The world economy is set for strong growth next year, helped by a broad roll-out of the coronavirus vaccine which will restore confidence. But there is a downside to this development: it will be followed by a strong rise in inflation – of up to 5%.
Simon Ward (pictured), Janus Henderson’s chief economist, gives this forecast to clients in his macroeconomic outlook. He expects a long-term period of substantially higher inflation from 2021 onwards.
Ward believes that markets will lose support from central banks in a relatively short period of time. ‘Looking at price inflation for consumers, I see a 5% inflation rate at G7 level in 2021 and 2022,’ says Ward.
He compares it to the period before the Great Financial Crisis, when there was also an (albeit smaller) increase in money growth, resulting in G7 inflation of 4%. Partly for that reason he now expects a higher peak.
Janus Henderson thinks that the acceleration of inflation is driven by raw materials. Ward believes that many companies will try to raise prices to make up for some of the losses from the coronavirus crisis and the lockdown.
Ward adds he doesn’t think the labour market will remain as weak as it was after the Great Financial Crisis. ‘If the world economy grows as strongly as I think it will next year, the labour market will tighten surprisingly quickly. I think it may well be that by the end of next year we will be back in the situation of 2019, when there was a labour shortage and subsequent pressure on wages.’