Stagflation: A return to a long forgotten pastSunday, October 17, 2021
In its World Economic Outlook (WEO), published last week, the International Monetary Fund (IMF) issued a stark warning about global economic growth being hobbled by the novel coronavirus pandemic amidst supply disruptions, rising prices and demand for higher wages.
Follow Ms Gita Gopinath, the IMF's chief economist: “The global recovery continues but momentum has weakened, hobbled by the pandemic. Fuelled by the highly transmissible Delta variant, the recorded global COVID-19 death toll has risen close to five million and health risks abound, holding back a full return to normalcy. Pandemic outbreaks in critical links of global supply chains have resulted in longer than expected supply disruptions, feeding inflation in many countries. Overall, risks to economic prospects have increased and policy trade-offs have become more complex.”
“Monetary policy,” Ms Gopinath urged, “will need to walk a fine line between tackling inflation and financial risks and supporting the economic recovery. While monetary policy can generally look through transitory increases in inflation, central banks should be prepared to act quickly if the risks of rising inflation become more material in this uncharted economic recovery.” According to Ms Gopinath, central banks have to be “very, very vigilant” about the second-round effects of increases in energy prices on wages and on core prices. And the WEO notes,“a spiral of doubt could hold back private investment and lead to precisely the slower employment recovery central banks seek to avoid when holding off on policy tightening.”
What does this mean for poor, open, trade-dependent and highly vulnerable Jamaica? Well, as in the 1970s, the Jamaican economy is once again haunted by the spectre of stagflation-high inflation amidst stagnating growth. While the Bank of Jamaica (BOJ) governor, Mr Richard Byles, does not use the term “stagflation”, inflation, for him, “a terrible sin [and] the quickest means to make poor people poorer”, has broken out beyond its upper bounds of six per cent. Meanwhile, real GDP, over the medium term, is projected to grow by a mere 1.0 per cent to 2.0 per cent per year, which is far lower than he had previously projected.
A concerned and “independent” governor, clearly aware of the risks but not taking any chance, has decided to act quickly by tightening monetary policy, not just to contain actual inflation but to repress inflationary expectations. The BOJ's mandate, he told parliamentarians, was to defend the country against inflation; and while he had no intention to place any impediment on growth (as some of his detractors had suggested he was doing by increasing the policy interest rate) he was prepared to step up to his mandate. Sir Richard, his sword unsheated, his quiver full of arrows, his barmy mantra of low, stable and predictable inflation writ large across his standard, has stepped forward boldly to slay the inflation dragon, which, after decades of hibernation, has suddenly emerged from its lair to devour the nation's poor people.
You could almost feel the weight of IMF advice bearing down on his shoulders. In fact, his lead advisor on the Monetary Policy Committee is Mr David “Billy” Marston, who until recently was head of the IMF's Risk Management Unit and a man steeped in IMF policy on financial surveillance work and knowledgeable about emerging, and low-income countries, like Jamaica. Mr Marston is a former member of staff of the BOJ.
The Private Sector Organisation of Jamaica (PSOJ), its private interests uppermost, deliberately misrepresenting the views of the IMF by suggesting that the inflation the country was experiencing was transitory, has expressed concern that the tighter monetary policy stance of the BoJ presented a risk to Jamaica's medium-term economic growth prospects. The reality is that years of accommodative, low interest rate, monetary policy has resulted in growth that the Government has described as “disappointing” and the IMF as “subdued”.
Yet, as noted by the IMF's most recent global financial stability report, financial markets and emerging economies are particularly vulnerable to sharp increases in interest rates. It recognises that a sustained rise in interest rates “could trigger a tightening of global financial conditions” that combined with existing financial vulnerabilities could result in a “sharp fall in asset valuations.” The implications for the Jamaican economy and for household, corporate and public debt are grave. The Jamaican housing bubble could burst. Loans could become unserviceable. Heavily indebted households and businesses bankrupted. The contagion could spread throughout Jamaica's unstable financial system. Difficult times are ahead for the Jamaican economy and for the vast majority of the Jamaican people.
At last week's meeting of Parliament's Standing Finance Committee, a visibly distressed Dr Nigel Clarke, the minister of finance and the public service, was asked about the status of public sector wage negotiations. All he could do was to waffle about good progress being made and about having something to report in the next few weeks. The fact is, workers are being squeezed to contain inflation. Public sector workers and their unions are likely to resist all offers which are below the “expected” rate of inflation, which is to say about eight per cent. Other workers are no doubt watching.
Audley Rodriques is Ambassador Emeritus.