Wages do not have to be held back to help avoid an inflationary wage-price spiral, a leading economist has said.
Speaking at a meeting of the World Economic Forum, Gina Gopinath, deputy managing director of the International Monetary Fund, told delegates including world leaders that it’s possible to create a situation where wages rise but prices do not. The key to doing this was to reduce company profits, she said.
Her remarks at the meeting in Davos, Switzerland, came a week after Andrew Bailey, governor of the Bank of England, told MPs that workers should “think and reflect” before asking for pay rises
The governor, who is on £575,000 a year, said high earners in particular should consider the impact of inflation before seeking salary top-ups as prices rises.
Gopinath warned of an uneven economic recovery, based on a variety of factors. “The advanced economies, based on our projections, will basically get back to where they would have been in the absence of the pandemic in 2024,” she said. “But we have emerging and developing economies that will be around 5% below where they will have been in the absence of the pandemic. It is this gap that’s … really worrisome.
“The world continues to face headwinds because we have a cost-of-living crisis as prices of commodities including fuel and food are going up,” she said.
“China is slowing because of the new waves of infections that are hitting their population and the lockdowns that go along with it and the weaknesses in the Chinese real estate sector.”
Gopinath added that Russia’s invasion of Ukraine was a major setback to economic recovery and that inflation “will remain significantly above central bank targets for a while”.
She said: “It is very important for central bankers around the world to deal with inflation as a clear and present danger, that is something they need to deal with in a very forceful manner”.
China’s relatively weak economic outlook was a source of global concern among delegates with philanthropist George Soros saying: “The lockdowns had disastrous consequences. They pushed the Chinese economy into a free fall. It started in March, and it will continue to gather momentum until Xi [Jinping] reverses course – which he will never do because he can’t admit a mistake. Coming on top of the real estate crisis, the damage will be so great that it will affect the global economy. With the disruption of supply chains, global inflation is liable to turn into global depression.”