Policies for investing in sustainable growth: risks and opportunities in the current macroeconomic environment

The macroeconomic environment has shifted rapidly in the past year. This has posed serious challenges for policymakers seeking to avoid recession and inflation but also to boost productivity growth and prevent dangerous climate change and environmental degradation. The purpose of this paper is to set out a stable and prudent course for macroeconomic policy in this environment.

Although fiscal and macroeconomic pressures will differ from country to country, common patterns can be discerned. The authors argue that a policy approach that encourages an acceleration in clean investment is best placed to address issues of slow productivity growth, boost competitiveness and account for the risks and opportunities associated with rapid technological, environmental and social change.

Main messages

  • As many countries struggle with close to record levels of public debt relative to
    GDP post-COVID, the unexpected threat of stagflation is changing the macroeconomic discourse.
  • However, the underlying case for active public sector support for the low-carbon economy remains as strong as ever.
  • Overstretched supply chains and the withdrawal of workers form the labour force are likely to prove temporary features, helping ease inflationary pressures as fiscal and monetary policy continue to tighten.
  • In the medium term, demographic conditions favouring low inflation and low
    real interest rates show little sign of reversing, making public borrowing for investment affordable.
  • Public and private investment in energy-efficient low-carbon sectors should more than pay for itself by crowding in capacity and lowering public debt relative to GDP.
  • Expanding investment in renewables, electrification and resource efficiency will yield significant gains to productivity in the medium to long term, through economies of scale in production and discovery. This is most likely to impart a counter-inflationary force and reduce vulnerability to global supply bottlenecks.
  • Some low-carbon or ‘clean’ sectors are particularly vulnerable to higher interest rates that may result from any policy reaction: they tend to be capital-intensive with their full profit potential yet to be realised and are therefore discounted more highly.
  • Uncertainty enhances the importance of strong, predictable and transparent public policy to steer private investment and to reinforce expectations of tangible returns from a clean transition.
  • The task for decision-makers in the current macroeconomic environment of rapidly mounting uncertainty and structural change is to maximise opportunities and minimise risk.