Rising inflation condemns European economies to stagnation
Industrial prices rise at the fastest pace since January 2006
The upward trajectory of prices, in a context of the slowdown in European economies, makes it difficult to achieve a sustained economic recovery after the hard blow of 2020, leading Europe to stagflation and, therefore, to permanently maintain nominal debt levels public debt above 100% of GDP in the EU and 120% in the case of Spain, a public liability threshold from which our country would not fall in five years with an average inflation of 2% settling.
In a scenario of practically no inflation and strong recovery of GDP ( in line with the initial estimates by the Government ), the Spanish public debt would, firstly, stabilize at around 125%, and then gradually reduce it. However, a slowdown in growth (between 3 and 4% by 2021, similar figures for 2022) coupled with higher inflation than the average of recent years (above the ECB’s 2% inflation target), It would not prevent the level of debt from stabilizing, but it would prevent it from falling significantly below the level at which 2020 has closed in a reasonable period of 5 years: 117%.Five years is what it took to achieve the stabilization of the debt / GDP ratio since the end of the previous crisis and, on this occasion, high inflation that conditions real growth makes it more difficult to achieve a sharp decline in the ratio to medium term.
If there was a fundamental characteristic that helped a vigorous recovery after the previous crisis of 2008-2012, such as the absence of inflation, now the opposite effect is most likely to occur. This is because, for the first time in many years, concern about the rise in inflation rates of consumer goods and aggregates such as foreign trade or public consumption, among others, has real foundations.
Inflationary tensions are emerging in a way that can hardly only remain temporary or accidental, for example, as an effect of the pandemic. But it is not about what many analysts have baptized as “post-Covid inflation”, which would be produced by the strong consumption impulse of families that have been confined and that, if they have kept their sources of income unchanged or with a moderate drop, they are willing to skyrocket their consumption.
This step effect will occur with high probability, but it has not been present until the coronavirus pandemic is definitively controlled and the percentages of the vaccinated population begin to be high enough to stimulate spending.
Everything that is happening in terms of prices is emerging before this scenario can take place. In the first place, there are conjunctural factors derived from restrictions and interruptions in global value chains that have led to a greater dependence on national productions, with episodes of shortages of mass consumer products. Containment measures for the pandemic have made it difficult for auxiliary services vital to maintain supply chains, such as truck traffic by road and port traffic.
As published by Bloomberg , in the main ports there are significant congestions. This is the case of Asians, where in Hong Kong in January according to data from the Freightos company, 77% of SME importers reported significant difficulties in supply chains and 44% applied price increases on their products such as answer.
It is also a direct consequence of the reduction in the level of competition in global maritime transport, where three large alliances of companies control 80% of global container traffic.
Meanwhile, component manufacturers and the automotive industry in countries such as Germany are carrying out a strong supply of raw materials and intermediate consumer goods, in order to avoid the paralysis of their production chains.
In December, according to Sea-Intelligence, only 44.6% of containers arrived at port on time and as planned, compared to 76.3% the previous year, worsening this factor to the lowest level reached in 2011.
Secondly, there is the rising cost of global raw materials , especially food and energy. For example, the global food commodity price index prepared by the United Nations has reached the levels of 2014, the latest episode of a significant rise in prices. On the other hand, the grain price index is 25% above last year, while other commodities have soared between 40% and 60% with respect to the minimum of March 2020 (the case, for example , from soybeans). These are strong signs that the super-cycle of raw materials is underway, with China as the main protagonist, as in the first decade of the 21st century.
The last deciding factor is the actual arrival on the market of the enormous amount of fiscal and monetary stimulus that governments and central banks are pushing.
In the United States , credit closed 2020 with a growth of 15.9% year-on-year, while in the euro area the net nominal increase in credit has gone from an average of 50,000 million euros per month between 2014 and 2019 to more than 100,000 since the Spring 2020. More specifically, banks have lent 1.79 trillion euros since the monetary policy review at the end of March 2020, with growth rates of credit to families (not mortgages) and companies that in countries like Spain have from just 2% growth in March to 9% last June and moderating to around 6% year-on-year in January.
An additional element of inflation is the housing market. For example, in the United States, the stock of housing for sale is the lowest since the 2008 crisis, while the demand for housing is growing in the income segments that have saved heavily during lockdown.
It is not a passing phenomenon
Therefore, the foundations are laid to think that inflation will not be a temporary phenomenon, although it may have various factors that can mitigate it in the short or medium term. Issues such as downward pressures on wages, rising unemployment, or continued technological innovation dampen the upward trend in consumer price indices, but they are not decisive in changing the trend. It is essential to weigh the different factors according to their current and historical importance, and without a doubt the factor that has kept long-term inflation at bay in recent years is the reduction in energy costs together with an increase in the added value of the companies.
The reappearance of inflation puts at risk the demand policy plans that had been drawn up by governments and central banks, which can only be sustainable if they do not generate sufficiently strong inflationary pressures. The markets are suspicious of the stimulus package of 1.9 trillion dollars that the Biden Administration is going to activate because it is very likely that they will turn into unwanted inflation that forces to anticipate that episode as feared as tapering and, even more feared, the sterilization of a good part of the amount of money that has been created in recent years.
Huge debt portfolios
But not only the central banks will have problems with the management of huge portfolios of public and private debt on their balance sheets. Countries face high debt-to-GDP ratios for years, as inflation helps to reduce the real cost of borrowing, but not the nominal debt ratio. In the case of Spain, with a real GDP growth rate prior to the crisis of 2% and a real cost of debt at 0% and an initial debt-to-GDP level of 97% of GDP, a sustained increase of Inflation that does not cause a rise in real interest rates improves debt sustainability ( ceteris paribus improves by 3%) but does not imply its stabilization (which is one of the most important objectives in the medium term), much less its reduction.
Even in the most optimistic scenario, the market consensus and a good part of the economic strategists and governments have already realized the anomaly that supposed an inflation as low as the one that has dominated the economic panorama in recent years.
With total factor productivity practically stagnant, once the excess supply in key commodities globally has been widely purged and observing how the enormous amount of money supply created in recent years is already seeping into the real economy, more Sooner or later inflationary tensions had to appear, something that thwarts the governments and central banks that in the coming months will try to deny by all means that this is the horizon that must be faced and that this will be the one that make aware of the enormous long-term cost that permanent “generosity” has in the last decade in both monetary and fiscal policy.
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