bne IntelliNews – CONFERENCE CALL: Economists warn of inflation and rising debt
As the world begins to emerge from the corona crisis, economists on an EBRD panel have warned of rising inflation, debt and the uneven recovery from the crisis, emerging markets and emerging economies. development lagging behind their richer peers.
Economists warned of inflation and rising debt as well as the uneven recovery in developed countries, emerging markets and developing economies during a panel hosted by the European Bank for Reconstruction and Reconstruction. development (EBRD) on June 30.
While Hungary, Czechia, Russia and Ukraine have already raised interest rates – the two Central European countries being the first in the EU to do so – other central banks in the region and beyond face difficult decisions about when to cut rates to contain inflation at the cost of slowing the recovery.
EBRD chief economist Beata Javorcik told the panel that this is “a real test” for central banks, because “it is never easy to determine when the right time is to pause the recovery to stop the build-up of inflation expectations “.
She also expressed concern that central banks will come under “political pressure to keep rates low and miss the point where inflation expectations start to rise”, with potentially serious social consequences. In the region âpeople remember the hyperinflation of the 90sâ.
This is potentially a problem in emerging Europe where, as Javorcik pointed out, many central banks are only a few decades rather than a century or more away. âThe key question is: will central banks be able to maintain public confidence that they will act when action is needed. A reputation takes time to build; you can destroy it in a millisecond. â¦ If central banks lose their reputation, we will experience a long period of high inflation, âshe said.
Carmen Reinhart, vice president and chief economist of the World Bank Group, agreed that she “does not envy central banks, especially in emerging markets and developing countries, because they are making a difficult balanced”. More specifically, the ability of central banks to act countercyclically âis now being tested by sharp increases in inflationary pressures. We want to start the recovery, but the issue of inflation has very deep social ramifications, especially food price inflation. “
The rise in inflation is partly due to short-term factors such as the depreciation of the currency, the rebound in commodity prices and pent-up demand. There are also factors in emerging Europe pre-pandemic, such as double-digit inflation in Turkey and boiling labor markets in Central Europe.
Gita Gopinath, economic adviser and research director at the International Monetary Fund (IMF), commented that the current situation is “unlike anything the world has seen before”. She pointed out the mismatch between supply and demand which puts pressure on deliveries, labor mismatch where people claim unemployment benefits but jobs are vacant due to issues such as risks to health and childcare. These are “unique characteristics that fuel inflation,” however, she noted, “many sources are transient. We have reason to believe the numbers will go down by next year.”
No financial crisis – again
A positive point is that so far, as Gopinath pointed out, there has not been a financial crisis at the same time as the health crisis. However, she warned that it was possible that debt relief or restructuring would be needed in the future.
Gopinath pointed out that with the “fiercely spreading” delta variant, the pandemic is far from over. âDelta is creating disastrous results in places where immunization rates are incredibly low. We are seeing a divergent recovery. We’ve been reporting this for six months now and for every month of data we have, this picture looks worse. ”
For all countries to achieve immunization rates of at least 40% by the end of 2021 and 60% by mid-2022, countries that have purchased more vaccines than they need – there is a surplus of about 2 billion – will have to share them, Gopinath said. âWe don’t have the luxury of time; This must be done within the next six months.
The IMF economist also pointed out the differences in financial resources. âDuring the pandemic, we saw rich countries able to simulate and protect their economies. $ 16 trillion was spent during the crisis, the overwhelming majority in advanced economies. Emerging markets and low-income countries are struggling to afford the necessary expenses. They are much more taxed and it will get worse. In addition to stimulating savings and increasing health spending, Gopinath argued that governments will need to invest to correct problems associated with lost education; âHuman capital has been severely affected,â she said.
Moreover, it is premature to speak of the end of the crisis. “The pandemic has driven the business cycle, and for countries that depend on tourism standardization, their slowdown is not over until it is over globally,” Reinhart warned. Even when the recovery begins, she warns against prematurely withdrawing monetary, fiscal and financial support measures.
Highlighting the huge financing needs across much of the world, Reinhart said, âWe need the wheels of finance to work well to ensure a recovery. The situation is very, very uneven between developed, emerging and developing countries. It is regressive across and within countries. The countries where poverty rates are skyrocketing, where the standard of living, from education to food security, deteriorates the most, are those where you already have a build-up of sovereign debt problems, which will hamper their ability. to continue to support the recovery. ”
The EBRD’s latest set of forecasts in its regional economic outlook report released on June 29 shows that the contraction in emerging European countries has been weaker than expected in 2020 and, as Javorcik noted, the region outperformed the world as a whole by about 1 percent. point. âTo a large extent, this is due to the higher share of the manufacturing sector in their GDP,â Javorcik explained. The countries that suffered the largest declines in GDP were mainly those with large tourism sectors.
Javorcik said she was “cautiously optimistic” about the recovery this year, while warning of risks such as vaccine shortages – Hungary and Serbia have some of the highest vaccination rates in the world, but only a small number have been vaccinated in parts of Eastern Europe, Central Asia and the Caucasus – while vaccine skepticism is also slowing the process, especially in Russia.
When it comes to supporting economies during the crisis, Javorcik noted that âour countries have been very fortunate to be able to borrow and, with few exceptions, have seen very limited increases in the cost of borrowing over the past year. “. However, she added, âwe should not take debt sustainability for granted because we know from past episodes that when global interest rates suddenly rise, investors start to pay more attention to fundamentals and country risk is reflected to a much greater extent in lending rates.