The year of compression
Few of us will mourn the passing of 2021. However, as the New Year’s party balloons lie limp on the floor, there seems little anticipation for the year ahead. On the contrary, there seems to be a nauseating confluence of negative issues that has affected many of us.
It may be an extension of Seasonal Affective Disorder (SAD), a type of depression linked to the change of seasons. Our economic mood seems to resonate with the abject depression of Richard II in Shakespeare’s eponymous play: “For God’s sake, let’s sit on the ground and tell sad stories about the death of kings; how some were deposited; some killed in war, some haunted by the ghosts they left behind; some poisoned by their wives: some asleep killed; all murdered: for in the hollow crown…”
But that’s just self-inflicted flogging that wallows in self-pity. The truth is that despite the occurrence of one of the greatest economic heart attacks in living memory, the global economic system has survived and rebounded with far greater vigor and vigor than most financial commentators predicted. in dark and depressing terms.
So let’s be clear: the global economy has in many cases rebounded to pre-pandemic levels and that’s good news based on hard facts and not the gurgling of illiterate soothsayers and ignorant “prophets”.
However, as we begin this year, there are vital matters that we must watch carefully in order to steer our economic ship into uncharted waters. Moving from a period of exuberant spending, we must now move through the next stage of increased economic and fiscal disciplines that must be enacted, while other unexpected pressures have been brought upon us.
The pandemic, we hope, will become an endemic that we should all learn to live with and not panic with. Yes, there will be other variants and strains but hopefully our ability to handle them will have improved as well.
Then there are a few key points worth highlighting:
Inflation. Since the 1970s, major economies have not suffered from prolonged periods of eroding inflation. Although inflation can have positive effects (such as the devaluation of public debt), it can be devastating to the personal wealth of many, as fixed incomes in retirement could be taken away. The question we cannot yet answer is to what extent the current surge in inflation is a temporary phenomenon, which will adjust after 12 months, or a more sustained underlying continuation of inflation.
Commodity prices. This is obviously related to the issue of inflation, but what we are seeing now are huge price increases (say a doubling) of gas and power generation. The issue of standard supply and demand, however, has been distorted by governments interfering in the markets to the extent that they have contributed to this industry-wide distortion. If they hold, these prices will certainly act as a floating anchor that will slow the potential speed of future growth.
supply chains. The demand for greater precision and efficiency in industrial management has caused the economic constraints of just-in-time delivery to become a taut rubber band to deliver its maximum efficiency; this, however, was destroyed when the rubber band broke and business efficiency became lazy chaos with containers, ships and even employees unavailable and often in the wrong place at the wrong time.
Company margins. We have already seen many companies pass on rising costs to the consumer and like a herd they will try to do this together so as not to be singled out as one culprit. Some companies may pass on these hikes, but others will suffer, particularly where government restrictions have capped the hikes – this of course causes further pain later when this support is removed. Of course, today’s populist politicians don’t care and just leave it to future incumbents.
Consumer power and spending. For many capitalist nations, it is private consumer confidence that is so crucial. The key here is the word “trust,” without which consumers spend less, businesses invest less, and the economy begins to shrink. The UK, for example, will see an increase in its income tax thanks to the introduction of a new National Insurance increase. It won’t help.
Government financial constraints. Part of the success of the recovery story has been the ability of many governments to shake the “money tree” and watch the seemingly free money pumped into the system through new variants of quantitative easing. It will, however, be a debt for future generations whose guilt today’s politicians are shedding with the eagerness of Pontius Pilate.
The spectacular recovery of 2021 is therefore unlikely to be repeated, but growth will most likely continue, although not at the pace predicted by some delirious chancellors and finance ministers. Already the Chinese recovery seems to be slowing but their data is somewhat opaque and we will have to see if this is a trend to be repeated elsewhere.
Great economies aren’t about to stop, but they will most likely suffer a squeeze that will inevitably have its greatest effect on all of us at the bottom of the economic ladder – the consumers. Yes, there will be painful belt-tightening, but that’s where we need to find enigmatic leaders who will inspire us to believe that the future is brighter, even if the most immediate period is more unstable. So it’s S, S & S – no stopping but gently pressed which, if handled correctly, will lead us to some success.