Arundhati BHATTACHARYA, Chairman of State Bank of India

Olivier BLANCHARD, Former adviser and Chief Economist at the International Monetary Fund

Florence EID-OAKDEN, CEO and Chief Economist of Arabia Monitor

Philippe ITHURBIDE, Chief Economist at Amundi

Moderated by: Adrian DEARNELL, Financial Journalist, Founding Partner of EuroBusiness Media


The Federal Reserve: Behind The Curve?

On the question of whether the Federal Reserve is behind the curve and taking action too late, Olivier Blanchard, former Chief Economist of the International Monetary Fund was clear: “I do not think the Fed is behind the curve, but we are very close to it. In the US, we are creating about 150,000 jobs a month, to keep unemployment constant we need about 70,000, so if you assume the numbers will be like that for about a year, there will be 4 percent unemployment in a year. That could put pressure on inflation, not an enormous amount but some. So, I think that, given the time it takes time for interest rates to affect activity, now is a good time for the Fed to make a move,” he said.

Philippe Ithurbide added, “The Fed is not doing exactly what they were supposed to do in that they wanted to exit QE and they cannot. They continue to replace the papers coming to maturity. They wanted to tighten, to send a message or to have room to manoeuvre in case of crisis, and they didn’t do it. In that sense they are behind the curve but nobody is complaining at this stage, which is important.

 

The Oil Price Paradox

The low price of oil can be seen as a two-sided coin. While it means increased purchasing power for households, increased consumption and better profit margins for companies, it also has a negative impact on growth in emerging economies and oil-producing countries. On balance then, is it a benefit or not?

Florence Eid-Oakden pointed out that Egypt, for example, which is an oil-importing country with 100 million people, benefitted from lower prices. However, because Egypt does not exist in a bubble and is part of the global economy, it then found any benefit it experienced was temporary. “Lower global growth means the FDI dries up, trade dries up and investment dries up, which effects currency,” Ms. Eid-Oakden explained. “There is pressure on reserves, there is no growth — it is a very complex situation. One usually thinks an economy like Egypt’s, or, to give another example, Brazil, which has suffered similar outcomes, does benefit from low oil prices. Low prices are good for them, but not so low that they contribute to a serious slow-down in the global economy,“ she concluded.

For oil exporters, the impact may be more positive than what might be surmised at first glance. Saudi Arabia’s Minister of Petroleum has made his country’s desire to establish leadership over OPEC policy very clear in recent talks. “Saudi Arabia has drawn a firm line with respect to their position. There will likely be no deal on supply and they have been clear in their desire to do what they think is best rather than coordinating with Iran. The chance of coordinating with Russia for the time being is also off the table,” said Ms. Eid-Oakden. “There is a positive impact from all of this on the economies of the Gulf. It may not seem that way on the surface when looking at the drop in the reserves, but there is a lot going on that is causing these countries to reconsider their domestic policy, and this is an opportunity for them to swallow the bitter pill they have known has been coming for a while and get out in front of it,” Ms. Eid-Oakden affirmed.

 

Secular  Stagnation And Growth Generation

Speaking on alternatives to negative interest rates for growth generation, Mr. Ithurbide noted that the best option would be to focus on the tax, fiscal and income policies, for example, or to focus on investment and corporate tax. ‘To exit secular stagnation you need to address innovation, you have to address demographic issues, and you need to favour employment. All in all it is a very complex issue. Accompanying the central banks with a fiscal and tax policy would be the most important measure for managing this issue at this stage,” he said.

Florence Eid-Oakden added her thoughts on secular stagnation and the end of cycles, saying: “We certainly have some cycles in the world that I would like to see end. Amongst oil exporters, for example, there are some fairly unhealthy cycles that have been there for a while and they need to be exited. Serious reconsideration of the structure of their economies is underway and that is a very welcome development. I think that unless these questions are asked and unless these economies are restructured, we are going to have a series of problems continuing to emerge from them and cause problems in other parts of the world. Unemployment is spilling over into other parts of the world, causing other geopolitical problems. I think that aspect of it is probable the end of a cycle and I think it is a very welcome end of the cycle.

 

The Death of Inflation

On the subject of inflation targeting by central banks, Mr. Blanchard said that inflation depends on the unemployment gap — the higher unemployment, the more pressure on inflation and our expectations of inflation. “We are in a place where expectations of inflation are moving a great deal and in many countries there is a very large unemployment gap. I think that is the reason why in the Eurozone we are not able to get to 2 percent but this is why in the US inflation is starting to increase. I do not think there is a puzzle and I think we will see inflation, again, in our lifetime,” he concluded.

Arundhati Bhattacharya provided the Indian perspective on inflation, noting that in that country they are targeting inflation, attempting to lower it with a prediction of plus 5 percent by the end of the year.

Inflation in a country like India, which has a very large demography, has its own particular challenges. Essentially, you must destroy demand in order to bring it down. At the same time, it does cause a lot of suffering because demands are huge and you create a further gap. Inflation is basically a tax on everybody, so it is something that needs to be fought. In India, it is something that we believe has to be controlled but it has to also happen,” she said.

Ms. Eid-Oakden agreed, saying, “By no means is inflation dead in the economies I look at. I think that the cycle of low oil prices has forced subsidy cuts and we are seeing inflation start to rise again, so my fear is that inflation will start to rise too quickly for some of the countries with pegged currencies.

Mr. Ithurbide noted that the real question was not whether inflation was dead, but rather how far we go in terms of complacency or excessive rigour. He insisted that we must avoid becoming complacent when inflation is close to the target, but excessive rigour can be dramatic too. “The central bank we have in the Eurozone has a single mission: price stability — in other words to fight against inflation. I do not know if I can change the mission, but it is clear that we cannot have a single mission of price stability because when you are in a deep mess after a huge crisis, amid secular stagnation fears, you cannot continue to fight inflation.