Ever since coronavirus vaccines arrived on the scene more rapidly than expected last year, the hope has been that economies could re-open quickly, households flush with savings would go out and spend, and we’d see a resurgence in growth to match the slide seen during global lockdowns. In the stockmarket, this particular bet was known as the “reflation” trade, with the companies hardest hit by lockdowns rebounding, while other “value” stocks such as miners benefited from surging demand for resources.
However, while growth has rebounded at a rapid pace, there are signs that the recovery might be running out of steam. The latest US nonfarm payrolls figures (a monthly measure of how many jobs are being added to the US economy) was hugely disappointing. And it’s just the latest sign that the Delta variant has thrown a spanner in the works of the re-opening process. As a result, we’re seeing more and more talk of an economic spectre that hasn’t reared its ugly head in 50 years – stagflation.
Stagflation (“stagnation” plus “inflation”) is an unusual and unpleasant condition in which the economy grows slowly or falls into recession, yet inflation stays high and rising. This makes it a central bank’s worst nightmare – they can’t raise interest rates to tackle inflation without squeezing the weak economy further, but they can’t cut rates to try to boost growth without fuelling inflation.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
So is it on the cards? We have argued for some time that we’re moving into a more inflationary world. But we’d hope that this would be combined with strong growth for at least a while. The main risk right now probably stems from any stalling in the re-opening process and employees returning to work. If that happens then activity and growth will take a hit, but supply chain issues will only get worse, partly due to labour market disruption. As Nouriel Roubini argued on Project Syndicate recently, we’re already seeing “mild” stagflation. The misery index (defined below) is running at double-digit levels due to high inflation and still-stubbornly high unemployment, levels not seen persistently since the late 1970s.
One thing is clear – investors should hope we can avoid it. Stagflation is mostly associated with the 1970s oil shocks, but Mark Hulbert in The Wall Street Journal notes that the stagflationary period actually ran from 1966 through to 1982, when then-US Federal Reserve head Paul Volcker helped to kill it off – at the cost of a huge recession – by raising US interest rates to double-digit levels. In that period, US stocks made almost nothing in “real” terms (ie after inflation), bond investors had to be very selective (avoiding long duration bonds in favour of medium and short-term ones), and even commodities – the classic inflation hedge – were mixed. Keep watching the jobs market.
-
How to pay in a chequeReceiving or writing a cheque has become much less common in recent years as instant bank transfers have grown in popularity. Amid widespread bank branch closures, we explain what to do if you get a cheque, and how you can pay one into your bank account.
-
Crypto assets of seven million UK investors at risk – how to keep yours safeCryptocurrency wallet rules make it hard to track down assets after someone has died, even if they leave a will saying who they would like to inherit them
-
'Governments are launching an assault on the independence of central banks'Opinion Say goodbye to the era of central bank orthodoxy and hello to the new era of central bank dependency, says Jeremy McKeown
-
Why investors can no longer trust traditional statistical indicatorsOpinion The statistical indicators and data investors have relied on for decades are no longer fit for purpose. It's time to move on, says Helen Thomas
-
The most likely outcome of the AI boom is a big fallOpinion Like the dotcom boom of the late 1990s, AI is not paying off – despite huge investments being made in the hope of creating AI-based wealth
-
The rise of Robin Zeng: China’s billionaire battery kingRobin Zeng, a pioneer in EV batteries, is vying with Li Ka-shing for the title of Hong Kong’s richest person. He is typical of a new kind of tycoon in China
-
How retail investors can gain exposure to Lloyd’s of LondonIt’s hard for retail investors to get in on the action at Lloyd’s of London. Here are some of the ways to gain exposure
-
The goal of business is not profit, but virtueOpinion Serve your customers well, and the profits will follow, according to a new book. It rarely works the other way around, says Stuart Watkins
-
Earnings estimates are a rigged game – especially in the USThe number of US stocks beating earnings estimates tells us only that guidance has deliberately been set too low
-
Why is Britain's industrial base crumbling?Opinion More and more factories in the UK are closing, and the government doesn’t seem to care. What’s going on?
