Bad winds from America. The North American situation has entered a spiral that threatens to spread to the rest of the developed economies. The maintenance of expansionary policies, the supply shock, inflation and the loss of traction in the recovery are the four threats that are already worrying analysts in Washington, who are increasingly seeing a stagflation scenario. A situation that many have already warned about due to the situation of rising prices while the economy stagnates and the rate of inflation does not subside.
It’s the cocktail everyone dreads. The situation has already provoked reactions within the European Central Bank (ECB) and the American Federal Reserve (Fed), which are now divided on the advisability of beginning to withdraw their monetary stimuli before it is too late. Despite the hawks’ voices from both central banks, who ask to begin with the withdrawal, the uncertainty about the recovery maintains the fear of withdrawing the stimulus. All this at a time when there is a strong shock from the supply side.
This accumulation of stimuli -monetary and fiscal-, of vigorous recovery and of limited supply threatens to lead to inflation much higher than real GDP growth, a phenomenon of which several analysts warned of its possibility in the medium term. However, the famous economist Nouriel Roubini, a professor at New York University, believes that he is already getting ahead in the United States. These are the four threats that bring the dreaded stagflation closer:
Prices at maximum
Inflation is at a decade high. The euro area signs 3%, the OECD as a whole 4.2%, and in the United States, where the greatest alarm signals come from, it reaches 5.4%. The debate among analysts is now on whether these figures will continue over time and whether GDP growth will be able to absorb this price hike.
Inflation could stay above 5% for a while, while economic growth could have peaked . That is the main fear. Until recently, economists had focused more on medium-term risks. Now they dare to argue that stagflation – albeit mild – is already underway. Prices rise in advanced economies, and growth slows dramatically, despite massive monetary, credit and fiscal stimulus.
This situation has already made US bankers talk about the advisability of beginning to withdraw the monetary stimulus. The chairman of the New York Federal Reserve, John Williams, said that at this time “it is clear that we have made substantial new progress in achieving our inflation target.” At the same time, he said there has been a lot of progress toward maximum employment, but he wants to “see further improvement before he is ready to declare that the test of further substantial progress has been met.”
Williams noted “Assuming the economy continues to improve as I anticipate, it might be appropriate to start slowing down asset purchases this year. I will carefully assess the incoming data on the labor market and what it means for the economic outlook, as well as the risks. like the effects of the Delta variant, “he said.
For his part, the president of the Fed of San Luis, James Bullard, reiterated in statements to the Financial Times that the Federal Open Markets Committee (FOMC, for its acronym in English) “should go ahead with a plan to reduce its enormous stimulus. “. As he explained, “there is a lot of demand for workers and there are more job offers than unemployed workers.” “If we can get workers to adapt and better control the pandemic, it seems that we will have a very strong labor market for next year,” he added.
The rise in prices remains unstoppable despite the loss of traction from the recovery in the United States. The main investment desks on Wall Street seem to have it clear. The US economy slows its recovery as the effect of the stimulus dissipates and the pressures of both the Delta variant and inflation take a toll on consumption. Goldman Sachs has been the last entity to join others, such as Morgan Stanley or Deutsche Bank, which have revised down their outlook for the country’s GDP.
In Goldman’s case, its economist Ronnie Walker cut its GDP growth projection to 5.5% in the fourth quarter, down from the previously estimated 6.5%. The bank expects annual growth to be 5.7% in 2021, below the 6.2% average expected by other entities. “The hurdle to strong consumption growth going forward looks much higher:
The Delta variant is already weighing on third-quarter growth, and the fading of fiscal stimulus and a slower recovery in the services sector will be the windfalls. against the medium term “, justified Walker in a note to his clients. For its part, Morgan Stanley also anticipates “a sharp slowdown” in growth in the second half of the year. Its economists have lowered their growth expectations in the current quarter from 6.5% to 2.9%. In the last three months of the year they expect the US economy to regain a little more momentum and grow at a rate of 6.7%.
The GDPNow indicator from the Atlanta Federal Reserve indicates that the GDP of the United States is growing in the current quarter at a rate of 3.7%, a decrease from the 5.3% forecast at the beginning of this month.
‘Shocks’ in the offer
Finally, there are still supply bottlenecks in the labor and goods markets . Shortages of key inputs, such as semiconductors, further hamper the production of cars, electronics, and other consumer durables, driving inflation. The Delta variant disrupts the reopening of many sectors and launches a new torpedo into global supply chains, ports and logistics systems.
The key to all this this set of situations will maintain inflationary pressure for a long time. Most analysts believe that it will not last long. However, the most negative views predict that supply shocks will persist in the medium and long term . The trend toward deglobalization and increased protectionism, balkanization and relocation of distant supply chains, coupled with the aging demographics of advanced economies and key emerging markets, scares experts. Furthermore, the political backlash against income inequality leads to a scenario with strong wage growth.
If this prediction comes true, the spiral of prices and wages threatens a stagflationary environment worse than in the 1970s. This year is key. Who will get it right?