The three wildest years in modern economic history

Three years ago, the world was already holding its breath in the face of the rapid advance of the virus, but nothing yet indicated that the economy was going to turn around like a sock in a matter of hours.

That the activity was going to be artificially hibernated.

And that the planet, in short, would wait for months waiting for the lack of confinement.

The possibility of the greatest recession ever experienced in peacetime entered neither head.

Nor was it that that peace was about to be blown up with the first war on European soil since the Balkans.

That energy and raw materials would break all-time highs.

That value chains would tighten to unimaginable levels.

And that globalization itself, unstoppable for decades, would be called into question.

A pandemic, a war and the outbreak of galloping inflation are strange episodes;

of those that, improbable, remain for decades in the collective memory.

Their confluence in such a short period is even rarer.

“They have been the three wildest years in modern economic history”, summarizes Gian Maria Milesi-Ferretti, today at the Brookings Institution after many at the IMF.

"They have been such big

that even the most sleepy economic variable of all, inflation, has skyrocketed."

Far from being a normal economic cycle, what happened is something “completely abnormal”, in the words of the economist Ángel Ubide: first an induced coma, then an acceleration never seen before, and then a war.

“There are three events that occur once every 100 years;

and all three, in a very short period of time”.

The result: a constellation of coups and economic policies "that make us live in a completely unique situation."

“Since the attack on the Twin Towers, the Great Recession, Brexit and the arrival of Donald Trump to power, black swans are not so black swans anymore.

But the last three years have been the height of unpredictability: we have never seen so much volatility and dispersion in all economic variables," says Leopoldo Torralba, from Arcano Research.

“There are several generations of us who have not experienced a succession of chained events like this one,” says Rafael Doménech, head of Economic Analysis at BBVA.

To find a comparable period, one must go back, according to Joan Roses, a professor at the London School of Economics (LSE), to the years immediately after World War I and the Spanish flu of 1918. "Now there has been no destruction of capital or a contraction of the labor force like there was then, but we are seeing something similar: there was inflation for a lot of years and international trade networks were destroyed.

“The global financial crisis [of 2008] was even more savage and difficult to control,” disagrees Olivier Blanchard of the Peterson Institute.

“It is understandable that we think that what is happening now is worse, but in the 20th century we have lived through very turbulent times: two world wars, a depression and another pandemic [that of 1918],” recalls Leticia Arroyo, an economic historian at City University from New York.

“This is the worst global crisis that those of us born after 1952 have suffered, when ration cards ended in Spain.

But, at least until now, it has been quite bearable”, synthesizes the also historian Francisco Comín.

“There have been other wild periods, but certainly what has happened in the last three years is unprecedented,” concludes Anne Krueger, former number two and former head of analysis at the World Bank.

What follows is a brief account of the three years in which the global economy hung by a very fine thread that —fortunately— never quite broke:

From negative rates to the biggest rise in half a century.

José García Montalvo, from Pompeu Fabra, used to start his classes by warning that "interest rates can never be negative."

That stopped being so.

The large economies, led by Europe, the US and Japan, plunged the price of money to the ground in 2020 and flooded the markets with liquidity to get out of penury.

The objective was to stimulate investment and demand.

“The natural interest rate had already been falling in the last 30 or 40 years.

But that era of negative rates completely distorted the foundations of the economy”, says the professor.

The pendulum, however, swung from one extreme to the other in the blink of an eye.

The end of the lockdowns released savings that had also reached historic proportions, skyrocketed demand, disrupted logistics and set the stage for an inflationary escalation later aggravated by the Russian invasion of Ukraine.

That didn't just end ultra-low rate policy: central banks stepped on the accelerator for the biggest hike in a long time.

In the case of the ECB, the most abrupt in its history: if its roadmap does not change, in just nine months Frankfurt will have raised it from 0% to 3.5%.

Charles Wyplosz of the Graduate Institute in Geneva believes that the era of ultra-low rates will have "massive implications."

“Public debts will be more difficult to service and this can be dangerous.

Asset prices will have to fall in a lasting way and we can anticipate a big cleanup in the financial markets.

Central banks have created huge amounts of liquidity, which must be withdrawn,” he states.

“There has never been a smooth transition from super-abundant to less-abundant liquidity.”

… And despite everything, the economy resists.

For almost a decade, the central banks threw all the firewood they could to prevent the bonfire of the economy from going out completely.

Now they are looking for just the opposite: high inflation has forced them to take out the fire extinguisher.

The ECB, says its president, Christine Lagarde, "will continue the course of significant increases at a sustained pace and will keep them at sufficiently restrictive levels to ensure the timely return of inflation to its 2% target."

Still, the economy is holding up.

Brussels had warned countries of a harsh winter, with power cuts and even the possibility of rationing.

But the gas has gone down and none of that has happened.

“The structural parameters of the economy are moving within different schemes than those of a few years ago”, considers García Montalvo.

Much healthier private sector balance sheets than in previous shocks help a lot.

“Banks have been recapitalizing since 2010, families have savings and companies are less indebted.

The starting position was better and the policies that have been adopted have also been better”, adds Ubide.

The euro zone closed 2022 with an advance of 3.5% after the economy stagnated in the last quarter and employment grew by 0.3%.

The United States, which started raising interest rates earlier, grew by 2.1% in the year as a whole, with an increase of 0.7% in the final stretch of the year.

The vigor of the economy has led central banks to warn of a new turn of the screw.

Federal Reserve Chairman Jerome Powell threatened to step on the accelerator again.

In Europe, the more orthodox wing of the ECB has even threatened to push interest rates to 5%.

Even acknowledging that the guardians of monetary policy were slow to react, which now raises the risk that they will have to go too far, Alejandro Werner, former director of the IMF today in Georgetown, throws a question into the air: "Do we prefer to live in a country that has an inflation problem but has recovered pre-covid activity levels or in one where the opposite has happened?

I am clear that in the first ”.

The problem, counters Arroyo, from the City University of New York, is that "inflation is not easy to control: inflationary inertia cannot be cut from one day to the next."

If rates had not risen at this rate, he projects, "we would be with inflation of 15% and accelerating."

The question is whether there is a risk that these rate hikes will end up leading to the recession that has been announced so many times.

“There is, but I still believe that if there is, it would be short and smooth given the strength of economic fundamentals.

And letting inflation entrench would be much worse: in that case, rates would have to stay high for even longer, which would end up hurting the economy even more,” says Berkeley's Barry Eichengreen.

From the short circuit in supply chains, to deglobalization?

"Global gridlock."

The first page of this newspaper on October 24 was the reflection of a collective state of mind.

The pandemic was receding, but a new batch of problems was arriving in the form of an unprecedented break in global value chains, which allow consumers to access products manufactured thousands of kilometers from their home.

That gear had taken hold: chips were scarce, the freight rate for a container from Rotterdam had increased fivefold in a year.

Getting a new car or a washing machine on time entered the realm of the chimerical.

The war would consummate the withdrawal of these global chains and would change the business mentality: from producing in the cheapest corner of the world, to doing so in the most reliable.

Globalization itself, the process that has changed the world's economic structure the most in recent decades, is under discussion.

“Suddenly, we have realized that bringing a ship from Shanghai to Long Beach is more uncertain than taking a train from Chihuahua to San Antonio.

Before we did not consider the risks of the first route;

now yes, and that is an important change, ”says Werner.

We are moving, then, towards a regionalized globalization, in which the role of China has also been touched.

“From being the country desired by all to almost a pariah.

It is clear that her image has suffered a setback, ”says Alicia García-Herrero, Natixis chief economist for Asia-Pacific.

“Although to a different degree than in the interwar period, there is now a return to protectionism as well.

And without a political agreement between countries, there will be no globalization: if what happened then is repeated, globalization will collapse”, predicts Roses, from the LSE.

The great lesson from then, he says, is that without international collaboration we could be facing a lost era.

Eichengreen is more optimistic: “There is little evidence to support deglobalization.

Rather, we are witnessing a reorganization of the world economy, with shorter and more diversified supply chains.

But that does not mean that they are being eliminated.

"There will be tensions and temporary setbacks, and it is even possible that we will see new regional trade blocs," predicts Ugo Panizza, vice president of CEPR, "but the world economy continues to be highly integrated."

Should globalization be reversed, warns Diane Coyle, from Cambridge, "the economic impact would be severe: that does not mean that it cannot happen, but it would place us in a scenario of conflict and potentially catastrophic results."

The weight of the public

In 2010, the international institutions decided that the crisis could be cured with an overdose of austerity that weighed down the European economies for years.

The public response to the two consecutive blows that companies and citizens have received as a result of the pandemic and the energy crisis has been radically different.

“After the financial crisis, the correct policies were not applied.

It was later, with Mario Draghi's

, when the direction was corrected.

But this time, fiscal and monetary policies have been on the right track,” says Bruegel researcher Gregory Claeys.

Last May, in the midst of the energy crisis, the EU was preparing to withdraw after the national treasuries had allocated 1.3 trillion euros -9% of GDP- in direct aid to stop the coup, according to the network of Institutions Independent Prosecutors.

Only until then, there had been more than 1,000 measures applied by the capitals, taking advantage of the temporary suspensions of the fiscal rules and State aid.

This policy was accompanied by a slap of 1.7 trillion euros from the ECB, which injected liquidity at large.

The US followed that same dynamic through Joe Biden's stimulus plans and massive debt purchases by the Federal Reserve.

“That we avoided the worst scenario responds, above all, to the effective and concerted steps of the monetary and fiscal authorities”, applauds Eichengreen.

“In five years, when we look back, we may see the total change in the way we understand monetary and fiscal policy.

Frames of reference have changed.

Governments and central banks stopped acting in unison when the energy crisis broke out.

With the exception of Japan, inflation led the monetary authorities to begin their withdrawal.

Washington started to reduce its balance sheet a year ago, while Frankfurt is starting to do so.

In the fiscal area, the stimuli remain.

The Twenty-seven have allocated 681,000 million to measures to protect citizens and companies, according to Bruegel.

Of these, 268,000 correspond to a single country: Germany, which has broken the deck.

That spending has aroused not a few misgivings among central bankers, who believe it hinders their fight against inflation.

Organizations, from the IMF to Brussels, are now beginning to tighten and ask for adjustments.

But much, much more timidly than a decade ago.

Acceleration or slowdown of the energy transition?

Although latent long before, the crisis of raw materials ran amok at the same moment in which the first shell of the Kremlin hit Ukrainian soil: Russia is the largest energy exporter in the world.

In parallel, there has been a kind of bellows effect in the ecological transition: more burning of fossil fuels —especially coal, the most polluting— in the short term, but also an unprecedented acceleration in the renewable revolution.

Carbon dioxide emissions grew 1% last year, largely due to the switch from natural gas to coal for electricity generation in various parts of the world.

Although lower than initially anticipated, the rise – “unsustainable”, according to the International Energy Agency – is bad news in the fight against climate change.

In the future, however, the trajectory will be reversed: the European desire for energy independence has raised the commitment of the Twenty-seven to wind and solar power.

And both the Reduction of Inflation Act in the US and the EU RepowerEU will add incentives for investment in both technologies.

“Without a doubt, the energy transition will accelerate;

at gunpoint, but it will accelerate”, says Francisco Blanch, head of raw materials and derivatives at Bank of America.

For two reasons: “Because the high prices have caused an effort to save, they have removed fat;

and because a lot of progress has been made in renewables”.

Lumps between the traditional and technological sectors.

The last two crises have been chained by tremendous volatility in the stock markets, with rapid changes between the winners and losers of each blow.

In 2020, big tech was emerging as the victor in the wake of remote working, while the cryptocurrency bubble bulged.

"In five months, we have experienced a technological change of five years," Matt Brittin, president of Google in Europe, told EL PAÍS at the time.

The change was not permanent.

Just two years later, tech companies have had to admit they were too optimistic and have launched mass layoffs.

“I don't know if that policy stimulated investment, but it did increase the risk of perpetuating zombie companies and forming bubbles,” former US Treasury Secretary Larry Summers said at a conference this week.

In its place, two traditional sectors have emerged, which have benefited from the crisis with a kind of income fallen from heaven: energy and banking, which have benefited from more expensive money.

Two unresolved enigmas: tax collection and the labor market.

With the global economic tone restored before the pandemic, tax collection has skyrocketed to levels never before seen throughout the West.

In part, due to the emergence of submerged activities —conditional aid to companies and workers;

lower cash payments—;

in part, due to rising inflation.

But there are still more elements to understand the puzzle in its entirety: it is one of the two black boxes of this crisis, on which only time will shed light.

The second is unemployment.

Especially, in the US, a country in which, true to its idiosyncrasies, the labor market was allowed to do and opted for checks —and not ERTE— to protect its citizens.

In those dark days of April 2020, when the economy was running at 50% and the world waited at home for a reopening that seemed like it would never come, nearly one in seven Americans—14.7%—was unemployed, the maximum since there is data.

Today, only one in 30 cannot find a job -3.6%-, the lowest level since May 1969.

Employment has not only held up better than expected in the toughest moments of the pandemic, but its recovery has been much faster than anyone could envision.

Inertia —job markets reached the Great Reclusion with minimal vacancy rates on both sides of the Atlantic— explains part of this recovery.

In the US, Trump's anti-immigration policies also offer an additional explanation.

But there is still much to be clarified.

"We are still studying it," admits Doménech, from BBVA.

“If three years ago they told us that today we were going to be where we are, even with a war in Europe involved, we don't believe it.

But be careful, because this polycrisis is not yet fully defeated, ”he warns.

"The risk now is that, in their game of mirrors with the markets, the central banks go too far," warns Torralba, from Arcano.

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