The current inflation surge is similar to the one after World War II. It then took two years for inflation to cool. Long-term interest rates should start to rise, according to the online Outlook 2022 conference organised by Candriam. Anton Brender and Florence Pisani, both economists, conducted the webinar.
After a slow start, the vaccination campaign in Asia has accelerated significantly. Industrial production has remained stable in recent months. However, supply chain bottlenecks will remain for some months. In China, regulations are increasing everywhere.
“Governments are cracking down,” explained Brender, “on the misuse of commercial and consumer loans in the property sector and have further restricted the use of the shadow banking system (such as trust loans and entrusted loans) by developers. Local administrators in cities where the real estate market is inadequately regulated and house prices are rising rapidly are now being put on notice.”
Construction and real estate account for 30 per cent of China’s final demand: a major correction in those sectors could have a far-reaching impact on activity. The Chinese authorities now face many challenges: if they cannot keep the economy in balance, growth could certainly be ‘underperforming’ in the coming years. If China slows down, this could have a significant impact on the rest of the world.
Inflation
“The rapid post-war inflation,” advanced Pisani, “was mainly caused by supply shortages (stocks had run out or were completely depleted during the war and families had difficulty buying cars and household appliances because they were not actually available), built-up demand after wartime rationing and the abolition of price controls. This inflationary period ended after two years when the domestic and foreign supply chains normalised and consumer demand began to level off.”
“The period after World War II is perhaps the most relevant blueprint for today,” he continued. “Supply shortfalls, a shift towards the consumption of durable goods, pent-up demand for services and lots of accumulated savings are all driving up prices. A major difference between the inflationary dynamics of World War II and those of today is due to price controls, which pushed the price level 30 per cent lower than it would otherwise have been. When the restrictions were lifted in 1946, prices rose sharply.”
Interest rate hike
“The Fed is starting to normalise its policy, so long-term interest rates should start to rise,” said Pisani. “Economically, the eurozone is still struggling as a result of Covid, despite a generally strong recovery. For example, bankruptcies have risen sharply in some service sectors, particularly in Spain. But in most eurozone countries, bankruptcies have been contained and business start-ups have been relatively high. Supply constraints, however, continue to dampen industrial activity, especially in Germany.”
“Companies’ financial savings have increased and financing conditions remain loose. Investment in equipment should increase. Investment in equipment should increase,” Brender explained.
“The rise in energy prices should not put too much of a brake on household spending,” he continued. “The accumulated savings surplus and government measures will help cushion the shock to purchasing power. For the time being, consumer confidence is holding up well. Public investment will support growth in 2022, especially in the southern countries.”
ECB more accommodative
Even if the ECB starts “tapering” in March 2022, it has many arguments to remain “accommodative”. While inflation will be “higher longer”, for now it will not be accompanied by wage increases. Despite the improvement in the labour market, the eurozone is still far from full employment. Despite the improvement in the labour market, the eurozone is still far from full employment.