09/04/2024
In CSI articles
Is the future of the global economy in jeopardy?
Written by : Kevin COMBE
Annotated by : Maxime MAURY
In this article, Kevin Combe focuses on the financial mechanisms of world powers and their ability to combat this timeless inflationary phenomenon. The article is annotated by the brilliant Dr Maxime Maury, who poses, in his words, “some disturbing questions about inflation and the return of stability”.
Introduction :
Inflation, or the threat hanging over the entire global economic system. However, it is necessary for the proper functioning of a given economic policy, as demonstrated by the European Central Bank, with a regular and moderate rise in prices of around 2%, a sign of economic growth.
However, the economy in the broadest sense of the term is dependent on variations both in the market and in political or social events. The Russian-Ukrainian conflict is a perfect illustration of this. In the face of this conflict, we have seen a significant upturn in consumer goods prices in Europe (+11.9% over 2022) and more particularly in France, with an increase of almost 17.9% between January 2022 and August 2023 [1].
Good economic policy rests on 4 pillars:
– Growth ;
– Price stability ;
– Full employment;
– External trade balance.
In this sense, rethinking the economic system also means ignoring – or leapfrogging – certain principles. In most European countries, the response to the COVID-19 pandemic was based on the imperative of macroprudential policy, in other words the easing of financial requirements, with the aim of facilitating economic recovery through easier access to employment. However, under more austere monetary policies, the rise in prices is measured and controlled, so inflation has less effect. But in return, these policies have a negative effect on employment, purchasing power and output [2].
This means that economic and public policy management will have to be rethought, taking into account the harsh reality that a return to pre-COVID-19 prices and the conflict between Russia and Ukraine is impossible. One of the reasons for this new dynamic is also linked to the substantial profits made by major companies over the last two years, notably through increased margins (+32% in 2023) and soaring energy prices (+40% on average in Europe).
The interweaving of geopolitical and economic factors should enable us to rethink and strengthen our multilateral trading system.
As a result, different dynamics are at play. The European desire to solidify the base of competitiveness largely defended by France and Germany is thus opposed to the American model which, since 2022, has been able to bring about the Inflation Reduction Act, which aims to strengthen the American model with its conservative values by giving companies a certain tax incentive to create jobs on American soil, even if this means sacrificing globalist principles.
It is a game of diverse and varied influences and strategies with which we are, and will be, confronted in the years to come. The Russian example can also testify to a desire to diversify its economy as best it can, despite these inflationary factors (+7.4% in 2023) on the back of a rebuilding as a war economy, enhanced by the multiplication of bilateral agreements signed with China, reaching a peak of almost 27
% in trade in goods and services by 2023. This strategy reflects a desire to unite, particularly in the field of armaments. From the Kremlin’s point of view, remobilising the economy involves massive investment in the army, with military Keynesianism shifting Russia’s economic policy towards restructuring its economy in order to combat inflation and influence international politics.
Demonstrating that Russia is capable of concentrating 6% of its GDP on the army is a euphemism for the Kremlin, a demonstration of what Russia wishes to project to the world: an economic policy capable of juggling European sanctions and the economic situation it is facing [3].
However, the above examples deal with individual cases, but the dynamics are indeed global, and even continental. The European Union’s “recovery and resilience” plan aims to devote 806 billion euros to the continent’s economic recovery [4] to deal with inflation, health and even military issues. But at a time when the anti-globalisation movement is alternating between hot and cold, it is another issue that is currently attracting attention: the ecological transition.
Indeed, it would seem that there is an interest in achieving the objectives set by supranational institutions such as the EU, whose member countries are required to devote 37
% of their budget to the climate and 20% to the digital sector. What does this mean? We need to see this as a global recovery plan, but also as a means of resisting powers such as Russia or China, or even the BRICS as a whole. Why should this be? Because the influence of these countries is currently growing.
In 2023 alone, there will be almost 60 applications to the group, which will be enlarged on 1 January 2024 to include Egypt, Saudi Arabia, Iran and Ethiopia, strengthening its political and economic position in the international political game.
The “BRICS+” are a real economic strike force (35.6% of world GDP in 2022) [5].
This opens up a global chess match between different economic policies and divergent objectives. But in many cases, greater policy coordination would be beneficial. Greater international coordination must respond to future needs, conflicts or challenges.
[1] Enlargement of the BRICS: what potential consequences for the world economy, Banque de France. URL: https://www.banque-france.fr/fr/ publications-et-statistiques/publications/elargissement-des-brics-quelles-consequences-potentielles-pour-leconomie-mondiale
[2] The European recovery plan: laying the foundations for the French recovery. URL: https://france.representation.ec.europa.eu/strategie-et-priorites/le-plan-de-relance-europeen_fr
[3] Desrosiers, É. (2024, February 23). La Russie a répondu aux sanctions par une économie de guerre. Le Devoir. URL: https://www.ledevoir.com/economie/807766/analyse-russie-repondu-sanctions-economie-guerre?
[4] When can macroprudential and monetary policies be in conflict? (2022, 7 April). Banque de France. URL: https://publications.banque-france.fr/quand-les-politiques-macroprudentielles-et-monetaires-peuvent-elles-etre-en-conflit
[5] Confrère, E. (2023, 13 November). Food inflation: why France is a bad pupil in Europe. Le Figaro. URL: https://www.lefigaro.fr/conso/inflation-alimentaire-pourquoi-la-france-fait-figure-de-mauvaise-eleve-en-europe-20231113
Dr Maxime Maury’s notes:
“Some uncomfortable questions about inflation and the return of stability.”
At a time when inflation indicators are converging towards 3%, there are a number of disturbing issues that require attention. I can think of at least four:
– Underlying inflation;
– The asset bubble;
– Energy prices;
– Interest rate uncertainty.
1) Underlying inflation :
This is the real inflation trend. It is measured by the rise in wages and the price of services. In the United States , it is still 4-5%. In the eurozone it is around 3-4%. It is the return of these figures to around 2-3% that will enable the central banks to cut interest rates, probably in the second half of the year.
2) The asset bubble :
We talk about “asset inflation” in relation to property prices and the stock market. It’s part and parcel of inflation.
The total amount of liquidity in circulation is estimated at 6,000 billion, equivalent to two years of France’s GDP. The high level of money creation over the last 20 years (see Jacques de Larosière: “Pour en finir avec l’illusion de la finance”) has pushed assets to artificially high and unsustainable levels.
A few months ago, INSEE estimated that property prices were 37% overvalued. All over the world, they have doubled in 20 years.
Stock markets are beating records that cannot be explained by movements in the real economy: price-earning ratios (P/Es), which have a long-run average of 12-14, are frequently 40 or more for leading stocks.
This is a form of inflation.
3) The price of energy :
According to Jean-Marc Jancovici’s Shift Project, we are on the cusp of peak oil.
Even if there is no direct and immediate relationship between the price of oil and its eventual scarcity, the rate of discoveries has fallen very low. The only way the world is maintaining its consumption is through shale oil and tar sands, which are producing low yields.
To ensure “all-electricity”, world metal production will have to be multiplied by 7 between now and 2040.
We are therefore entering a world in which energy will continue to be expensive. Added to this are the geopolitical risks.
4) Interest rate uncertainty :
Against this “post-inflationary” but still inflationary backdrop, the central banks are not letting their guard down completely. They have announced that they will continue their policy of reducing the size of their balance sheets. This means rolling over an increasingly small proportion of maturing government securities.
We could therefore see a fall in short-term interest rates combined with a rise in long-term rates. Especially as long rates have already fallen in the autumn in anticipation of the fall in short rates.
In conclusion, we must avoid the simplistic reasoning that we generally read in the press. The fight against inflation and the restoration of stability is far from over.
***
Sincere thanks to Dr Maxime Maury for his support of the Cercle de Stratégies et d’Influences and for contributing his expertise to our work.
The authors :
Kevin COMBE
“Writer for the Cercle de Stratégies et d’Influences” (Circle of Strategies and Influences)
Kevin COMBE has a Master’s 2 in human and social sciences, specialising in “political professions”. Through his university career and various professional experiences, Kevin has specialised in French and international political influence and dynamics.
Maxime MAURY
“Professor and former Regional Director of the Banque de France
Dr Maxime MAURY is an affiliated professor at Toulouse Business School and the Institut Catholique de Toulouse. An Officier des Palmes académiques, his previous positions include Regional Director of the Banque de France in Toulouse (2016-2019), Clermont-Ferrand (2009-2015) and Caen (2007-2009), and Departmental Director of the same institution in Troyes and Arras.