The global pandemic has the potential to become a powerful turning point on the international economic and investor map and to erase some of the pre-coronavirus differences between countries. The ability to get out of pandemic constraints quickly and effectively means an effective business card for investors, and thus the promise of stronger future growth. And of course the opposite.
“Especially in economies that lag behind other countries in vaccination against COVID-19, an era of low growth and high inflation, ie an era of stagflation, may come. These countries will lose competitive advantages, growth potential, business opportunities and attractiveness for investors will decline, “points out Raiffeisenbank economist Helena Horská. The time needed to slam the door behind the covid will thus be a key starting point for the future and will be reflected in the economic reality of states and their inhabitants. It will not depend on whether the country will deal with the virus, but when it will.
Guessing inflation
At the beginning of 2021, it is difficult to find a topic that would divide the professional community more than the opinion on future inflation. While experts can agree that, at least in the Euro-American world, central banks are printing a large mushroom for potential price growth by spending money and spending it, they do not find common ground on whether rapid and chronic inflation will actually occur.
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Proponents of the future inflation boom point out that the indebtedness of countries has risen to record levels in history as a result of the pandemic – according to statistics from the hedge fund Bohemian Empire, the world currently owes almost four times the global annual output of the world economy. “Historically, debt repayment has always ended in inflation,” emphasizes Štěpán Pírko, head of the Bohemian Empire hedge fund. According to him, the future will therefore belong to the growth of rates and inflation.
However, the rise in prices may also be triggered by consumer euphoria after viral statistics start to show marginal numbers in the long run. Economists call the phenomenon the post-war syndrome, which has historically been associated with the permitted gates of consumer confidence and “building” mood in economies. So far, they are generating government spending in advance: the Democratic Party’s total victory in the US is likely to trigger a giant, two-trillion stimulus package, not far from a trillion euros is a supportive injection of state money on the other side of the Atlantic.
Economists in the eurozone are already expecting roughly 2% inflation this year, and price growth of three percent should be a reality in America. While in the United States it would be a double increase in prices compared to previous years, in the European Union inflation of 2% would mean a dramatic turnaround. At the end of 2020, EU prices increased on average by only two tenths of a percent, ie ten times less. “Inflation can easily run out of the pot with a delayed central bank response. Just as the covid shock was an unexpected, unlikely event with a far-reaching and profound impact on the economy, inflation may also play a role sometime in the future, ”emphasizes economist Horská.
Forgotten inflation
Inflation has become a dust-catching concept in the Euro-American world, at least for the last decade. It did not massively consume savings, nor was it necessary to change the investment strategy due to rising prices. However, he struck the covid and the states and central banks responded to his threat in a way that is unparalleled in history. The scale at which the volume of money increased is closer to the increase in the balance sheets of the main central banks. According to data from the Federal Reserve Bank of Saint Louis, the assets of the US Fed have risen since the beginning of the pandemic at the end of February last year from 4.1 to 7.4 trillion dollars at the end of January, ie by almost 80 percent.
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According to its statistics, the European Central Bank reported less than seven trillion euros in assets this year at the end of January. At the end of last February, it was only 4.7 trillion euros. The balance sheet of the first bank in the euro area thus swelled by almost half in less than a year. This happened mainly in the form of a massive purchase of government and corporate bonds into the assets of central banks. In addition, the governments of these countries have not spared and, with the generous help of central banks buying their debts, have launched massive spending to alleviate the course of the crisis. However, investors began to ask whether the current relative balance would not collapse like a house of cards. And they started buying what was available on the stock exchanges.
Inflation threat
“The expansion of the vaccine will bring economic recovery closer. But as central banks send signals that low rates will last us for some time to come, this only increases the risk that inflation will be fueled by a political mistake, ”warns Saxo Bank chief investment analyst Steen Jakobsen against the fiscal adventure, adding that expected inflation rises is indisputable.
However, the threat of inflation does not have to be a strictly current threat. “Inflation will be subdued for some time, less so in the Czech Republic than in Western Europe, but the environment seems to be significantly more inflationary than in the event of an economic downturn in 2013,” said Pavel Sobíšek, an analyst at UniCredit Bank. According to him, factors such as the smaller free capacity of the global economy or the effect of the mentioned long-term policy of central banks play a role on the inflation side.
“The risk is not in inflation itself, it is historically the easiest way to repay your debt. On the contrary, it would be critical for the economy if central banks responded to high inflation by exaggerating interest rate increases, ”says Petr Zajíc, portfolio manager of the Amundi CR investment group. Nevertheless, many of the heavyweights of the financial world do not even admit that the world is on the verge of a wild rise in prices.
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“I do not think that we have a painful future for us ahead of us,” the governor of the Czech National Bank, Jiří Rusnok, opposes for the E15 daily, for example. According to him, by the beginning of next year, Czech inflation will descend to the current goal of the central bank, ie to a 2% year-on-year rate. However, the construction of domestic inflation has, among other things, been recorded in recent years that it does not sufficiently include rapidly rising real estate prices. Well-known investor and exbank Radovan Vávra, for example, think the same way. “I can’t imagine the reasons why we should have years ahead of natural inflation,” he says.
Inflation prologue?
Unlike before, however, inflation can arrive in a new form, the so-called two acts. While supermarket price tags have remained relatively low in the country for less than a year since the outbreak of the pandemic and eventually the money spins, the investment world has already experienced one of the strongest growth impulses in recent decades. According to economists, this was a possible prologue to complex inflation. “The incredible supply of liquidity has been reflected in the prices of all assets, where, unlike the consumer basket, which determines inflation in the economy and where it is still relatively under control, we see relatively high inflation in their prices,” emphasizes Zajíc.
Global stocks rose nearly 80 percent from the start of the pandemic to the end of January, and the market value of global stocks rose from nearly $ 62 trillion to $ 106 trillion, according to statistics from Bloomberg and Conseq. The world has not experienced such strong stock market growth in such a short period of time in at least the last two decades.
“At the same time, the current very loose monetary policy means that investors are willing to take on more risk, or rather are pushed into riskier equity-type investments,” explains J&T Bank analyst Milan Vaníček. The extremely risky segment of cryptocurrencies has also had a tumultuous year, the value of which has increased about seven times since the beginning of the pandemic to its all-time high of over one trillion dollars.
Inflation scenario
According to economists, the conceivable shape of the future is that financial assets will grow faster than consumer prices in the long run. “If the prices of shares and other similar assets rise, it will increase the wealth of households, which should be reflected in their higher consumption, demand in the economy and subsequently in higher growth in prices of goods and services,” said an economist at a French investment bank last year. Natixis Patrick Artus. According to the economist, however, in practice this mechanism is too weak to maintain a correlation between the prices of investment assets and goods and services.
According to the bank’s statistics, for example, in the United States, from the end of the Great Depression until the end of last year, the gap widened between higher stock growth rates, as well as house prices and lower consumer price growth. “This makes it possible to maintain a loose monetary policy, which may not respond to higher inflationary pressures. However, this policy can inflate bubbles in investment asset markets, resulting in a cycle of inflating and bursting these bubbles, ”added Artus.
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