We knew that the best growth rates would be achieved by comparing the second quarter of 2021 with the second quarter of 2020, when many countries were in a first lockdown to combat a worrying virus, without the help of vaccines to combat the threats. This has proved to be the case
Most confidently predicted that growth rates would be stellar by past standards but would soon fall away as the previous year’s figures offered a more serious challenge – and as the initial recovery from reopening many closed activities was banked. Commentators assumed that the huge fiscal and monetary stimulus administered to economies to offset some of the damage done by lockdowns would be reduced as more normal life resumed. With any luck, the authorities would judge that right to allow a smooth transition from heavily subsidised business and employment to independent private-sector trading.
There were two differing worries. One camp thought that the stimulus – particularly all the money printing – might go on for too long and trigger a nasty inflation. Others worried in case the authorities withdrew stimulus too soon and collapsed the recovery before it was well established.
It was necessary to analyse the different circumstances country by country, as the scale of the stimulus and the energy of response varied considerably. We argued that Japan and the European Union would not experience an inflation problem, despite continuing with easy money and the printing of more euro and yen for the foreseeable future. The US was likely to experience more inflation because it had provided a larger stimulus and because its economy was likely to show more energy and enthusiasm in recovery. So, it has proved, with US inflation reaching 5.4% whilst Japanese and EU inflation remains under reasonable control.
New era of stagflation?
It is still not clear if inflation in the US will prove to be as temporary as the Fed tells us, or whether there could be a follow-through into wages and service-sector prices. Will there just be a first burst of higher prices for commodities and for items in short supply as a result of closures and changes in underlying demand? Meanwhile, a new worry starts to stalk some market followers – the worry that there could be a new era of stagflation. What, they ask, if the US economy slows from here whilst inflation remains a nuisance?
So far, we see some signs that give the Fed cause for encouragement. Prices of some commodities such as timber and iron ore have fallen away from their peaks. Maybe the pressure is reducing from commodities as stocks are rebuilt and as companies adjust to the new levels of underlying demand. China slowing has also been an important factor in reducing some of the demand pressures. The obvious areas of shortfall like the shortage of shipping containers and of microchips will in due course be plugged, as new factories and new supplies of containers are introduced to the world trading system.
There are also signs of some consumer reticence or change of preferences. People are not leaping back to the City offices and to the cafes and restaurants that surround them. They are not keen to jump on the trains and buses to go into an office to work. Those who have saved across the lockdowns because they have kept their full salaries but avoided the travel and eating out costs are not necessarily rushing to the shops to buy many more goods. They will need to be tempted by experiences as sport, entertainment and hospitality gradually reopens. They may continue to spend on improving their homes. All this is abating the forward indicators of activity and slowing the service-sector recoveries.
It does not look as if there will be one overall pattern worldwide of either successful good recovery or disappointing stagflation. Each country and region has some differences, based on the degree of stimulus provided, the state of their labour markets and the extent of their vaccination programmes to allow a freer economy. We have probably seen the best of the equity market moves this year, based on the large money-creation programmes and on very favourable comparisons in the first flush of re-opening and recovery. From here it will be a case of being more selective and identifying the trends for growth and higher profits that will emerge.
It is a more nationalistic world with a global economy still scarred by the antivirus policies and by some defined shortages and trade frictions. So far, the US has led the rebound thanks to the huge double fiscal and monetary stimulus. The US markets are making new highs and looking forward to a further fiscal stimulus as Congress fights over the magnitude and detail of the packages. We will watch these carefully to see if they will give the necessary support – or if they become too inflationary.
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