Global economy watch: Is high inflation back for good? - PwC
High levels of inflation in most advanced economies (AEs) is starting to make some policymakers, households and some of our clients nervous. The real question is whether this is temporary or something that will last longer? To answer this question, this edition of Global Economy Watch disentangles the inflation dynamics we see in AEs and analyses the arithmetic, demand and supply side drivers.
The arithmetic driver tells us that some of the increase in the inflation rate in the first half of the year is due to ‘base effects’. Shutting down and reopening segments of the economy has led to erratic price changes. These have led to statistical oddities which will gradually fade.
La comunicación “A 7375”, que dispuso que sólo se puedan pagar las importaciones a partir de la llegada al país de los bienes y fijó un límite para la cancelación de anticipos de u$s250.000 (antes era de $1 millón), tiene vigencia hasta el 31 de octubre. Ahora la entidad que preside Miguel Pesce resolvió a través de la comunicación “A 7385” habilitar un mayor cupo de divisas para evitar que ninguna cadena productiva se vea afectada por falta de insumos y en función de lo conversado en las últimas semanas con las cámaras.
On the demand side, even though the rebound has been strong in the G7 (the Group of Seven is an inter-governmental political forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States), most are still operating with a significant degree of slack or an output gap. The International Monetary Fund (IMF) estimates that this will persist for a few years for all of the G7 except the United States (US). However, the employment data suggests that even the US labour market is operating with significant slack. On balance, we think that the risk of demand-pull inflation is low.
On the supply side, large and unpredictable swings in demand have stretched supply chains and logistic networks. Nevertheless, we are seeing evidence that, consistent with economic theory, prices are acting as signals to both producers and consumers to change behaviours. For example, US timber prices were at an alltime high in April this year, but have since then subsided, in part due to changing behaviours in the housebuilding industry and also supply side improvements.
We also revisit reshoring, a theme that was on the mind of CEOs during the trade tensions between the US and China a few years back, which later resurfaced at the height of the COVID-19 pandemic when there was a global shortage of personal protective equipment (PPE). Our static scenario based analysis shows that up to 1.2 million jobs could be created by reshoring in the G7. However, this requires more careful consideration as policymakers should factor in the potential negative economic effects of re-allocating labour to potentially less productive sectors against the security benefits of producing critical goods domestically.
Finally, we continue to monitor leading indicators for Eurozone growth for the third quarter of the year. Figure 2 shows that some of the Baltic economies have already exceeded their prepandemic levels of output. We expect this positive momentum to continue into the third quarter, particularly for the southern European economies.
Economic update: The Baltics bounce back
The Eurozone’s latest Q2 Gross domestic product (GDP) figures shows that its economy grew 2.2% quarter-on- quarter. In year-on-year terms this comes to 14.3% growth relative to 12 months ago which marked the height of the pandemic in the continent. This relatively strong set of growth statistics was underpinned by a rapid expansion of the region’s vaccination campaign, which paved the way to reopening some of the service sectors where activity was restricted. Consumer spending therefore recovered strongly as households begun to spend some of the ‘excess’ savings accrued in the past few quarters.
At the bottom of the pack are Spain, Portugal and Malta, all of which are highly dependent on services, in particular tourism. Before the sector ground to a halt in 2020, it accounted for around 15% of economic output in each country1.
Similarly, the tourism sector accounted for at least 10% of GDP in 2019 for the other economies that are currently smaller than their pre-pandemic size, with the exception of the Netherlands and Germany.
What is the economic impact of reshoring certain ‘strategic’ sectors to the G7?
The 2007-08 Global Financial Crisis (GFC) marked a turning point in international trade. World exports fell by 10% in one year as global demand dried up. And while subsequently exports recovered to pre-crisis levels, the growth rate slowed considerably towards the end of the last decade. Our analysis suggests that there were three key driving factors. First, wage growth in emerging economies reduced the monetary benefits of offshoring away from advanced economies. Second, new technologies (3D printing and artificial intelligence) reduced the benefit of labour cost arbitrage. And third, trade tensions between the US and China disrupted global trade flows.
But in 2020 another global economic shock changed the trajectory of global trade. As the COVID-19 virus swept across the world, governments tried to deal with shortages of certain goods and equipment by restricting their exports. This mainly related to ‘critical’ medical goods such as pharmaceuticals and PPE. This move also emphasised some of the downsides associated with having highly integrated supply chains which span more than one country.
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