Inflation: another symptom of the zombie economy

In both the UK and the US, the monthly inflation figures released this week came in well above the forecasts. These announcements have added to fears from many economists that we could be seeing a return to inflation rates not seen for 40 years.

Led by Jay Powell, chair of the US Federal Reserve, most central bankers believe that the current high levels of inflation are ‘transitory’, and will fade away once the lockdowns have been fully lifted. Meanwhile, critics say any delay in monetary tightening will simply force the central banks to slam on the policy brakes harder at a later point, resulting in even greater economic disorder and perhaps an even harsher recession.

So who is right? The inflation hawks or the apparently dovish central bankers?

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A post-Covid boom? Not so fast

Some pundits are getting a little carried away by the signs of a rapid economic bounce-back. The uniqueness of the past year has distorted the data, creating a misleading impression of our economic prospects. We would be well advised to be more sceptical than usual about the economic stories being told.

The biggest worry is that politicians will overinterpret the contemporary statistical fog in a way that allows them to evade the deeper, more substantial economic issues they should be addressing. We have been complacent for too long about the state of the Western economies. If we get too excited about high growth rates and other anomalous data, we are much more likely to waste the opportunity for real change thrown up by this crisis.

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A ‘rebound’ to the Old Normal is not good enough

At the end of April, Barclays boss Jes Staley was forecasting that 2021 would see the strongest boom in Britain since the aftermath of the Second World War. The emerging consensus among economists is only a little less ebullient in anticipating the fastest pace of growth since 1989. The Bank of England’s chief economist, Andy Haldane, captured the upbeat mood: ‘As I’ve been saying for months – drawing on the economics of coiled springs, and crouching tigers, and “Chicken Lickens” – I do think more likely than not we are [set] for a rapid-fire recovery. That is coming, and I think that is coming soon.’

The upgraded forecasts for Britain’s economic growth this year and next from the likes of the IMF and the EY ITEM Club are quite feasible. However, it is short-sighted to think a rapid bounce-back over the next year or so will mean a robust long-term recovery. Moreover, talk of a ‘great rebound’ could also reinforce the tendency of successive governments to abandon their economic responsibilities to help the private sector create new growth sectors with enough decent well-paying jobs for people.

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Another crisis wasted

At El Alamein in 1942, British forces secured their first military victory of the Second World War. Winston Churchill assessed that Britain and its allies had ‘perhaps’ just reached the ‘end of the beginning’ of the war. But that didn’t stop him and other Western leaders starting to plan for life after the war. In Britain the government’s Beveridge Report was published in November that year, paving the way to the expanded welfare state that became a hallmark for the postwar domestic settlement. Less than two years later, with Allied armies only weeks into fighting their way across Europe and still heavily engaged in the Asia-Pacific theatre of war, their countries’ representatives convened in New Hampshire’s Bretton Woods. There they charted out what became the postwar international economic and monetary architecture that operated for the ensuing quarter century.

These ambitious initiatives remind us that huge crises, such as our coronavirus pandemic, used to be seized as opportunities to undertake radical longer-term planning. Judging by this week’s UK Budget package, this is not the case anymore. Times like this demand bold economic thinking. Rishi Sunak has squandered that opportunity.

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The economic transformation we need

One legacy of the pandemic has been to bring government activism out of the shadows. Whether you criticise or support how governments managed the pandemic, it is indisputable that their actions and inactions were of huge consequence to our lives and to the economy. So far, though, this acknowledgment has yet to unmask the myth that the past 40 years has been a period of state economic inactivity. Until this is understood, the current debate about state economic intervention will be misleading, when what we really need is a state-led shake-up of the failing status quo.

Read the full article here.