Calibrating policies to safeguard recoveries is proving harder than crisis-time responses to the pandemic last year. Then, the sole challenge was to counter the severe economic fallout of lockdowns imposed for a health emergency. The direction was unequivocal and clear, i.e., easing fiscal and monetary policies, there weren’t any trade-offs, and even where present, e.g., countries with no fiscal room to spare, debt sustainability issues were postponed to worry about later.
Cut to the recovery phase this year and drafting right policies is a downright challenge. Data readings tend to be more obscure than clear, unexpected developments constantly upset policy matrices, while unperceived risks seem to snowball in no time. Feeling the way through is a bit like blindfolded marksmanship, increasing the scope for policy errors. Securing economic recoveries is not easy in any part of the world, howsoever resounding the bounce-backs from the pandemic troughs may be.
The travails of discerning inflation, transitory or otherwise, are by now familiar and well understood across countries. Besides the global divisions on the United States Federal Reserve’s interpretation and the riskiness of its non-reaction, India’s own case is testament to similar perplexities. It has taken much heel-digging by the Reserve Bank of India (RBI) and perseverant communication from its Governor to resolve the discordance between the market and the central bank’s views.
The August retail inflation data released this week, which showed a three-month successive decline to 5.3 percent versus a 5.6 percent consensus expectation, appears to have been a clincher — in this week, most analysts have shifted ahead their expectations of the timing of monetary policy normalisation by at least one quarter.
While more data is more convincing, the certainty that increases the odds of getting policy right is almost non-existent. Consider the unexpected and forceful eruption of supply disruptions, along with spread of the COVID-19 Delta variant in many economies, large and small. This has ignited fresh doubts over the extent to which price pressures are driven by demand spurt due to near-simultaneous reopening in the large economies, or if these mainly reflect a range of supply factors that extend from breakages of supply chains, elevated transportation costs, container scarcities, port congestions, labour shortages, to cite some.
Prices are not the only source of confusion. Labour market reading is no less of a challenge — many countries are challenged by pockets of shortages that are forcing firms to raise wages and raised unemployment rates in some other segments. Then there is vaccination, where leaders have started to lag — this has nothing to do with vaccine access, which was the key perceived holdback to pandemic recovery not so long ago.
Unexpected turns in growth outlooks are another feature. For instance, the strong economic restorations of the US, China and Europe in the last quarter generated optimism about its maintenance ahead. But this suddenly stands shaken by the signs of abating momentum in the US and China, to which supply disruptions and Delta variant have added; growth anxieties have extended to Europe. Slowdown risks are now on the rise, confidence on recoveries wavered.
The challenge of confirming demand impulses, the key ingredient of policy response functions, is anyone’s guess. The heterogeneity of views worldwide, and their discordance, is at least one reflection of the heightened uncertainties.
The ball of course returns to the courts of policymakers, with whom the buck stops. When the revival is marked with oscillations and bumps, and its path is less of a smooth and continuous affair, securing it firmly is easier in theory than in practice.
It is certainly much more difficult than crisis-time handling that is mostly unidirectional. Without the virus’ normalisation itself, it seems that economic variables will raise more doubts and questions than clear answers.
Renu Kohli is a New Delhi based macroeconomist.
Views are personal and do not represent the stand of this publication.
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