Since the start of 2021, the world’s economies have begun to recover in a post-pandemic environment marked by large-scale vaccination campaigns, yet they are doing so in a desynchronised manner. Europe and Japan will still have a negative output gap in 2022, while the US economy is on a path toward overheating. How might this situation play out?
Is US inflation a risk for financial markets globally? How can investors take advantage of the diversification opportunities created by the current desynchronised recovery and the divergence among economic blocs?
After the asymmetric shock from the pandemic, economic cycles across the major regions will be further desynchronised by differences in the pace of vaccine rollout and the extent to which fiscal policies initiate a gradual path towards normalization.
In the short term, the stimulus programmes and the forced savings built up during the pandemic should lead in 2021 to a vigorous rebound in demand from households and businesses alike. This will bring about a temporary rise in inflation due to supply bottlenecks affecting semiconductors, transport by road and by sea, construction materials and specific metals (such as copper and cobalt) involved in the energy transition. In the United States, the problem is being compounded by labour shortages caused by lower immigration and unusually generous unemployment benefits.
The pandemic has accelerated three key underlying trends: Digitalisation, Deglobalisation and Decarbonisation. The first constitutes a positive supply shock, but the other two entail negative supply shocks that may well generate more lasting inflation.
The rising trend in US inflation will likely prove more persistent than expected by the Federal Reserve, given the upward pressure on rents, wages and health insurance.
While most of the world is still stimulating and monetizing fiscal deficits, China is trying to stabilise its overall level of domestic debt. That suggests we’ll see strong upward pressure on its currency. Beijing’s efforts to keep the yuan from appreciating too much may re-ignite trade tensions with the United States.