The world is headed for a difficult period in which significant economic slack will be required – and concrete commitments from the G7 leaders will be essential
What are the current conditions of the G7 economies and the world’s other major economies?
For the first time in decades, inflation is now a defining macroeconomic problem for the United States, Canada and the European members of the G7. Inflation and its ultimate resolution also carry quite substantial recession risks, and slowdowns in the main engines of the industrial world also raise important challenges for many emerging markets.
What are the prospects for the rest of 2022 and beyond?
I think we’re headed for a difficult period. We’re likely to need significant economic slack if we’re going to succeed in containing inflation, and slack is never pleasant and controlling the process is never easy.
What are the major risks that you see for the G7 economies in terms of probability and magnitude?
The major risks are stagflation and recession, as well as enormous internal political polarisation. The greatest risk coming out of the Elmau Summit is that the world, preoccupied by Ukraine, will have lost its focus on the ongoing challenges of the COVID-19 pandemic and climate change.
What about the recent surge in COVID-19 infections in China and even to some extent in the United States and elsewhere?
We may be done with the virus, but the virus isn’t done with us. As long as there are substantial pockets of infection, there is a substantial systemic health risk that demands our attention. It’s tragic that the United States has been unable to vote in significant COVID-19 support in light of all the other things that are happening.
Another challenge is climate change with intensified extreme weather events and chronic conditions.
It’s clear that climate change is real. It’s clear that climate change has serious consequences. It’s clear that there are irreversibilities associated with climate change. It’s also clear that science and technology offer the prospects of containing, not reversing, climate change, but that’s going to require bold action. Whether that action is going to be forthcoming is very much in doubt at this point.
Could shrinking equity assets and crypto currency prices generate serious financial instability?
I think the risks associated with crypto are important topics for financial regulators in individual countries and for those regulators to discuss. But on the scale of the stability problems posed by a rising China, by the war in Ukraine, by pandemic risk and by climate change, the risks associated with crypto are rather trivial.
How much stronger will inflation get in the United States and in other G7 members?
I think the outlook for inflation depends very much on the geopolitics, as they bear on commodities and supply chains. It’s quite possible that inflation in the United States will come down from its current 8.5% level, but I don’t think it’s likely to come down anywhere near the 2% we associate with price stability without some material increase in unemployment.
What should the proper mix of monetary policies and fiscal policies be for G7 members?
The primary response should be monetary policy. I think it’s very important that fiscal legislation be passed, particularly in the United States, that implements the very important agreements on corporate tax harmonisation, where US treasury secretary Janet Yellen has played a strong leading role. In addition to promoting more equitable taxation, such legislation would operate to restrain aggregate demand, which is desirable in moments of inflation.
How could those fiscal and monetary policies be coordinated to have the most beneficial impact?
I don’t think the primary issues at this point involve policy coordination. I think the primary issues involve each major region doing the right thing domestically.
Can G7 members better coordinate their more microeconomic Build Back Better programmes?
There is substantial scope for cooperation to reform the international development banks, which could do a great deal more in building back better all over the world. We need to renew the mandate of the World Bank much more around sustainability. We need to rethink its very traditional set of lending tools and we need to replenish its resources.
Looking beyond the G7, what do you see as the dominant prospects for the Chinese economy, its growth and potential financial problems in the real estate sector, and COVID-19 lockdowns?
I’ve got very substantial concerns about the future of the Chinese economy around the factors you just described. I suspect people will look back at China today in ways reminiscent of the way we look back on Japan, where we saw an enormous threat that ultimately didn’t materialise.
What should G7 leaders at Elmau do to support the desired safe, sustainable, fairer growth, and also address these other threats – Russia’s invasion of Ukraine, COVID-19 and climate change?
That’s too general a question! The key will not be the expression of laudable sentiments. The key will be concrete commitments. The areas for cooperation that are most important are with respect to the international problems. That means Ukraine. That means committing substantial funds for COVID-19. That means increasing the availability of finance for developing countries to meet climate commitments and also containing emissions at home.