Barriers to trade keep rising. Aging population. A broad shift from carbon-emitting fossil fuels to renewable energy.
The trend, which is pervasive across the globe, could exacerbate global inflationary pressures in the coming years and make it harder for the Fed and other central banks to hit their inflation targets.
Such concerns were the subject of several high-profile speeches and economic studies at the Fed’s annual meeting of central bankers in Jackson Hole, Wyoming, on Friday and Saturday.
For decades, the global economy has been moving toward a more integrated direction, with goods flowing more freely between the United States and its trading partners. Lower-wage production overseas has allowed Americans to enjoy cheap goods and keep inflation low, albeit at the expense of many manufacturing jobs in the United States.
However, since the outbreak of the epidemic, This trend has shown signs of reversing. Multinational companies have been shifting supply chains away from China. Instead, with U.S. encouragement, they are seeking to make more of their products in the U.S., especially semiconductors critical to the production of cars and electronics. Big subsidies from the Biden administration.
At the same time, large-scale investments in renewable energy could cause disruption, at least temporarily, by increasing government borrowing and demand for raw materials, fueling inflation.A large portion of the world’s population is aging, and Older adults are less likely to continue working. These trends could create supply shocks similar to the shortages of goods and labor that fuel inflation during a pandemic recessionary rebound.
“The new environment sets the stage for a larger relative price shock than before the outbreak,” European Central Bank President Christine Lagarde said in a speech on Friday. Given supply constraints, we are likely to see greater price pressure in markets such as commodities, especially metals and minerals that are critical to green technologies.”
That would complicate the work of the European Central Bank, the Federal Reserve and other central banks whose job it is to rein in rising prices. Nearly all central banks are still struggling to contain the high inflation that has intensified since early 2021 and has only partially receded so far.
Pierre-Olivier Gourinchas, chief economist at the International Monetary Fund (IMF), said in an interview: “We live in a world where more and even bigger crises are expected. A supply shock.” “All of these factors tend to make production more difficult and more expensive. It’s definitely the central bank’s least favorite allocation.”
Shifts in global trade patterns drew the most attention in discussions at Saturday’s Jackson Hole meeting. A paper by Harvard Business School economist Laura Alfaro found that after decades of growth, China’s share of U.S. imports fell by 5 percent between 2017 and 2022. Her research attributes the decline to tariffs imposed by the United States, as well as to U.S. efforts. Major U.S. companies are looking to other sources of goods and components after shutdowns caused by the pandemic in China disrupted their output.
These imports come mainly from other countries such as Vietnam, Mexico and Taiwan, which have better relations with the United States than China – a trend known as “friendly outsourcing”.
Despite these changes, U.S. imports are still at a record high in 2022, suggesting that overall trade remains elevated.
“We’re not deglobalized yet,” Alfaro said. “We see a ‘Great Redistribution’ looming” as trade patterns shift.
She noted that there were also first signs of “reshoring” — the return of some production to the United States. Alfaro said the U.S. is importing more components and semi-finished products than before the outbreak, evidence that more final assembly is being done domestically. The decline in U.S. manufacturing jobs appears to have bottomed out, she said.
But Alfaro warned that the changes also had a negative impact: Over the past five years, the cost of goods from Vietnam has increased by about 10 percent and from Mexico by about 3 percent, adding to inflationary pressures.
In addition, China has increased investment in factories in Vietnam and Mexico, she said. In addition, other countries that ship goods to the United States also import components from China. These developments suggest that the United States will not necessarily reduce its economic ties with China.
At the same time, some global trends could turn in the opposite direction and keep inflation in check for years to come. One factor is weak growth in China, the world’s second-largest economy after the United States.and its economy is in troubleChina will buy less oil, minerals and other commodities, a trend that should put downward pressure on the global cost of those commodities.
Bank of Japan Governor Kazuo Ueda said in a discussion on Saturday that while China’s slow growth was “disappointing,” it was largely due to rising defaults in its bloated property sector rather than changing trade patterns .
Ueda also criticized the U.S. for stepping up subsidies to support domestic manufacturing over the past two years.
“The widespread use of industrial policy globally may just result in inefficient factories,” because they are not necessarily located in the most cost-effective locations, Ueda said.
World Trade Organization Director-General Ngozi Okonjo-Iweala defended globalization and condemned rising subsidies and trade barriers. She asserts that global trade tends to dampen inflation and contribute to a significant reduction in poverty.
“Predictable trade,” she said, “is a source of deflationary pressures, reducing market volatility and increasing economic activity. … Economic fragmentation will be painful.”
Svlook
