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Global economy escaped freefall, but higher inflation set to persist
The global economy escaped disaster following the financial crisis but higher inflation is set be part of the global economic landscape for the foreseeable future, attendees at the keynote economics session of the Credit Suisse Asian Investment Conference heard today.
Two leading figures from the policymaking world talked down the negative impact of global trade imbalances, noting that they were a fact of life that needed to be managed.
Y Venugopal Reddy, Former Governor of the Reserve Bank of India and Emeritus Professor at the University of Hyderabad, told attendees that there had been dramatic changes in both thinking and policy in two key areas since the global financial crisis - capital flows and inflation.
Traditionally, inflation was around 2% in advanced economies and about 200 basis points higher in developing economies, he pointed out.
"I expect the general level of inflation will be higher in the future than before the crisis,” said Dr. Reddy, adding that this was due to a combination of factors including a diluted focus on price stability and huge public debt in advanced economies leading to inflationary financing.
“Both in the short term and medium term, generally global inflation will be about 200 basis points above pre-crisis levels.”
Dr. Reddy said global economic imbalances should not be overplayed as they will always exist, and just have to be managed. “This is an unequal world,” he said.
He added that the economic and social consequences of the management of the crisis, including the various stimulus packages, were still unfolding.
Focusing on India, he said the country “has the advantage of having no baggage of imbalances” and was "hugely politically stable".
Jagdish Bhagwati, Professor of Economics and Law at Columbia University and Senior Fellow for International Economics at the Council on Foreign Relations, also discussed global economic imbalances. His view was that “surpluses and deficits come and go”, and that the notion that the current imbalances were here to stay was short-sighted.
He told the conference that, at the start of the global financial crisis, many commentators feared the world was in store for an ongoing, long-running crash but that the discussion had moved on to the “shape” of the recovery.
“In fact what you actually have is a debate about whether you have an L shaped curve, or a V or a W. Actually we have run out of room in the alphabet - we should probably draw from the Arabic alphabet or Chinese letters,” he said.
“I don’t think we have had a freefall – that’s the good news. [But] there is also bad news and the bad news is that vulnerabilities persist and those are hard to assess.”
Professor Bhagwati also noted that caution was required when governments undertake infrastructure projects in an effort to stimulate economies, noting the difficulties that arise when projects are pulled back a few years later when spending cuts are needed.
Dr. Reddy said he believed there would be further quantitative easing to boost the global recovery: “I expect that we will be keeping quantitative easing. QE3, if necessary, [is] very much on the table.”
Turning to the valuation of the renminbi, Professor Bhagwati said the US administration was not convinced major change was necessary, in spite of the heated political debate. "They're not particularly hung up on the value of the renminbi," he commented.
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