The world economy looks to be transitioning to a more difficult era in which interest rates will be higher, geopolitical tensions greater and uncertainties more pronounced.
That’s the message that emanated from this year’s annual meeting of the American Economic Association in New Orleans. Economic luminaries — including former U.S. Treasury Secretary Lawrence Summers, ex-International Monetary Fund chief economist Kenneth Rogoff and former Bank of England policymaker Kristin Forbes — warned of perils ahead.
On the way out is an era of ultra-low interest rates and rapid Chinese growth. Investors and policymakers will instead confront a new world where an intensifying U.S.-China rivalry and dangerous debt blow-ups are more the norm.
“We live in an era of many shocks,” said Rogoff, a Harvard University professor. “We may be at a turning point for the global economy.”
The warnings of longer-term trouble come as investors are growing somewhat more hopeful of the Federal Reserve’s ability to rein in sky-high inflation without causing a recession. Stocks and Treasuries rallied on Friday after the Labor Department’s jobs report showed wage gains ebbed last month while unemployment fell back to a multi-decade low.
As the AEA winds up its conference on Sunday — the first in-person gathering in three years, with attendees in face masks — the economics profession is enduring something of a crisis of confidence.
The failure of most forecasters to see the persistent inflation coming out of the pandemic has led to much soul-searching and questioning of the assumptions in computer economic simulations that have guided policy for many years.
“Our track record at understanding inflation is really, really bad,” University of California, Berkeley, professor David Romer said. “The range of plausible outcomes over the next year or two years is very, very wide,” including having inflation either fade or become embedded in the economy.
Reflecting that uncertainty, conference economists gave the Fed conflicting advice. Nobel laureate Joseph Stiglitz warned that tight credit would hurt the economy and do little to reduce inflation that’s been driven by supply shocks stemming from the pandemic and Russia’s invasion of Ukraine.
IMF chief economist Pierre-Olivier Gourinchas, in contrast, stressed the importance of the Fed and other central banks maintaining their resolve to conquer inflation even as unemployment rises.
Atlanta Fed President Raphael Bostic said the central bank still needs to keep raising rates despite cooler-than-expected wages.
But he acknowledged how uncertain the outlook is.
“Because things are unprecedented, because this pandemic has been so unique, it’s hard to have firm expectations about how things are going to evolve over time,” Bostic, who doesn’t vote on rates this year, said at an AEA session Friday.
Some aspects of the conference itself showed how the profession is struggling adapt to a new reality.
While mask mandates have ended in almost all non-medical settings across the U.S., face coverings were required at all sessions in New Orleans.
Attendance was roughly half of the more than 12,000 registered attendees at the last in-person gathering in San Diego in early 2020, just before the pandemic.
Some of the drop was due to a change in the recruiting process for fledgling economists — they’re now being interviewed via Zoom rather than on site. But many of the most prominent speakers, including Summers and Rogoff, didn’t attend in person.
Virtual or not, there was plenty of debate this time.
While then-AEA President Olivier Blanchard made the case at the 2019 conference for an extended period of low interest rates, Rogoff and Summers maintained in New Orleans that a variety of factors — including increased government deficits and debt and coming investment to combat climate change — will raise interest rates on balance above the low levels that have prevailed since the 2007-09 financial crisis.
“My guess is that we’ll not return to the era of secular stagnation,” Summers, a Harvard University professor and paid Bloomberg Television contributor, told fellow economists on Saturday.
That will have huge implications for markets and the economy. Low rates were a major reason why housing and stock prices rose so high and helped facilitate massive government borrowing to fight the pandemic, according to Rogoff.
Ex-BOE policy maker Forbes, a Massachusetts Institute of Technology professor, said the policy responses to COVID-19 have “introduced new vulnerabilities and risks.”
The big build-up in government debt has raised the risk of fiscal crises while the pandemic’s rock-bottom interest rates spawned asset bubbles that could burst. Such vulnerabilities could manifest themselves “sooner rather than later” as the cost of credit has skyrocketed, she said.
Another tectonic shift in the offing is a steep slowdown in China’s longer-term growth that has helped power the global economy in recent decades, Rogoff said.
While the nation’s economy should enjoy a bounce this year with the end of "COVID-zero" restrictions, Rogoff highlighted deeper-seated difficulties with a Chinese growth model that depends heavily on excessive infrastructure spending and a bloated property sector to boost gross domestic product. His calculations show that housing prices in smaller Chinese cities that account for more than 60% of the country’s GDP have already fallen 20%.
The Chinese slowdown is unlikely though to ease the rivalry between the Communist Party-run country and the U.S. over everything from computer chips to the military balance in the Pacific.
University of California, Berkeley economist Barry Eichengreen warned that a confrontation between the U.S. and China over Taiwan would trigger economic shocks that would be “several orders of magnitude larger” than those after Russia’s invasion of Ukraine.
