Why should we review our economic outlook?

What are the economic prospects? There are many questions following the covid shock. Activity, growth, employment, standard of living, what does the near future hold for us? Will there be a rise in inflation or not? Reality has slipped out of the frames of reference we had for it. Good old theories, well-established patterns no longer work. We are going to have to innovate… in the economy too.

Why was there no inflation?

Economic reality has escaped the frames of reference we had for it.

Thus we have long learned that the increase in the money supply produces inflation. However, unprecedented injections of cash were made in 2008-2009, in response to the financial crisis of subprime and the risks of a global banking crisis and economic depression. They were not followed by inflation. The equally massive injections on a global scale in 2020, to deal with the economic consequences of health measures linked to covid, have also not produced the effect that could be expected in terms of inflation.

Certainly, there is no shortage of arguments to explain why the cause and effect relationship no longer works.

• We have cited, for example, the deflationary effect of digital and the wave of innovations.
• We also mentioned the reluctance of banks, and this in all countries, to finance economic actors
• Above all, it was explained that there was a transfer of inflation to the asset markets: bonds, equities and real estate. There’s a price hike though!
• Not to mention the more subtle explanations surrounding the ultimately indirect intervention of central banks.

The relationship between growth in the money supply and the rise in inflation has therefore loosened. It is now difficult to answer reliably the question of the inflation outlook.

To respect the good old economic theories, it is therefore necessary to add complementary reflections, which already poses a problem. But above all, behind inflation, other phenomena may have also ceased to respond…

The rise in the standard of living no longer follows growth

The formidable performance of the thirty glorious years in the advanced countries was reproduced recently in China. Strong economic growth, strong rise in income and standard of living.

Unfortunately, the virtuous relationship between GDP growth and rising living standards has broken down here. The fate reserved for the middle classes, and the impoverishment of a growing part of the population of so-called “rich” societies, are a phenomenon well explained… afterwards.

Where had the forecasting experts gone? This is, however, a major consequence of the new forms of growth which have appeared with globalisation, the emergence of new technologies and the greater influence of finance on the economy. Why was such an important development not included in the economic forecasts? The reading grids and analysis diagrams were already no longer in touch with reality. Otherwise they would have allowed us to anticipate this phenomenon. And maybe, why not, cushion it to some extent. Because the fall in the relative income of an increasingly large part of the population raises considerable risks for the social and political balance. Not to mention the individual dramas behind the overall stats.

The theories for analyzing the economy and its impact on society have not been unworthy, they have been useful… in other times. The changing world continues to overwhelm them. And we would like, with the same patterns, to predict growth, anticipate changes, say what the economy will be like in one or five years?

Today the question of covid prohibits too precise forecasts. Indeed, the uncertainties about the duration during which it will be necessary to cope, and the different reactions from one country to another, blur the immediate horizon. But, covid or not, three shifts require new, curious, questioning attention.

Who really directs the economy today, the Central Banks or the GAFAM?

The governments of practically all countries are trying to agree to catch up, at least on the fiscal level, with the big digital companies. But the essential is already elsewhere. The covid crisis has accelerated the takeover, both economic and societal, of GAFAM and a host of companies in their wake.

The financial power of these actors is considerable, probably unique in the history of the world economy. They are constantly changing and in competition, structurally condemned to conquest. They penetrate and revolutionize all sectors of activity. Even the world of banking and finance now seems within their reach. Their economic influence is experiencing a constantly renewed development.

But digital players, who moreover constantly see new competitors appear in their ranks, do they themselves know where they are going, towards which economy and towards which world they are leading us?

Artificial intelligence and virtual reality will produce a different society. To describe it and above all to understand it, economists will come later, somewhat like historians.

And we could expect clear and convincing presentations on the economic prospects in a year, five years or more now?

Unique demographic reports in history

The expressions generation X (born between 1965 and 1980), Y (between 1980 and 2000, the famous “millennials”) or Z (since 2000), testify to the cognitive precipice into which we have just plunged. Farewell to the ultimately fairly stable, fairly predictable profile of today’s aging baby boomers… The younger generations follow each other and no longer look alike. And no one yet knows how the concepts of production, consumption, exchange or social relations will be expressed in the future.

Not to mention that demography accumulates novelties, the “first times” in the history of humanity: world population, relative weight of continents, proportion of elderly people, distribution of age groups, everything has moved too quickly.

The demographic framework in which economic exchanges take place has therefore profoundly changed. It would be amazing if we could understand all the implications now. Establishing medium- or long-term economic prospects therefore becomes a very daring exercise.

Ecology at the center of concerns: everyone agrees to save the planet!

One of the major phenomena of recent years is the awareness of a collective responsibility towards the environment. Behavioral changes are reflected at the individual level, at the level of companies, as well as countries and international organizations.

Questions, criticisms, debates and controversies accompany this evolution. We are witnessing the development of many initiatives. Standards and labels are gaining ground. New technologies go in the same direction, others in the opposite direction. We know, for example, that 5G, whose possibilities are fabulous with regard to daily life and in fact all possible activities – economic, social or cultural – will also induce a new volume of energy consumption.

In short, if the direction is known and the intention undeniable, the game is not yet won. But, good will or necessity, we already know that we will not fail to move forward on the path of development that is more concerned with the preservation of future resources and the environment. The sacrosanct GDP, a quantitative measure if ever there was one, is increasingly supplemented by other, more qualitative criteria.

Environmental, social and governance responsibilities were present neither in macroeconomic theories nor in theories of business. Can we claim to know how to measure the consequences of this shift on growth, prosperity, standard of living?

Review our economic plans

In a nutshell, we all know the world has changed, and is changing in an accelerated fashion. However, the development of theories takes time. Many diagrams and reasoning date from the time when the economy was industrial.

• They were not fundamentally revised when services became dominant in terms of activity, trade and jobs.
• The schemes and reasoning were not deeply revised either when the world of banking, insurance and more generally finance became a major economic player. Whereas in the past one could consider savings as a flow (income minus consumption) and find an equivalence with investment, the phenomenon of accumulation has shaken everything up. Today global savings represent more than twice the global GDP. With this mass of capital, the finance sector is no longer the simple servant that it was to other sectors of activity. But an economic player in its own right.
• And what to say when the whole society switches to digital, which redistributes the cards of growth and income, wealth and poverty?
• This is, moreover, the whole problem of the GDP. It was suitable for an industrial era, but its relevance has waned with services. And even more with digital. The transition from a material economy to a largely immaterial economy would require reviewing the measuring instruments.
• Finally, all these mutations are accompanied by new risks, which would require that economic theories and reasoning land in real life.

The major temptation is therefore to cling to patterns that have proven themselves in other contexts, and to make mistakes that we will later regret..

Managing new risks, seizing new opportunities

A concrete example of this problem is the question of debt. The “whatever it takes” of 2020-2021 has worsened the situation inherited from the 2008-2009 crisis. We now live in an over-indebted economy. According to well-established patterns, one way or another, the debt accumulated over the years will have to be repaid. Finance has its rules.

What if repaying a large part of the debt was, in the world as it rocks, a dramatic mistake? Obviously, looking for ways to escape it also makes you dizzy, the dizziness of the unknown. What would a debt be that was created without being intended to be repaid one day? Adopting new angles of view harbors a risk, that of playing the sorcerer’s apprentice. And yet, if this was a magnificent opportunity to prepare for a different economic growth…

There are many issues that we have to deal with. After the covid and beyond the only economic perspectives, social issues are also emerging. Problems and risks abound. Great opportunities will also arise, which we will have to know how to seize. Paul Valery saw us entering “a time of the world where the world is going to think and meditate less and less”… Perhaps the trend towards innovation, so dynamic today, should also take hold of our way of thinking, including our way of thinking about the economy?