Lhe economy of OECD countries will, in the coming years, look more like that of the 1980s-1990s than that of the 2010s. The first characteristic of this “back to the future” is the sequence of prices and salaries. The bargaining power of employees is indeed recovering, for two reasons. First, high inflation will push them to demand better indexation of wages to prices, the loss of purchasing power due to the current low indexation being unbearable; then, the recruitment difficulties of companies have become, since 2021, extremely strong, with the change in the needs of companies – they must meet a much stronger demand for goods – and with the rejection of arduous jobs and atypical hours. We should therefore observe in the future a greater ability of employees to obtain wage increases when the economic situation is good and a better indexation of wages to prices.
The second characteristic is the attitude of central banks. Since 2012, faced with permanently low inflation, they have no longer conducted restrictive monetary policies. We will see the reappearance of a countercyclical monetary policy, expansionary after recessions, then gradually restrictive. Of course, central banks are still reluctant today to return to this monetary practice of the past, but they will have to come to terms with it and start fighting inflation again in the second part of the expansion periods.
We are therefore going to witness the reappearance of monetary cycles, as in the years 1970 to 2000, before the subprime crisis: after a recession, unemployment is high, inflation and interest rates are low; gradually, unemployment decreases, inflation increases. At a certain stage, the central bank takes the decision to trigger a recession to break inflation (this is what was done from 1980 to 1982, in 1990, in 2000 and in 2008). Inflation is falling, and monetary policy may become expansionary again, the economy is picking up. These monetary cycles, linked to inflation cycles, disappeared in the 2010s.
“Overheating Theory”
What are the consequences of this return to monetary cycles? The first is that medium-term debt stabilization constraints are reappearing. At the end of the 2010s, as interest rates were not rising, it was not really necessary to deleverage States or companies, and public deficits moreover remained high in many countries (United States). United States, United Kingdom, France…). We then spoke of the “theory of overheating”: it was a question of continuing to support demand while the economy was close to full employment, to force companies to be more productive and encourage them to hire low-skilled workers. .
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