Hello. Today we look at the threat of stagflation, this week’s European Central Bank meeting and how some Americans still aren’t receiving their benefits.
A Concerning Combination
The world economy risks turning stagflationary.
While policy makers once hoped we’d now be seeing decent growth and slowing inflation, obstacles to that outlook are emerging by the day.
The mounting concern now is of a toxic mixture of weak demand and accelerating prices.
Risk one is the delta variant, which, as Enda Curran details, is undermining efforts to rev up factories, offices and schools.
Worrying recent data include the smallest hiring of Americans in seven months, deterioration in Germany’s Ifo index, a crumbling of China’s services sector and a weakening of global manufacturing.
There goes the demand side, but the new form of the coronavirus is also hurting supply chains, limiting the worldwide provision of key products. That shock, which is building just as Christmas nears, threatens to force up inflation too.
Meanwhile, natural gas prices are witnessing a historic surge, catapulting the cost of the fuel to seasonal highs in most major markets just as winter approaches in the northern hemisphere.
Soarings bills could crimp households’ spending and erode their wages through inflation, a stagflationary combination especially if families and businesses react to rising utility charges by pushing up pay and prices.
Price Pressure
Energy inflation is soaring across G-7 economies
Source: Organization for Economic Cooperation and Development
For policy makers, this environment is a conundrum. To date, most have focused on spurring their economies with stimulus, arguing the inflation surge would prove temporary. Now that view will be tested.
Catherine Mann, recently recruited by the Bank of England from Citigroup, has some words of comfort. She used a speech to Australian businesses today to argue inflation isn’t set to follow a 1970s-style spiral, in part because firms have less pricing power and tight labor markets don’t necessarily ignite wages.
- Check out Mann’s comments, here
For an overall economic recovery, science will ultimately be the key.
High inoculation rates are allowing advanced-world governments to resist another round of shutdowns, opting instead for targeted measures that include vaccination requirements for public places such as restaurants.
Meanwhile, emerging markets could be worse off: Manufacturing and tourism-led economies like Vietnam and Thailand have already been forced to close factories and turn away visitors.
That’s why wealthy countries could face mounting pressure to divert vaccines to lower-income regions. A new analysis shows they’ll likely have about 1.2 billion extra doses available by the end of the year.
The Week Ahead
Central Bank Decisions This Week
Note: Mapped data show rate decision schedules for distinct central banks
The European Central Bank will decide this week if it should dare to dial down emergency stimulus while the pandemic still menaces the euro-zone economy.
The threat posed by the delta variant of the coronavirus could yet embolden policy makers on Thursday to keep up the “significantly higher” pace of bond purchases they adopted earlier this year. But advanced vaccination rates, a robust rebound and inflation that is already at the fastest in a decade are all reasons to consider a downward shift in gears.
Elsewhere, at least eight other central banks globally are due to deliver monetary decisions, including Australia and Canada. While most are likely to keep their stance unchanged, Russia and Ukraine could deliver interest-rate increases.
For a full rundown of the week ahead, click here.
Today’s Must Reads
Click on the blue links to read any of the stories in full:
- Joblessness nightmare | For millions of Americans, the Labor Day weekend brings the end of federally funded emergency unemployment benefits and a lurch into the uncertain economic recovery.
- Income redistribution | China’s push for “common prosperity” is not just about taxing the rich but also directing resources into rural areas and to those on lower incomes, according to one of the country’s most prominent experts studying wage inequality.
- UAE trade | The United Arab Emirates plans to deepen its trade ties in fast-growing economies in Asia and Africa, and draw $150 billion in foreign investment from mainly older partners to reposition itself as a global hub for business and finance.
- U.K. choices | Chancellor Rishi Sunak is facing five crucial fiscal decisions — including whether to deliver the biggest overnight welfare-benefit cut in history and the largest state pension increase in 30 years, according to the Resolution Foundation think tank.
- German ship demand | Factory orders in Europe’s biggest ecnomy unexpectedly rose in July, driven by a surge in export demand for ships.
- Taper debate | Australia’s central bankers are set to revisit the question of whether to delay a planned taper of bond purchases as a worsening outbreak of the delta variant dims economic prospects.
Need-to-Know Research
Working Obstacles
Japan lags in employment rates for working-age disabled people
Sources: U.S. Department of Labor (2021), German Federal Statistical Office (2017), U.K. Office of National Statistics (2019), Japan labor ministry (2020), Japan Cabinet Office (2016), Bloomberg
Paralympics host Japan’s track record for integrating people with disabilities into the workforce lags many of its peers. The proportion of working-age disabled people with a job there is around 19%, based on a Bloomberg calculation, compared with 30% in the U.S.
To read more, click here.
On #EconTwitter
Disappointment over the U.S. August jobs report is all but certain to push Federal Reserve policy makers to delay considering a move to scale back asset purchases at their Sept. 21-22 meeting.
Read more reactions on Twitter
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What's Happening in the World Economy: Stagflation Threatens to Upend Economy - Bloomberg
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