The International Monetary Fund Shows the Jobless Recovery

April 12, 2021 Updated: April 19, 2021

Commentary

The International Monetary Fund (IMF) has published its April outlook for the global economy. It has been hailed by most commentators because of the strong upgrade in GDP recovery.

The report states that “global growth is projected at 6 percent in 2021, moderating to 4.4 percent in 2022. … The upward revision reflects additional fiscal support in a few large economies, the anticipated vaccine-powered recovery in the second half of 2021, and continued adaptation of economic activity to subdued mobility.”

However, there are important warning signs that should be considered, because headlines have been predominantly euphoric about this optical upgrade.

Two factors that affect the quality of the recovery should worry us: The upgrade comes mostly from higher government spending and rising debt, and the job recovery is much slower than in previous cycles.

The unemployment rate in the euro area will remain well above 2019 levels, even in 2022 (rising to 8.5 percent in 2022 from 7.9 percent in 2020). Only Germany shows a positive employment outlook that leads its unemployment ratio to fall to 3.7 percent. On the opposite side, Spain, according to IMF estimates, will end with an unemployment rate of 15.8 percent in 2022, from 15.5 percent in 2020. This would make Spain the eurozone economy with the highest unemployment rate even in 2022 and one of the highest in the world.

The United States is estimated to end 2022 with a 4.2 percent unemployment rate, a rapid decrease from the current 6 percent, but still above pre-pandemic levels. China’s unemployment is expected to remain low at 3.6 percent, and advanced Asia will likely show the best improvement in unemployment, reaching near-record lows in 2022.

Even with these optimistic estimates of recovery, the IMF is showing that the COVID-19 crisis is going to result in millions of workers being left behind, and that it will be particularly negative in an area that prides itself on social policies and high public spending, the eurozone.

This crisis has proven that being rich and having elevated government spending didn’t help manage the health and economic crisis better.

The biggest loser of this crisis has been the middle class. According to Bloomberg, “An estimated 150 million slipped down the economic ladder in 2020, the first pullback in almost three decades.”

Massive liquidity injections and large government spending programs have not helped the middle class, and we could argue that it created a negative effect. Why? The middle class has been the most negatively affected by the loss of employment while its savings and real wages have been eroded by inflation as central banks pumped trillions into government debt, creating a perverse spiral of rising prices when disposable real income fell dramatically.

We could argue that it would have been worse without central bank intervention and government spending, but there’s absolutely no evidence that shows it should have been as massive and indiscriminate as it was in 2020.

We have been told to ignore the size of the stimulus or its effectiveness and just accept these massive repurchase and spending programs as essential. No one seems to ask how much is too much and even less when the results are a bloated GDP recovery due to debt and public expenditure with a poor job recovery ratio. As time passes, we have grown used to hearing “trillion-dollar stimulus” and thinking it’s not enough.

This poor return on capital employed in government and central bank programs would result in layoffs of management in any company. We’re not discussing diminishing returns of monetary and fiscal policy, but outright negative effects if we add asset bubbles and high leverage.

Any serious analyst would be appalled at the figures of unemployment and growth shown by the IMF after spending close to $20 trillion in chained stimuli. Furthermore, any serious analyst would be seriously warning about the negative consequences of making central banks and government the lender of first resort, not the last resort. What’s the biggest risk? That the 2022 estimates prove to be too optimistic, again, and governments and central banks push for an even higher level of interventionism.

The destruction of the free market, competition, and innovation may seem appealing to some now, but the likely outcome of poor employment, negative real wage growth, and stagnation should be a real cause for concern.

Daniel Lacalle, Ph.D., is chief economist at hedge fund Tressis and author of “Freedom or Equality,” “Escape from the Central Bank Trap,” and “Life in the Financial Markets.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.