Social Europe

politics, economy and employment & labour

  • Themes
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter

Inflation in the strongest recovery since 1945

Paul Sweeney 17th June 2021

Governments should ignore siren warnings that only hyperinflation can come from pandemic-induced investments.

inflation,recovery
Paul Sweeney

Inflation is rearing its head again in the public discourse, especially with soaring commodity prices. Inflation was very high in the advanced capitalist world in the 1970s and 80s, when it was destabilising and adversely affected the incomes of millions. Rapid price rises did mean big pay rises—but amid hyperinflation real wages could still fall.

Today, the international agencies agree that the economic outlook is fairly positive. The European Commission forecasts that the European Union will expand by 4.2 per cent in 2021 and 4.4 per cent in 2022 (4.3 and 4.4 per cent respectively for the eurozone). This is a big turnaround and recovery from the 6.1 per cent contraction in 2020 (6.6 per cent for the euro area). As to inflation, however, the commission projects rates of 1.9 per cent this year and 1.5 per cent in 2022 (1.7 and 1.3 per cent)—continuing to undershoot the European Central Bank’s 2 per cent benchmark.

Globally, the International Monetary Fund predicts quite a strong recovery. It expects world output, which fell in 2020 by 3.3 per cent, to rise by 6 per cent this year and a further 4.4 per cent next. Growth for the United States is envisaged to be similar and for the euro area specifically 4.4 per cent in 2021 and 3.8 per cent in 2022. Output did not fall in China last year and this year a rise of 8.4 per cent is anticipated, followed by 5.6 per cent next.

The IMF does however warn of unevenness: ‘The strength of the recovery will depend in no small measure on a rapid rollout of effective vaccines worldwide.’ With its new focus on inequality—a long time coming—it says: ‘Much remains to be done to beat back the pandemic and avoid persistent increases in inequality within countries and divergence in income per capita across economies.’


Our job is keeping you informed!


Subscribe to our free newsletter and stay up to date with the latest Social Europe content. We will never send you spam and you can unsubscribe anytime.

Sign up here

The outlook from the Organisation for Economic Co-operation and Development is of global growth of 5.8 per cent this year—a sharp upward revision from its December 2020 forecast. It notes too, though, that some countries are recovering much more quickly than others: ‘Korea and the United States are reaching pre-pandemic per capita income levels after about 18 months. Much of Europe is expected to take nearly 3 years to recover. In Mexico and South Africa, it could take between 3 and 5 years.’

Echoing the IMF, the OECD warns that ‘while vaccination rates are progressing well in many advanced economies, poorer and emerging-market countries are being left behind’. And it stresses: ‘Unless everyone is protected, no one is protected.’

Bouncing back

One reason the world as a whole is bouncing out of the recession sparked by Covid-19 is the vaccine rollout. This will be the strongest recovery since 1945 (in growth of output from the trough)—steeper than in 1945-46, 1982 or 1991.

Another reason for its strength is that governments borrowed and invested massively and subsidised private sectors to an unprecedented degree to maintain private businesses. They supported financially vast numbers of private-sector workers, so that once the recovery began businesses could restart.

We Irish had thought that, after the crash of financialised neoliberalism in 2008, the government’s rescue of the private property ‘market’ and all the private banks would remain the biggest state rescue ever. But now it has happened on a much bigger scale.

Such a recovery will raise prices. Another driver of inflation is commodity prices, which are escalating internationally. Contributing to this is the demand for clean energy. In the Democratic Republic of Congo, high-grade copper is booming because it is used in wind turbines and electrical vehicles. The energy future is electricity and copper wire is at its core—lots and lots of it.

Governments’ investment programmes are shifting to environmental sustainability, boosting demand for commodities such as copper, lithium, nickel and cobalt and other minerals used in sustainable products. Prices for copper, iron ore, palladium and timber hit record highs in May and agricultural commodities—grains, oilseeds, sugar and dairy—have also jumped.

Another spur of global inflation is China’s voracious demand for commodities and other products. China was largely outside the world market in the 1970s and 80s but is fully integrated today. The huge glut in savings because consumers have not been able to spend as much during the pandemic will also enhance demand, and so many prices, for a time.


We need your support


Social Europe is an independent publisher and we believe in freely available content. For this model to be sustainable, however, we depend on the solidarity of our readers. Become a Social Europe member for less than 5 Euro per month and help us produce more articles, podcasts and videos. Thank you very much for your support!

Become a Social Europe Member

Modest and temporary

The rise in inflation could however be modest and also temporary, according to the US Federal reserve. If the Fed were to raise interest rates too high too quickly, it could cause another recession in the US.

Larry Summers, a former Treasury secretary and influential right-wing Democrat, is highly critical of the investment programme pursued by Joe Biden since he became president, arguing that it will lead to high inflation and worse. He estimates the administration’s initial stimulus package as representing 14 per cent of US gross domestic product. Accompanied by extraordinary monetary-policy measures and with the prospect of a huge savings unwind, Summers fears the requisite response is being way overdone: ‘Now, the primary risk to the US economy is overheating—and inflation.’

But the Nobel prizewinning economist Joe Stiglitz argues that ‘whether those peddling inflation fears are pursuing their own agenda or simply jumping the gun, they should not be heeded’. A major recovery can be expected to elevate prices in the short run but that is not a bad thing because it helps oil the wheels of the economy and business.

Accelerated shift

The coronavirus crisis accelerated the shift towards digitalisation and automation, including through huge growth in e-commerce and remote working. This will increase productivity substantially and is unlikely to be reversed, helping to sustain the recovery.

But the rewards from enhanced productivity will flow to the owners of capital. Meanwhile, many workers who have been displaced must be supported and retrained. The international efforts to tax capital and profits adequately must succeed if states are to recover the costs of the pandemic supports they endowed on businesses and workers. In this new world no subsidies should ever again be given, and on such vast scale, to private firms by governments without explicit and defined returns for the long-suffering taxpayer.

The public sphere has shown itself to be the dominant force in the new world order. Its leaders must recognise this. They should adopt the ‘can do’ attitude which has been missing from progressive politics with the diminution of the state in the neoliberal era. They must negotiate and plan, with this political ambition paramount, to ensure inequality is reduced and climate repair rapidly addressed—just as with Covid-19.

Paul Sweeney
Paul Sweeney

Paul Sweeney was chief economist with the Irish Congress of Trade Unions for a decade.

You are here: Home / Economy / Inflation in the strongest recovery since 1945

Most Popular Posts

Visentini,ITUC,Qatar,Fight Impunity,50,000 Visentini, ‘Fight Impunity’, the ITUC and QatarFrank Hoffer
Russian soldiers' mothers,war,Ukraine The Ukraine war and Russian soldiers’ mothersJennifer Mathers and Natasha Danilova
IGU,documents,International Gas Union,lobby,lobbying,sustainable finance taxonomy,green gas,EU,COP ‘Gaslighting’ Europe on fossil fuelsFaye Holder
Schengen,Fortress Europe,Romania,Bulgaria Romania and Bulgaria stuck in EU’s second tierMagdalena Ulceluse
income inequality,inequality,Gini,1 per cent,elephant chart,elephant Global income inequality: time to revise the elephantBranko Milanovic

Most Recent Posts

transition,deindustrialisation,degradation,environment Europe’s industry and the ecological transitionCharlotte Bez and Lorenzo Feltrin
central and eastern Europe,unions,recognition Social dialogue in central and eastern EuropeMartin Myant
women soldiers,Ukraine Ukraine war: attitudes changing to women soldiersJennifer Mathers and Anna Kvit
military secrets,World Trade Organization,WTO,NATO,intellectual-property rights Military secrets and the World Trade OrganizationUgo Pagano
energy transition,Europe,wind and solar Europe’s energy transition starts to speed upDave Jones

Other Social Europe Publications

front cover scaled Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship
Women Corona e1631700896969 500 Women and the coronavirus crisis
sere12 1 RE No. 12: Why No Economic Democracy in Sweden?

Hans Böckler Stiftung Advertisement

The macroeconomic effects of re-applying the EU fiscal rules

Against the background of the European Commission's reform plans for the Stability and Growth Pact (SGP), this policy brief uses the macroeconometric multi-country model NiGEM to simulate the macroeconomic implications of the most relevant reform options from 2024 onwards. Next to a return to the existing and unreformed rules, the most prominent options include an expenditure rule linked to a debt anchor.

Our results for the euro area and its four biggest economies—France, Italy, Germany and Spain—indicate that returning to the rules of the SGP would lead to severe cuts in public spending, particularly if the SGP rules were interpreted as in the past. A more flexible interpretation would only somewhat ease the fiscal-adjustment burden. An expenditure rule along the lines of the European Fiscal Board would, however, not necessarily alleviate that burden in and of itself.

Our simulations show great care must be taken to specify the expenditure rule, such that fiscal consolidation is achieved in a growth-friendly way. Raising the debt ceiling to 90 per cent of gross domestic product and applying less demanding fiscal adjustments, as proposed by the IMK, would go a long way.


DOWNLOAD HERE

ILO advertisement

Global Wage Report 2022-23: The impact of inflation and COVID-19 on wages and purchasing power

The International Labour Organization's Global Wage Report is a key reference on wages and wage inequality for the academic community and policy-makers around the world.

This eighth edition of the report, The Impact of inflation and COVID-19 on wages and purchasing power, examines the evolution of real wages, giving a unique picture of wage trends globally and by region. The report includes evidence on how wages have evolved through the COVID-19 crisis as well as how the current inflationary context is biting into real wage growth in most regions of the world. The report shows that for the first time in the 21st century real wage growth has fallen to negative values while, at the same time, the gap between real productivity growth and real wage growth continues to widen.

The report analysis the evolution of the real total wage bill from 2019 to 2022 to show how its different components—employment, nominal wages and inflation—have changed during the COVID-19 crisis and, more recently, during the cost-of-living crisis. The decomposition of the total wage bill, and its evolution, is shown for all wage employees and distinguishes between women and men. The report also looks at changes in wage inequality and the gender pay gap to reveal how COVID-19 may have contributed to increasing income inequality in different regions of the world. Together, the empirical evidence in the report becomes the backbone of a policy discussion that could play a key role in a human-centred recovery from the different ongoing crises.


DOWNLOAD HERE

ETUI advertisement

Social policy in the European Union: state of play 2022

Since 2000, the annual Bilan social volume has been analysing the state of play of social policy in the European Union during the preceding year, the better to forecast developments in the new one. Co-produced by the European Social Observatory (OSE) and the European Trade Union Institute (ETUI), the new edition is no exception. In the context of multiple crises, the authors find that social policies gained in ambition in 2022. At the same time, the new EU economic framework, expected for 2023, should be made compatible with achieving the EU’s social and ‘green’ objectives. Finally, they raise the question whether the EU Social Imbalances Procedure and Open Strategic Autonomy paradigm could provide windows of opportunity to sustain the EU’s social ambition in the long run.


DOWNLOAD HERE

Eurofound advertisement

Eurofound webinar: Making telework work for everyone

Since 2020 more European workers and managers have enjoyed greater flexibility and autonomy in work and are reporting their preference for hybrid working. Also driven by technological developments and structural changes in employment, organisations are now integrating telework more permanently into their workplace.

To reflect on these shifts, on 6 December Eurofound researchers Oscar Vargas and John Hurley explored the challenges and opportunities of the surge in telework, as well as the overall growth of telework and teleworkable jobs in the EU and what this means for workers, managers, companies and policymakers.


WATCH THE WEBINAR HERE

Foundation for European Progressive Studies Advertisement

Discover the new FEPS Progressive Yearbook and what 2023 has in store for us!

The Progressive Yearbook focuses on transversal European issues that have left a mark on 2022, delivering insightful future-oriented analysis for the new year. It counts on renowned authors' contributions, including academics, politicians and analysts. This fourth edition is published in a time of war and, therefore, it mostly looks at the conflict itself, the actors involved and the implications for Europe.


DOWNLOAD HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube