High prices, high rates will be new normal in post-COVID world, BNP economists warn

Europe is facing a “generational shift” in its economic architecture that will cause inflation to be structurally higher than at any period since the early 1980s, two leading BNP Paribas economists told Euractiv, warning that high price pressures and high interest rates will be the new normal.

Koen De Leus and Philippe Gijsels, chief economist and chief strategy officer at BNP Paribas Fortis, said in an interview that rising public debt levels, geopolitical fragmentation, aging, and climate change will translate into quasi-permanent surging prices that will inevitably force central banks to keep rates at levels not seen in decades.

While price stability should remain the European Central Bank’s core official mandate, the two analysts expected that inflation of 3% will become “the new 2%” as the  reference target.

“This is a generational shift at the moment – and the last big one was at the beginning of the 1980s,” Gijsels said – referring to a period when former Federal Reserve Chairman Paul Volcker reined in the 1970s’ hyper inflation by hiking interest rates to a peak of 20% in 1981.

“Everything changed [in the 1980s]. And now we believe everything is going to change again,” Gijsels said. “The biggest mistake is to think that COVID was a ‘black swan’, but we’ve dealt with it, and now we’re going back to normal,” he added.

Unlike before the COVID-19 pandemic, where low growth and low inflation caused central banks to reduce interest rates close to zero and buy government and private bonds to stimulate the economy, “[today’s] world looks way more like the 1960s and 70s,” he said.

Inflation in the 1960s and 70s “was mainly caused by oil shocks,” Gijsels said. “But you had a lot of other things,” he added, citing higher military spending, the Vietnam War, government interventions, transfer payments, protectionism, strong unions and wage pressures –  many of which look familiar today, he noted.

“Like Mark Twain said: ‘History does not repeat itself, but it rhymes’,” he said.

Four inflationary trends, one deflationary

The two economists, who recently authored the book “The New World Economy in 5 Trends”, noted that of five “megatrends” they expect to shape the current global economy, only one is deflationary – innovation-driven increases in productivity.

They explained that the anticipated “productivity boom” – which they expect will take place sometime over the next five to 15 years – will largely take the form of “process innovation” in fields such as artificial intelligence and quantum computing, hence transforming companies’ work and production processes

“These will really make processes much more rapid, much more productive,” De Leus said. “We think we are on the verge of rolling out these new processes.”

However, the economists warned that such rapid increases in productivity will likely not be sufficient to counteract the other four inflationary tendencies.

“We had 40 years of decreasing interest rates, and now we will have ten, 20, 30 years of increasing inflation and interest rates because of these four inflationary tendencies, and probably one deflationary tendency,” De Leus said.

No mass unemployment, but employment shift

The analysts poured cold water on the idea that the increasing adoption of new technologies, especially AI, will drive down prices by causing mass unemployment.

Still, they warned, workers who refuse to adapt could soon see themselves out of a job.

“AI is not going to lead to you losing your job, but the other company using AI is going to lead to you losing your job if you don’t use AI yourself,” De Leus said.

The authors cited a 2020 study by the World Economic Forum, which estimated that AI will result in a net increase of 12 million jobs by 2025, with 85 million roles disappearing and 97 new ones being created.

“In total, there’s going to be positive elements from AI,” De Leus said. “So I’m not afraid that we’re going to [see] huge job destruction – but indeed there’s going to be a change in jobs.”

[Edited by Anna Brunetti/Zoran Radosavljevic]