IMF: rising inflation in Europe is a consequence of the disruption of the supply chain due to the pandemic

The International Monetary Fund notes the serious challenges posed by the disruption of supply chains due to the pandemic and is calling on governments to change fiscal policies to further help workers.

Supply chain problems due to the pandemic are further fueling inflation, which is already weighed down by energy problems and is undermining economic growth in Europe, the International Monetary Fund has warned. At the same time, problems can last until 2023 and will not be resolved in 2022, as was originally expected. At the same time, the IMF notes the big problems associated with this situation in monetary policy and calls on governments to adopt such fiscal policies to help workers more, rather than increase demand for products.

The IMF calculations are indicative. In their opinion, eurozone industrial production in autumn 2021 would be about 6% higher without restrictions on the supply of goods. In addition, based on the historical correlation between manufacturing and total output, gross domestic product is expected to be about 2% higher, equivalent to annual growth during normal pre-pandemic periods for many European economies.

This information is indicated in the fund’s blog by the head of the IMF herself. Kristalina Georgieva and her colleagues: Iya Kelasun, who is deputy director of the European department of the fund and head of the German economic monitoring service, and Alfred Kamer, director of the IMF for Europe. This data is from a special IMF report that has just been released on the subject (“Supply Bottlenecks: Where, Why, How Much, and What’s Next?”).

When countries asked citizens to stay at home to check for COVID-19, consumers cut spending on services and bought more groceries, according to a joint IMF blog post by three top leaders. “The reopening of the economy has stimulated production, but new lockdowns and a lack of raw materials for microchip production have caused a stalemate in the restoration of factory production. The prices of basic consumer goods have risen sharply as delivery times have reached an all-time high, sparking controversy over inflation and monetary policy,” they said.

For these reasons, they are now urging policymakers to support the recovery without allowing high inflation to consolidate, as they point out supply constraints are likely to persist.

The biggest blow to the industrialized countries

According to the IMF, the slowdown in production was stronger in countries where the industry is more dependent on supplies from around the world. Key examples include countries with a strong automotive industry such as Germany and the Czech Republic, where it has been reported that output could increase by 14% under other conditions.

Supply constraints have also played a major role in fueling producer price inflation in the euro area, but strong demand is no less important. The share of industry in the producer price inflation component was about 9 percentage points higher than in the pre-pandemic period in the first three quarters of 2021, according to the IMF. “We estimate that a supply crunch could explain about half of the increase in price inflation for processed goods. The rest is mainly due to increased demand,” the report said.

Supply disruptions had less of an impact on core consumer prices (inflation excluding energy and food prices). This inflation rate is estimated to have been only about 0.5 percentage points higher over the same period due to supply constraints.

IMF: problems may persist

The Fund notes that, globally, up to 40% of industry supply restrictions can be discovered when factories close, which, as already noted, should usually have only a temporary effect on inflation.

The same goes for severe weather and other factors that have negatively affected the production in 2021 of products – from microcircuits to entire cars. “Other supply-constraining factors, such as labor shortages (explaining up to 10% of global production constraints) and aging logistics infrastructure, may, however, have a more persistent impact on supply and inflation than factory closures,” the fund said.

Late last year, industry experts expected the auto parts shortage to be largely eliminated by mid-2022. But the Omicron mutation has brought new uncertainty. Europe and China have introduced new restrictions on production, and there may be more disruptions to industrial production. “In general, supply disruptions may last longer, possibly until 2023,” the report said.

Policy priorities set by the foundation

“The first line of defense is to remove bottlenecks in the provision of regulatory measures where possible, for example, by quickly monitoring the certification of transport and logistics workers, temporarily relaxing restrictions on port opening hours, streamlining customs activities, and implementing practices that reduce the spread of the virus and protect health. workers,” the IMF suggested.

The fund also proposes fiscal measures to address bottlenecks and prevent irreversible damage to potential growth. “Supporting aggregate broad demand now could exacerbate bottlenecks and boost inflation, with limited impact on output and employment. Instead, support must be targeted. For example, it is still important to maintain sustainable jobs once bottlenecks (such as highly skilled manufacturing jobs) are gone. It is equally important to ensure that labor supply is restored by removing barriers to work (through child and elderly care).

Monetary Policy Difficulties

The prospect of lingering supply bottlenecks and disruptions poses challenges for monetary policy makers to maintain a still-incomplete recovery and ensure production is in line with pre-pandemic trends without allowing wages and prices to surge. “Maintaining stable medium-term inflation expectations despite a temporary rise in inflation, including supply disruptions and rising energy prices, is key to managing these efforts,” the fund said in a statement.

“Despite the rapid tightening of the labor market in the euro area, recent data and historical precedent suggest that wages will rise only modestly, and therefore we expect inflation to fall slightly below the target of the European Central Bank. Once the pandemic subsides,” the fund added. In addition, the more successful and targeted fiscal measures are in addressing supply bottlenecks, the less likely policymakers will be forced to rein in aggregate demand and economic growth to curb inflation, concludes fund.

Georgios Kanellopoulos, columnist “Οικονομικός Ταχυδρόμος(Economic Postman), leading economic publication in Greece.

Source link