Small discrepancy between the UN and the International Monetary Fund (IMF). The first urges central banks to loosen the monetary noose, unlike the second, which believes that the inflationary threat is currently more serious and damaging over time than a recession. The IMF is, in all likelihood, right.
Earlier this month, the UN trade and development agency urged central banks to quickly loosen the monetary noose to avoid a global recession. For the UNCTAD (United Nations Conference on Trade and Development), the monetary and fiscal policies taken by advanced economies are pushing the world towards a global recession and prolonged stagnation, “inflicting damage worse than that of the financial crisis of 2008 and the shock of COVID-19 in 2020”, reads a text from Agence France-Presse (AFP).
The organization believes that the pace of inflation is beginning to show signs of slowing in advanced economies and advocates government interventions directly targeting price spikes in the energy, food and other vital areas. While advocating an approach that borrows from price controls, taxes, antitrust measures and tighter regulation of commodity speculation.
Three days later, in an interview with AFP, the Managing Director of the IMF, Kristalina Georgieva, called on central banks to “stay the course”, even to “do more”. For now, “the risk is that they are not doing enough, not doing too much” in the face of inflation, which “remains stubborn and persistent”, she added, comparing the rising prices “to a tax paid by the poorest”.
On Tuesday, in his presentation of the institution’s global forecasts, the IMF’s chief economist, Pierre-Olivier Gourinchas, insisted that “the intensification of price pressures remains the most immediate threat to current and future prosperity, because it compresses real incomes and weakens macroeconomic stability,” pointed out colleague Éric Desrosiers.
If they don’t do enough, the banks risk losing all credibility in the eyes of households and businesses and no longer being able to bring inflation back to their targets. In contrast, doing too much would push the global economy “into an unnecessarily severe recession”. These two forms of error “do not however have an equal cost”, since a loss of credibility of central banks “would prove even more detrimental to macroeconomic stability”.
In a speech given on October 6, the Governor of the Bank of Canada, Tiff Macklem, recalled the importance of avoiding an unanchoring of the 2% target from medium and long-term expectations that could fuel a wage-price spiral. . Inflation is still too high and expectations are on the rise, he warned. The longer this situation lasts, the more likely it becomes that people will base their long-term plans on current inflation rates. “That in itself can become a source of inflationary pressure. When these kinds of inflation expectations take root, we have to raise interest rates even further to restore price stability, which weakens the economy. The economic cost of restoring price stability would be greatly increased.
Coherent fiscal policies
That said, this necessary monetary austerity must be accompanied by coherent budgetary policies and timely and targeted interventions that do not thwart the efforts of central banks. On this point, Canada should feel particularly challenged as it, in terms of public finances, should regain the enviable place it occupied within the G7 before the pandemic. According to data drawn by economists from the National Bank of World Economic Outlook According to the IMF, Canada should in 2023 post the lowest budget deficit as a proportion of GDP in the G7 and the lowest net debt-to-GDP ratio. The improvement is set to continue — and the gap with the G7 set to widen — over a five-year horizon, despite the expected economic slowdown.
Above all, and the IMF insists: “in the face of lasting supply shocks and generalized inflation, attempts to limit price increases through price regulation, subsidies or tax cuts will be costly for the budget and ultimately ineffective. Authorities should let prices adjust and temporarily provide targeted cash transfers to [agents économiques] the most vulnerable. » What economic history teaches.
“Fiscal consolidation sends a strong signal that policymakers are on the same page in their fight against inflation, which helps reduce the size of policy rate hikes needed to keep inflation expectations anchored. , and to keep the cost of debt servicing lower than it otherwise would have been. »
A trap must be avoided. “Relying on unexpected and repeated changes in inflation to reduce public debt is not a viable strategy and would create spending pressures […] Reducing deficits is necessary to help tackle inflation and debt vulnerabilities. »