.
by Emilio Rossi
Net of further black swans, 2023 looks like a year of transition for advanced economies towards a new standard of structurally moderate growth (after more than two years of strong rebound), but with inflation closer to and perhaps slightly higher than in targets of central banks in the pre-pandemic decades. To evaluate this path it is useful to frame the new year within not only recent developments in the global economy and in advanced countries.
The economic effects of the pandemic and of Russia's invasion of Ukraine entered the global context of the 2000s characterized, at least in advanced countries, by the factors of secular stagnation: population aging, technological transition characterized by little effect on growth of productivity, savings gluten and negative real natural interest rates. In the years leading up to the pandemic, these factors were compounded by the drive towards a faster energy transition.
The pandemic and the war in Ukraine have significantly worsened the momentum world, exacerbating factors such as the slowdown in globalization and the growing burden of debt and adding new ones such as inflation, the difficulty in accessing energy and material resources and the organization of logisticsto.
A new standard: complexity
In the last three years we are witnessing the transition from a standard that is at least twenty years old which is difficult to manage (low inflation/low growth) to a socio-economic system characterized by high complexity, determined by the strong and intertemporal interaction of geopolitical, economic factors (industrial transition , digitalisation, AI, technological competition) and environmental (energy transition). There complexity management it will require greater attention to all aspects of risk management, in order to obtain greater stability and resilience of the economic and entrepreneurial system, but at the price of an inflationary reflection combined with a compression of profit margins.
The key driver for managing complexity will once again be technology in all aspects – including (among others) big data, IoT, machine learning, cloud, fintech, security, emissions mitigation or net zero emissions, use of new energy sources and connected new industrial processes, management of energy and telecommunications networks including satellite technology, new drugs and diagnostic and treatment technologies, etc. It is no coincidence that a fort is being developed in these areas protectionist confrontation between the economic powers of the planet on taxes and barriers to the entry and exit of these technologies. And therefore a redesign of international trade is underway, also with a view to reorganizing the reliability and diversification of its suppliers. The result will risk being the reorganization of world trade well beyond 2023; a topic that should be explored further.
The evolution of 2023
The new year is shaping up to be a final (and crucial) step towards the new standard – with divergent monetary and fiscal policies (before both becoming restrictive or neutral from 2024), an early part of the year with growth around zero and inflation still high albeit in sharp slowdown. The second half of 2023 will instead see a improvement in growth, the end of the inflationary emergency and the return of sovereign debt sustainability the center of attention of policy makers.
According to forecasts by Oxford Economics (more pessimistic than the IMF and Consensus), the first part of the year will be characterized globally by very weak growth – and in some areas by recessions – still accompanied by inflation and restrictive monetary policies; with a moderate recovery of growth in the second half of the year determined by a marked reduction in inflation and the consequent greater confidence and positive trend in real incomes. On annual average, global GDP will see a cooling from 3% in 2022 to values around 2-2.5% in 2023, with North America and the United Kingdom suffering the most and China recovering well due to exceeding the lockdown.
Also in the Eurozone and in Italy in 2023 the annual average growth will be around 0.5% after a weak first half. Furthermore, Italy will not be able to count in 2023 - as well as in the following years - on a significantly expansionary budget policy as an engine of growth, unless we want to put the country on a collision course with its European partners and above all with the markets which not long they will put debt/GDP back as the key variable to monitor. It therefore becomes crucialappropriate use of the resources of the Pnrr and in particular the implementation of the reforms connected to it. There remains the need for a profound revision of the state budget, both in terms of revenue and expenditure, in order to take into account both the simplification and the efficient use of public resources (reduction of waste and tax evasion). Nor is the EU budget exempt from this requirement.
Inflation cooling
In particular, a growing can be expected mitigation of the inflation phenomenon – and therefore one position less hawkish of the ECB - starting from the second quarter of the year, in conjunction with the becoming more explicit both of the impact of the restrictive policy of the central banks (through the traditional lagged effects of the transmission of monetary policy) and of the base effect of energy prices, commodities and maritime transport freight rates. In this regard, it is important to keep in mind that:
- The inflationary flare of the last quarter of 2021 was mainly due to a series of concomitant but temporary factors, including the reduction of European gas reserves at 74% made by the operator Gazprom (an unrepeatable lightness ....), the closure of the flow of Russian gas from Ukraine, various adverse and almost simultaneous atmospheric events in the USA (hurricane), China (drought), the UK and Northern Europe (weak winds), a faster recovery in post-Covid demand than expected although still weak compared to pre-Covid levels – and whose combined effects were emphasized by the small size of the TTF market
- Services account for three quarters of the economy and inflation in services sectors, while on the rise recently, is less exposed to energy prices and typically less volatile than that of manufacturing
- The effects of monetary tightening will begin to be felt on the classic transmission mechanisms of monetary policy to prices, with the ECB which, while completing the rate hike cycle in the first quarter of 2023, will continue on its path to reducing the size of its balance sheet.
Emile Rossi, Senior Advisor, Oxford Economics, Director of the Tertiary Observatory of Manageritalia.
Edit of February 21, 2023 of an article published by the author in a column of the Group of 20 in Formiche.net.
