Never mind the post-pandemic euphoria, it’s time for a reality check with Roger Williams.

Credit: Alamy

Sickness, isolation, lockdowns, shutdowns, Government borrowings and enforced savings are all at record levels. Millions of people have died, some 3.4 million during the current pandemic. There were 1.8 million COVID-19-related deaths reported last year.

The rate of death has accelerated. There have been 1.6 million deaths reported in the first five months of this year alone. Globally, there have been nearly 167 million reported COVID-19 cases. Now we have a new challenge—a worldwide economic sickness is back. Inflation is here and it’s spreading, pulled by consumer demand and pushed further by production costs.

In the UK, we have had large segments of the population paid to stay at home. Unable to work, unable to spend, many have been forced to save. Unspent disposable income has been estimated between £238 billion in the UK and £430 billion in the eurozone.

Moreover, reduced aggregate consumer borrowings on credit cards in the UK last year was down by the highest amount since 1993, some £16.6 billion. As restrictions are eased, following a successful lockdown and vaccination programme, consumer spending is turbo-charged by these enforced savings. Those returning to work enhance production. However, the shortfall in business output relative to demand is the highest in 23 years. Such a shortfall is made worse as countries are not recovering in unison nor is their economic position homogeneous.

Those in the world in poverty have been and remain unable to isolate. Without savings, to live and feed themselves they need to work. They are often unvaccinated and unfairly have been decimated by COVID-19. In contrast, many in richer countries have found themselves unable to spend and their savings have accumulated at a rapid rate. You end up with reduced output at a time of increased demand as Covid restrictions are eased. 

During the pandemic, sanctions, accidents and trade wars have not stopped. They have sliced trade routes for key components. The impact of this upon Huawei, for instance, has meant it is unable to buy key chips for its telephones and has been denied operating software from the US. It has seen its world market share tumble to 4%, falling from the world’s largest supplier to sixth place in that league.

There have been economic positives and negatives. In the world of big pharma, with remarkable speed, new treatments and drugs have been clinically tested, approved and produced with previously unseen cooperation. However, the global, connected economy has had to deal with shortages.

Silicon chips for cars are in short supply. Some car manufacturers have shut down as production of this key component is unable to expand quickly enough to deal with the demand. The lead time for restarting lines was extended by the inability to accurately predict recovery of car production in a diverse portfolio of countries. 

Meanwhile, governments have borrowed and borrowed to fund fiscal measures to aid their citizens and their businesses. They have been willing to break golden rules considered fundamental to their union in doing so. It is estimated aggregate eurozone national deficits will reach 8.8% this year, with Italy leading the charge and likely to reach a deficit of nearly 12%.

Common trend

Physical markets have reflected price rises and some volatility. Stockpiling by major industrial countries has not helped the cause, and production lead times have exacerbated the problem. Inflation is back and a common trend has been established by which it will thrive: 

  1. As countries determine to come out of lockdown and furlough of employees, consumers look for things to return to normal but avoid risk of contact on crowded buses or trams. Instead, they seek to buy a car. 
  2. Consumers are keen to go back to pubs and restaurants. 
  3. Many workers who have been at home under lockdown restrictions seem to have determined that “stimulus payments are providing enough cushion so that returning to work is not worth it yet”. 
  4. Car production takes a long time to restart and some key components extend the lag in production, so new cars are in short supply. People turn to second-hand cars and demand exceeds supply. 
  5. As pubs and restaurants attempt to reopen, they seek to hire staff. Around 10% of the staff in the industry pre-pandemic have left during the pandemic. There is pressure to offer higher wages to attract staff back to the hospitality industry.
  6. The majority of food in the UK is imported. Indeed, worldwide, all advanced economies have reduced the scale of their agricultural production as their economies have grown, and developing countries in Africa or South America, for instance, have tended to specialise and increase production of commodity crops. These countries are unable to fulfil demand and transportation by air is restricted and by ship, disrupted.

The net result of this in the UK, for instance, is that second-hand car prices rise, and wage pressure in hospitality increases costs at a time when commodity food prices are impacted by production disruption and higher transport costs as planes are grounded and shipping suffers from ships and containers being in the ‘wrong’ place. In summary, inflation rises as both consumers are ‘pulling’ it up and costs are ‘pushing’ it up.

Some level of inflation is considered good. Countries manage their economies to a series of targets and inflation is one of them, but therein lies the rub. The loop we’re already in may not be manageable. 

Bonds and shaky banks

Governments, ours included, have partly or wholly funded deficits by quantitative easing (QE) and near-zero interest rates. Unwinding this QE, or ‘tapering’, in inflationary times poses real problems. Higher interest rates will mean the value of government bonds in the hands of shaky banks can fall sharply. 

Many of these banks, particularly in the southern EU states, have continued to buy and hold their government debt despite having huge portfolios of non-performing loans. QE tapering will see these institutions pushed to the wall.

In a world of higher inflation, where the damping of inflation is brought about by higher interest rates and QE tapering, the control levers are likely to be ‘unavailable’ without substantial numbers of bank failures. Inflation looks certain to run largely unchecked as the EU cannot afford to see the economic destruction of banks and the possible domino effect in the Club Med states. 


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