Alejandro Werner joined the Georgetown Institute of the Americas as founding director in march 2022. The Mexican economist was director of the Department for the Western Hemisphere of the International Monetary Fund (IMF) from January 2013 to August 2021. He served as deputy minister of Finance and Public Credit, director of economic policy and chief of staff of the Ministry of Finance of Mexico, as well as director of economic studies of the Bank of Mexico and head of corporate and investment banking at BBVA-Bancomer.

Designated a Young Global Leader by the World Economic Forum in 2007, Werner spoke exclusively with LPO about how the US economy is doing. Unlike others, he does not think that there will be a very strong recession. And he thinks that the same drop in the level of activity will help to ease up inflation, the pain in the neck of the Biden administration. In a way, he defends what the Fed did at the beginning of the crisis, also immersed in criticism from the economists. "Perhaps what was done was well done given what was known at that time," he says.

La sombra de una recesión en Estados Unidos amenaza a las exportaciones y las remesas en México

It seems that there is consensus that there will be a recession in the country. The question is whether it will be strong or rather controlled.

As an economist, I can hardly say that a recessionary scenario is imminent. We have seen an increase in the possibility of a recession in the United States in the next 12 to 18 months. Why? On the one hand, the economy was subjected to a multiplicity of fiscal and monetary stimuli never seen before. And after Covid, it had a much faster recovery than estimated. The economy is still artificially stimulated by very aggressive public policies and it is recovering growth and activity in a stronger way. This generated a very important inflationary process that had more to do with supply factors, such as the increase in the prices of many manufactured goods associated with problems in the supply chain. And it began to get complicated with the generation of wage price increases and inflation expectations.

There will be a stable downward trend in inflation, with high but stable levels of raw materials. Part of the inflation is that raw materials went up a lot. We know that given the current stability, 12-month is going to be lower. The underlying is the one that the Fed is targeting with the rate hike.

After the recovery, was everything set for an economic downturn?

The tight labor market. Last year, we had financial markets with high prices. This has led many analysts to think that in order to contain the inflationary pressures that are operating in the labor market, an increase in interest rates and a tightening of financial conditions will be necessary, which must lead to a rise in the unemployment rate and a recession. Because the Fed is considered to be late.

In simple terms, many economists characterize a recession by 2 negative trimesters. I would tell the difference in growing to minus 1 during two consecutive trimesters and then growing to 2; with growing to zero three trimesters in a row. We would not call it a recession. But in the end, we will be in the same place and the suffering of the labor market will be the same.

I think that the probability of having a not so tremendously prolonged period of low growth exists. But it would begin next year. There is the very high probability of an scenario with low growth and recession in the United States. What supports growth is the saving of families, which is going to be eroded when harsh monetary policies are combined. Furthermore, we are going to have a very tight housing market.

So you are not seeing a recession with 2008 levels...

I think it will be a prolonged period of low growth where the recession will be defined, and what is not clear today are the situations of financial vulnerability that transform the recession like in 2008. The balance sheets are strong, banks are fine. We can see bankruptcies in funds that invested in crypto and high yield bonds. In households it is the same because we do not see an excess of leverage of families, the sum of the financial excesses is not in the private sector but rather in the public sector. The problem has been concentrated in the public sector. In that sense, having passed the recession from 2008 to 2010, with a low recovery until 2015, and then the Covid cycle, this is more the contractionary part of the economic cycle that is usually more normal.

I think that the probability of having a not so tremendously prolonged period of low growth exists. But it would begin next year. There is the very high probability of an scenario with low growth and recession in the United States. What supports growth is the saving of families, which is going to be eroded when harsh monetary policies are combined. Furthermore, we are going to have a very tight housing market.

Will this lower growth be able to lower inflation, or will both scenarios coexist?

There will be a stable downward trend in inflation, with high but stable levels of raw materials. Part of the inflation is that raw materials went up a lot. We know that given the current stability, 12-month is going to be lower. The underlying is the one that the Fed is targeting with the rate hike, but the monetary measures take effect between 12 and 24 months later. We will begin to see these measures next year, what must happen is and impact on housing, construction and that it is seen in the labor market. We are going to see a slowdown in jobs, less consumption, these channels take time. Hence, analysts are hoping that the rate hike works.

Part of the market blames the Federal Reserve for being too far behind the issue. Do you agree?

Perhaps what was done was well done given what was known at that time. What would have happened if there was another Covid variant? Like in China, that generated less economy activity. Given the risks, it is a fair and honest debate to say whether they overdid it or calibrated policies to a pessimistic scenario. But maybe it was the right decision.

But once such a negative scenario does not materialize, the Fed have probably maintained the diagnosis that inflation was more a process of supply than demand, associated in part of the reaction of fiscal and monetary policy, for too long. That criticism is valid, the economy was recovering and it would have been wise to be a little more agressive. Given the state of health of this economy, it probably makes sense to withdraw these stimuli.