Demand is less of a hindrance due to historic levels of central bank liquidity injections, but Covid-19 factors have upended the supply side
Coming out of the 2008 global financial crisis, it took too many too long to recognise that the economic shock was more structural and secular than cyclical. The result was a policy response that, while effective in dealing with the immediate emergency, proved insufficient for longer-term economic wellbeing.
The need to address the content and mix of policies is urgent, both at the national and multilateral levels. Failure to do so could turn stagflationary winds — that disruptive mix of declining growth and higher inflation — into a much more disruptive phenomenon with economic, financial, institutional, political and social implications.
Yet what ailed the global economy went deeper than just excessive and irresponsible finance. The “financialisation” of the economy itself had sidelined pro-growth initiatives. An early economic lesson of Covid-19 is that its drivers of structural fluidity have transformed the efficiency of a just-in-time global economy from a strength into a notable fragility. Tightly woven cross-border supply chains suddenly fell victim to Covid-19 related closings in one or more ports. Shipping and container disruptions turned cost-effective value chains into loss-makers.
This will come as no surprise to behavioural scientists. Cognitive traps can slow the shift of policymakers’ focus to supply disruptions, which have become the main cause of the economic malaise of today and tomorrow. Instead, they reinforce some approaches, particularly in monetary policy, that inadvertently amplify the stagflationary winds that are starting to blow across a growing number of countries.
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