Home » “The global economy is likely to have a very difficult next two to three years,” says Nobel Laureate in Economics Michael Spence
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“The global economy is likely to have a very difficult next two to three years,” says Nobel Laureate in Economics Michael Spence

Michael Spence | 2001 Nobel Laureate in Economics | (Vittorio Zunino Celotto/Getty Images Europe)

Michael Spence, the 2001 Nobel Laureate in Economics, spoke at Afreximbank’s 29th Annual General Meeting in Cairo, Egypt, about his predictions for the world economy.

“The fundamental challenge facing people in business, financial markets, and central banks is to navigate the extremely short-run turbulences that we are experiencing without losing sight of the long-term objectives,” said Nobel Laureate and American economist Michael Spence at Afreximbank’s 29th Annual General Meeting in Cairo, Egypt. He participated in the event digitally from his home in Milan, Italy.

He explained that the various Covid-19 pandemic reactions have resulted in a huge increase in global sovereign debt levels, leading to inflation and rising interest rates. “In many places of the world, there is more fragility, there are more dangers, and there is a greater possibility of debt hardship,” said the American economist.

Michael Spence also focused his intervention on the disruption of the supply chain. “It’s critical to note that supply chain congestion is far worse than anyone anticipated a year ago. It is not a passing fad, and the bottlenecks are severe, constituting a significant and approximate source of inflation. The risk, as central bankers will accurately warn you, is twofold. The first is rising prices, which are causing many to struggle to make ends meet. The other is that inflationary pressures become embedded, and once they do, even if supply-demand imbalances are removed, which is what we’re seeing now on a global scale, inflation remains, and you have to take fairly extreme measures on the monetary policy side to sort of reset those expectations,” he argued.

An Aging World population

Michael Spence who won the Nobel Prize for Economics in 2001, with George A. Akerlof and Joseph E. Stiglitz, for laying the foundations for the theory of markets with asymmetric information, believes  that we’re in a  very difficult situation. “In summary, a lot of things are going to happen. It’s going to be a rocky journey, and the global economy is going to be very difficult for the next two to three years,” he predicted.

He went on to say that one of the most pressing challenges is the world population’s ageing. “At this juncture, elderly societies produce 70 to 75 percent of global GDP, and dependency ratios are rapidly increasing.” They’re also rising in the context of at least some fiscal tightening. As a result, there are concerns about whether sufficient resources will be available to invest extensively in these longer-term transformations.”

Shifts in the labor markets

Michael Spence also called attention to the shift in labor markets. “One of the things we don’t understand, but it’s becoming increasingly clear as labor market behavior shifts dramatically. People are quitting the labor market, people are declining to perform particular occupations, and it’s happening all over the place, and it’s a huge contribution to the supply-side inflationary pressures we’re experiencing.”

He claimed that the world now has less capacity that it did previously. “We now have millions of new middle-class consumers who have blown up the global economy on the demand side. We’ll live in a world that feels more supply restricted than before, and we won’t be able to rely on the arrival of millions and millions of new people to meet our productivity targets, so they’ll have to come from someplace else. This is what I call the Lewis turning point in the world economy,” Michael Spence stated. The Lewis turning point is a situation in economic development where surplus rural labor is fully absorbed into the manufacturing sector. This typically causes unskilled industrial real wages to rise. The term is named after economist W. Arthur Lewis.

Conflict in Ukraine

According to him, the conflict in Ukraine will force Europe to diversify away from its reliance on Russian fossil fuels.”This is not an economic argument. It’s a question of economic and energy security. “We live in a global economy that is subject to increasingly frequent and extreme shocks, from climate, pandemics, geopolitical tensions, and a variety of other sources, and the response will be a complete change in the architecture of global supply chains, driven a little or even more than a little by business decisions, because resilience has value in a high-shock environment. It will, however, be influenced by government policies. And you can see it happening all over the place,” he stated.