"Stay The Course": Experts Urge Central Bankers To Keep Fighting Inflation

"Stay the course", said economic experts at the annual summit of the World Economic Forum in Davos as they urged the central bankers to keep fighting inflation, despite signs of improvement. They noted that the signs of declining inflation, resilient consumer spending and strong labour markets, among others, suggest that growth could be rebounding in the short term.

During a panel session on the global economic outlook, Kristalina Georgieva, Managing Director, International Monetary Fund (IMF) said, “My message is that it is less bad than we feared a couple of months ago, but that doesn't quite get to us to being good."

Amid the threat of rising inflation and interest rate increases from some central banks, several decision-makers have expressed determination to sustain rates, however, there is a risk that recent improvements could cause leaders to ease rates.

“The greatest tragedy at this moment would be if central banks were to lurch away from a focus on assuring price stability prematurely and we were to have to fight this battle twice,” said Lawrence H. Summers, Professor at Harvard Kennedy School of Government.

A major economic priority worldwide for 2023 involves accelerating decarbonisation. Recent legislation in the United States to support green energy will provide billions of dollars in funding but has provoked concerns about launching a subsidy war between Europe and the US over decarbonization technology. 

On the one hand, competition to promote green energy could accelerate progress for the benefit of all. On the other hand, the risk that nations will block technological developments and turn inward would deter global progress.

“I hope very much that this subsidy race we are hearing about is not going to be a race for the bottom. A negative repercussion of Europe-US competition would be overlooking the imperative to finance the green energy transformation in the developing world, which is the most vulnerable to the impacts of the climate crisis," said Christine Lagarde, President, European Central Bank.

Competition over green energy could amplify other risks of fragmentation in global trade as many nations prioritize national security over global integration. “Over the last three years, we have entered a new era of globalisation. We have shifted from market-driven globalization to politically powered globalisation,” said Bruno Le Maire, Minister of Economy and Finance, France.

Fragmentation poses numerous risks to the world economy, such as higher costs associated with reorganizing supply chains. For example, Europe and the US have focused recently on increasing domestic production of silicon chips. There is a risk that such turning inward will impede global cooperation on trade and climate goals.

The easing of pandemic restrictions in China raises questions for the 2023 economic outlook. One potential concern involves rising energy costs worldwide, as Chinese consumption rises.

"In Japan, inflation remains a concern, but the nation has seen recent improvements in job creation. We made that change I should say mainly due to increased labour participation of women,” said Kuroda Haruhiko, Governor, Bank of Japan.