SINGAPORE: The world faces a sharper trade-off between growth and inflation as inflation is “almost certain” to be higher for longer, Finance Minister Lawrence Wong said Monday (April 18th).
Many countries around the world were already grappling with the problem of sluggish growth before the COVID-19 pandemic. But the virus outbreak and war in Ukraine have since prompted another challenge of higher inflation.
Global growth is also threatened by the effect of national macroeconomic policies in some major economies.
“In short, the risks to growth and inflation weigh significantly on the downside,” Wong said, noting that this complicates an already extremely difficult task of balancing growth and inflation for central banks, by especially those in the advanced world.
It remains to be seen whether central banks will succeed in guiding their economies to a soft landing, he added.
Compounding these growth challenges is a “more fundamental and disturbing shift” in the global economy – the receding tide of globalization. While he does not expect a reversal of globalisation, Mr Wong warned that the world “could be heading towards a new era of decoupled globalisation”.
“The hope for a few decades was that trade could dampen geopolitical rivalry, but now we see another logic at play, with geopolitics having the potential to undermine trade instead,” he said.
“It is too early to say what decoupled globalization will look like, but we must prepare for a more economically divided world that will mirror a more politically divided world.”
This will impact global growth, with the poorest and most vulnerable countries likely to be hardest hit. This in turn will make it harder for developing countries to converge with the advanced world, he said.
Wong laid out the threats governments and societies face today to growth in a keynote address at the Peterson Institute for International Economics Macro Week in Washington DC. The annual event includes a series of speeches and discussions from finance ministers and central bankers from around the world.
In his nearly 30-minute speech, the finance minister, who is visiting the United States, also highlighted two other structural challenges facing the world: inclusion and sustainability.
On the first point, Wong noted that there is a growing gap between the richest and the poorest both across and within nations, in part due to rapid technological advances.
Inclusive growth has also been made more difficult by the pandemic, with unskilled workers and women suffering disproportionately. He also highlighted how, in Southeast Asia alone, the pandemic has pushed nearly five million more people into extreme poverty.
“The consequence of these factors – low and unequal income growth, high inequality and low social mobility – pose significant risks for all of us,” Wong said.
“When people feel the odds are stacked against them, when they can’t reach the top no matter how hard they try, when their children will never do better than them, social stability is affected and things start to fall apart. “