The Global Economy is Losing Momentum

The outlook for the global economy does not seem to be so favorable given the significant challenges it has to face. More specifically, the problem of inflation is major at the moment with most analysts believing that the phenomenon is temporary and once supply chain problems normalize, striking a balance between supply and demand, inflation will decline. But things do not seem to be moving in that direction.

The real challenges that continue to exist lead us to another type of scenario. More specifically, in terms of challenges, we expect the pandemic problem not to subside so easily and given that vaccination programs are moving at a very different level between countries.

This means that the spread of the virus with new mutations will make their appearance, creating a certain degree of restriction in the various countries that will continue to affect, either more or less the supply chain.

This also means a strong degree of imbalance between supply and demand. The strengthening of inflation is sure to lead to a very limited monetary policy that will cause a wave of bankruptcies in businesses and vulnerable income households.

In such a case, in order to reduce the dramatic effects on the economies, governments will be forced to continue their support to the economic units, increasing the size of the new support packages that will lead to an increase in the size of the public debt and the federal deficit of the state budget.

Rising energy costs in EU member states will cause social unrest in the form of “yellow vests” such as in France, which will lead to an increase in the subsidy policy of governments, worsening their public finances. In the event of an intensification of the Sino-US trade war, the effects of rising energy costs will worsen.

These are the challenges that the global economy must overcome. However, in the event that situations in the supply chain begin and normalize, then growth will accelerate but inflation will remain at persistently high levels indicating that it is not a temporary phenomenon.

In this case, the solution to the problem will depend on the right timing at which the central banks of the strongest economies will act.

• If they are slow to move, then stock markets will continue to move in positive territory for a while, as real interest rates will remain low. At the same time, however, the persistence of high inflation will cause an increase in future nominal and real bond yields, causing in-depth corrective moves in the shares.

• But if central banks take early action against inflation, interest rates will rise, sending yields higher and causing greater corrections in stock markets.

If these moves are implemented, with strong social unrest due to increased cost of living and energy respectively, then the shocks in demand will exacerbate the challenges of the global economy by creating reduced dynamic growth.