4 experts explain how to prepare for a new economic reality and protect the most vulnerable

  • Chief economists are largely in agreement that the outlook for the economy is bleak and a recession is likely.
  • This new reality will take its toll on inequality and widen social disparities.
  • Four experts explain how politics could address the immediate crisis to build long-term resilience.

The latest outlook from the World Economic Forum’s chief economists suggests a global recession is “fairly likely” and the fallout will take its toll on inequality. Just this week, the OECD issued a similar message in its interim report, warning that recent indicators had “taken a turn for the worse”.

Chief economists are almost unanimous in predicting that wages will not keep pace with rising prices, with nine in ten expecting real wages to fall in low-income economies in 2022 and 2023, while 80% in the high-income economies will fall.

This will lead to a continued deterioration in household purchasing power, compounded by the general pressure on basic needs such as food and energy.

Chief Economists Outlook September 2022

Image: World Economic Forum

Saadi Zahidi, executive director of the World Economic Forum, highlights “growing inequality between and within countries” as “the lingering legacy of COVID-19, war and uncoordinated policies.” She says: “The global cost of living crisis is hitting the most vulnerable hardest as inflation rises and real wages fall. As policymakers strive to control inflation while minimizing the impact on growth, they must ensure that support is targeted to those who need it most.”

We asked four chief economists who took part in the survey what measures they thought would protect the most vulnerable and how this new economic reality could be managed to better prepare for the future.

‘price cArbon (worldwide) must play a central role

Christian Keller, Head of Economic Research, Barclays

The only change I would make to the global economy to better prepare us for the future would be to introduce a global carbon pricing mechanism. Earth’s climate is the ultimate “tragedy of the global commons”: Individual and collective incentives are misaligned because the price of harmful economic activity does not accurately reflect the true societal cost. It leads to overproduction of carbon-intensive assets to the detriment of global well-being.

Pricing carbon emissions – or internalizing their negative externality – is the first step to addressing this “market failure”. Increasing their price reduces incentives to emit carbon while generating public revenue to compensate groups adversely affected by the transition and/or fund public goods such as low-carbon energy infrastructure.

Such a carbon pricing mechanism would ideally be global in nature to avoid regulatory arbitrage and cross-border carbon leakage. The principles of such a mechanism are textbook economics, but in practice many more questions arise, including how to determine the true ‘marginal external costs’. Of course it would be a discovery process and there would be interference. However, if one believes that climate change is a threat and that it is caused by carbon emissions, carbon pricing (globally) must play a central role.

Chief Economists Outlook September 2022

Image: World Economic Forum

“Development of a resilient and sustainable pricing strategy”

Gregory Daco, Chief Economist, EY-Parthenon, USA

The various drivers of economic activity that were once taken for granted now deserve much more attention from businesses, investors and consumers. This new paradigm will have five key tenets: inflation, labor, supply chain, cost of capital, and environmental, social and governance (ESG) and sustainability considerations.

While the current focus is on inflation hovering at multi-decade highs in many places around the world, there doesn’t seem to be a broad understanding that the persistence and volatility of inflation will likely be a key feature of the outlook for the next few years . As such, companies must consider building a robust and sustainable pricing strategy that is agile enough to navigate a world where demand will fluctuate and fall more than it has in recent decades. Cost management and productivity gains will also likely need to be at the heart of companies’ holistic inflation strategy.

In an environment where talent is not only more expensive but also perceived as more valuable, and where pricing power is constrained by weakening final demand, leaders must increasingly focus on productivity and efficiency gains to offset higher labor costs. It won’t be easy, but it will be crucial to their success.

Supply chain issues have been a central part of the inflation story over the past few years, and it would be wrong to think that these issues will resolve themselves overnight. Businesses need to build supply chain resilience while remaining aware of economic, geopolitical, and political undercurrents.

Rising borrowing costs have caused business leaders to put some investment plans on hold, while wide swings in stock valuations have created a wedge between buyers’ and sellers’ perceptions of an asset’s true value. In addition, the significant appreciation of the US dollar against most other currencies has created new considerations for multinational companies that need to hedge their international exposure and incorporate a new consideration into their organizational and portfolio decisions.

In recent years, companies have increasingly focused on ESG and sustainability aspects to create long-term value, develop a sense of purpose and bring trust and confidence to the market. The last few months have lent a sense of urgency to these developments.

“Tackling structural factors to reduce future vulnerabilities”

Eric Parrado, Chief Economist; General Manager, Research Division, Inter-American Development Bank

The global inflationary crisis is having a profound impact on the well-being of populations around the world, particularly in emerging and developing countries. Estimates for Latin America and the Caribbean suggest that food inflation could increase poverty rates by 1.6 percentage points and extreme poverty by 1.8 percentage points.

Chief Economists Outlook September 2022

Image: World Economic Forum

Policy should have a short- and long-term focus. In the short term, governments should provide transfers to the poorest sections of the population to offset rising food prices. This helps to keep people from sliding into poverty and extreme poverty. Subsidies should be carefully designed and funded to avoid larger fiscal imbalances that could contribute to higher inflation rates.

Long-term strategies address structural factors to mitigate future vulnerabilities. Investing in agricultural innovation, research and adaptation to climate change is key to improving agribusiness productivity, food system resilience and long-term strengthening of food security.

A greater focus should be placed on action to mitigate climate change to ensure agricultural frontiers are not pushed further and food supplies are not restricted. At the same time, countries can avoid using scarce tax resources to cover the costs of dealing with costly man-made natural disasters.

“Advancing Employment Opportunities and Protection”

Svenja Gudell, Chief Economist, Indeed

Access to good jobs is an integral part of both achieving and maintaining quality of life and well-being. From a labor market perspective, policies that could significantly benefit vulnerable populations could include: skills-based hiring, pay and wage transparency, second-chance hiring, accessibility tools and arrangements, and inclusive and non-judgmental hiring – to name a few. While some executives use one-size-fits-all policy to address cost-of-living issues, the truth is that this rarely produces the desired outcome. Instead, policymakers must consider both the broader, long-term picture and the unique situation within industries, geographies, and individual needs to close these gaps.

With the cost of living rising, global warming, geopolitical tensions, etc., employment opportunities and protection are key to future prosperity for all. The micro and macro benefits of decent work allow for an increase in quality of life and well-being, the opportunity for economic mobility, and physical and mental health benefits. Ultimately, we need to identify and build on technologies at a global level that are being used effectively to support workers and ensure that job mobility, continuous learning and access to information are widely available to promote employment opportunities and protection for workers.

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