State interventions to support families and businesses are running out, Covid seems far from defeated and the large infrastructure investments announced both in the USA and in Europe still appear a long way off. The result is that the economic recovery that started at the beginning of the year is starting to show a worrying slowdown.
This is confirmed by the latest data from China: GDP growth in the third quarter is three percentage points lower than the previous one, the same trend can also be seen for the other countries, in the USA the GDP growth forecasts at the end of the year were lowered from +6,7% to +5,7%.
A set of cyclical and longer-term factors tend to cast doubt on the strength and continuity of an economic recovery that had been announced with great optimism.
A complex phase probably awaits us in which we will have to deal with a too hastily forgotten recent past and with an uncertain future.
In the background, the threat of secular stagnation, never seriously addressed and discussed, seems to re-emerge.
THE SHORT-TERM VISION
At present, most commentators tend to justify the slowdown in growth by interpreting it as cyclical in nature.
Delta variant that has not affected all countries in the same way, uneven levels of vaccination between rich and poor countries, narrow-gauge supply chains, scarcity of raw materials, are identified as the key elements of this slowdown phase.
Meanwhile, while the mismatches between labor supply and demand are becoming evident, employment levels still appear far from those pre-crisis Covid 19.
Up to 22 million jobs have been lost in the US and still are 8,4 million Americans are actively looking for work while another 5 million have given up looking for one. In the'Eurozone there are over 14 million unemployed. Most of the new hires are on temporary contracts and wages aren't going up. If people don't work and don't have money in their pockets, it will be difficult for them to spend and they tend to save what they have.
Furthermore, the increase in the inflation rate that central bankers are now pricing in for longer than hitherto anticipated erodes the purchasing power of state aid and wages.
NOT RELATING PREDICTIONS
Il CBO (Congressional Budget Office), a bipartisan US congressional body, released its new estimates for the years ahead last July.
They cover the span of a decade: from 2021 to 2031 and for this reason they appear quite interesting.
According to the CBO in the USA, once the effects of the support policies implemented by the Government have been attenuated (only those already legislated are included in the estimates), we will see a significant decline in real GDP growth: +1,5% in 2023, + 1,1% in 2024, +1,3% in 2025, to then move between +1,4 and +1,6% in the five-year period 2026 - 2031 (but we are now a long way off and the estimates are losing strength).
In 2019, the year before the pandemic, US real GDP had grown by +2,1% and the previous year (2018), by almost +3%. To see lower growth figures, of the kind projected from 2024 onwards, we have to go back to the surroundings of the great financial crisis of 2007.
Here, after the effect of state aid is where it is estimated, the US economy will land.
Will it be different for other countries?
Italy: since the great financial crisis it has almost always been in stagnation, except for a couple of rebounds in 2010 and 2017 (in which it recorded a +4.0% due to Industry 1,7). In 2018, growth was just +0,9%, declining to +0,3% in 2019.
The post-Covid recovery is expected to increase GDP in 2021 by +5,9% and that in 2022 by +4,1%. However, for now it is a rebound as the Prime Minister underlined Mario Draghi. Subsequently, a significant decline is also expected in our country. The forecasts of the International Monetary Fund indicate a +3,8% growth in 2023, which drops to +1,6% already in 2024 and then stops in the following years at +0.9% in 2025 and +0,8% in 2026.
Germany is doing a little better. The IMF forecasts +3,3% this year and +4,6% next year (other sources estimate lower growth rates), then the decline starts again: +1,5% in 2024, +1,2% in 2025, +1,1% in 2026.
This trend is seen in all major countries.
THE PAST RETURNS
The rapid reaction following the crisis caused by the lockdown has perhaps dulled the perception of those forces at work since the end of the last century which tend to lead the economy towards a secular stagnation.
They are still at work and it will not be possible to avoid dealing with them.
We are referring to the aging of the population which characterizes all industrialized countries (including China) and influences, with the decline in the employment/population ratio, both the dynamics of productivity and investment, and the relationship between consumption and savings.
Similarly, the redistribution of income and wealth does not seem destined to reverse. Covid has brutally hit the lowest income categories. stated the The Washington Post that the recovery has left black and less educated workers behind. Today in the USA there are, compared to before the pandemic, almost five million unemployed aged 25 and over without a diploma or degree.
Furthermore, the influence of current technologies remains, which have created monopolies whose power to dominate the performance of the real and financial economies is very evident.
The big digital players immediately put their feet on the smart working plate and the pandemic has allowed them to orient and shape future growth guidelines even better. Are their strategies and related investments going in the same direction as the recovery programs put in place by individual countries?
Finally, zero interest rates. They were indispensable until 2019 to keep a static economy alive, today they serve to support the recovery, the financial markets have got used to them and whenever the fear of their rise arises, the reactions of the stock exchanges appear devastating because the risk ratio / return tends to deteriorate as does the cost of leverage.
OLD RECIPES
Fiscal policy, which has been invoked for years as a necessary complement to monetary policy, has entered the field, on the initiative of the various national governments, in such a massive way as to raise fears of the risk of an endemic recovery of inflation. Yet, as we have seen, forecasts are for a progressive slowdown in development, unless state support becomes an integral part of the future economic scenario. With worrying consequences for public deficits.
It is natural that the governments of the most industrialized countries, faced with the recession, have rushed to dust off the Keynesian toolbox, which has been sitting in the attic for a long time.
What makes us wonder is whether those tools are still valid and sufficient.
Today we are not faced, unlike in the immediate post-war period, with cities, factories, bridges destroyed and to be rebuilt. The assets that emerge from the lockdown are intact and do not require the huge mass of investment (and the enormous amount of work) which then represented the determining factor of the economic recovery.
Each dollar (or euro) of investment also produces fewer effects on employment than in the past, because less labor is needed to operate an automated factory.
Lastly, on a global level, the solid international alliances that supported and enabled the development of that time do not exist today. Instead, we are witnessing a retreat of countries within their own borders and a worrying phase of resurgence of conflict which could bury the phenomenon of globalization as known up to now.
Perhaps LH Summers is right when he invites his fellow economists to develop one new old Keynesian economics?
What else does it mean if not to face with determination an economic context that the pandemic has dramatized, but certainly not changed in its basic components.
CREATE A NEW TEMPLATE
In other words, we are faced with a narrow and bumpy path that we are probably facing not entirely adequately.
The programs launched to support the post-Covid recovery, in their vastness, run the risk of suggesting a certain lack of clarity on real trends and the consequences they could have on future well-being.
With an excess of zeal and the (gradually waning) confidence of being able to push the public debt to the maximum, intervention plans have been outlined often aimed at tackling everything that in the past had been postponed.
The signs of uncertainty in the recovery, despite the measures taken, probably show us that we will have to think about the future more than the past.
Focusing on a limited but discriminating number of objectives, which allow for a rethinking of the economic process by correcting its current functioning.
Deliberate major measures should go in this direction, rather than risk becoming a perennial crutch to a stagnating economy.
Some starting points for a debate could concern a careful reconsideration of the decline of the middle class and consequently also a profound restructuring of the world of services. Overall, from the most advanced forms to the "token work" (gig economy). Too little attention has been paid to services although they represent the emerging trend of the new millennium. Alongside this, it is essential to pursue a renewed centrality of the manufacturing industry in the West, too hastily transferred to the Far East (with devastating consequences also on the environment). Furthermore, free competition in the individual markets must be safeguarded, to allow for a regeneration of the entrepreneurial fabric, the growth of efficient operators, the possibility of guaranteeing security and a long-term vision for new initiatives and investments.
Finally, one should find the courage and determination to break the vicious circle created by the financialisation of the economy to the detriment of the real one, which embodies most of the ingredients of secular stagnation: focus on short-term profits and buybacks rather than investments , marginalization of work and growing inequalities, unjustified destruction of sustainable economic models appreciated by consumers (think of the entire retail world). The great forces currently largely out of control, which have changed the face of the real economy, are also modifying its social contexts and cultural references. It is urgent today to identify the resources capable of taming and channeling these voracious spirits. From here the action of economists and politics should restart.
*** The author recently published the book “Secular Stagnation. Comparing hypotheses” published by goWare
