Stagflation fears intensify in signs of slowing growth

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Provide chain disruptions sweeping main economies have reawakened an outdated nemesis for buyers: stagflation.

Nervousness over rising inflation has been ever-present in markets this 12 months. However with oil topping $80 a barrel, international meals costs a 3rd dearer than they had been a 12 months in the past and different commodities at decade highs, buyers say a longer-than-expected inflationary surge is coinciding with a slowdown in development — and making it worse.

Economists and buyers play down comparisons with the aftermath of the Nineteen Seventies oil shock, which gave rise to the time period “stagflation”. Then, inflation and rates of interest bumped into double digits, unemployment soared and GDP recovered solely slowly from repeated setbacks.

However with power payments now rocketing, many fear a couple of development slowdown at a time when central banks are edging in the direction of lifting rates of interest in a bid to maintain a lid on longer-term inflation.

“The dialog round inflation has undoubtedly shifted,” stated Seema Shah, chief strategist at Principal World Buyers. “There’s nonetheless a broad settlement that loads of it’s transitory, however we nonetheless suppose it can final effectively into 2022 and actually begin to hit shopper spending.”

“It’s not the Nineteen Seventies, however that is modern-day stagflation.”

Line chart of Annual % change in consumer prices  showing Inflation has risen faster than expected across developed economies

Alerts from the Federal Reserve and Financial institution of England final week that they might quickly start lifting charges have fuelled a giant bond sell-off over the previous week and a half. However in distinction to the “reflation” commerce at first of this 12 months, shares have been unable to attract consolation from the prospect that tighter financial coverage will probably be accompanied by accelerating development.

Ample proof means that the availability shock reverberating around the globe, mixed with outbreaks of the Delta variant of coronavirus, is tempering the restoration in development.

Knowledge launched this week pointed to a pointy slowdown in Chinese language manufacturing, as regulatory pressures and excessive power costs shut down some manufacturing. Enterprise surveys from the US, UK and eurozone counsel that exercise has slowed as supply instances lengthened and backlogs constructed up.

Line chart of Manufacturing purchasing Managers Index (Above 50 = a majority of businesses reporting expansion) showing Business surveys suggest the global recovery is now losing momentum

Promoting exercise spilled over into fairness markets this week after information confirmed that US shopper confidence had dropped to a six-month low in August.

The UK has discovered itself on the sharp finish of stagflationary considerations, with a surge in power costs compounded by driver shortages that left petrol pumps working dry.

Whereas revised information present exercise bounced again quicker than thought over the summer season, the restoration now seems to be faltering. The Financial institution of England’s governor Andrew Bailey acknowledged this week that offer bottlenecks and labour shortages had been worsening, and will maintain down development and gas inflation for some months to come back.

“The restoration has slowed and the financial system has been buffeted by extra shocks,” he stated in a speech to the Society for Skilled Economists.

Considerations over development are one motive the pound has not benefited from a pointy rise in UK authorities bond yields, as they sometimes do, after Bailey signalled {that a} price rise might come as quickly as this 12 months. As a substitute, sterling has slumped to its lowest degree of 2021 in opposition to the greenback, as some buyers worry that early price will increase might choke off a fragile restoration.

“Whether it is stagflation, central banks are in a bind,” stated Jim Leaviss, head of public fastened revenue at M&G Investments. “Climbing will scale back demand somewhat bit and strengthen the forex. However it can don’t have any influence on provide chain points [ . . .] it gained’t carry again lorry drivers.”

That dilemma — shared by different huge central banks — might threaten buoyant fairness markets, in line with Mohamed El-Erian, chief financial adviser at Allianz.

“Central banks will probably be torn between reacting to the ‘stag’ and the ‘flation’,” he stated. “That’s a world the place buyers’ confidence in policymakers is shaken, and the backstop they’ve had over the previous decade isn’t there any extra.”

Vicky Redwood, senior financial adviser at consultancy Capital Economics, stated the UK’s “stagflation lite” was seen in lots of nations — with the surge in inflation coming earlier within the US, however development now slowing there too on account of the unfold of the Delta coronavirus variant.

However inflation ought to begin to ease in 2022 and the scenario was nonetheless “a great distance off something just like the Nineteen Seventies,” she stated, including: “we gained’t see inflation get into the system like we did then.”

Others warn, nonetheless, that there isn’t any signal but of the strains on provide chains easing, and that the world might be heading for a extra sustained interval of tepid development and better inflation than policymakers have been predicting.

“It’s a world drawback,” stated Kallum Pickering, economist at Berenberg, arguing that corporations had little visibility over “very sophisticated provide chains” and disruption might final for much longer than thought.

If provide chain issues continued for an additional six to 12 months, whereas customers nonetheless had job safety and had been prepared to pay for the products they needed, he stated: “the whiff of stagflation is likely to be extra of a stench”.

Further reporting by Federica Cocco 


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