Wednesday, February 21, 2024
 
 

The year of the squeeze

EPA-EFE/DANIEL DAL ZENNARO
A trader covers his face with his hands at the stock exchange in Milan, Italy on 08 October 2008 (re-issued 29 May 2018).

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Few of us will mourn the passing of 2021. However, as the New Year party balloons lie flaccid on the floor, there seems little anticipation about the forthcoming year. Rather, there appears to be a foul-smelling confluence of negative issues which has affected many of us.

Perhaps this is an extension of Seasonal Affective Disorder (SAD), a type of depression that’s related to the change in seasons. Our economic mood seems to resonate with the abject depression of Richard II in Shakespeare’s eponymous play: “For God’s sake, let us sit upon the ground and tell sad stories of the death of kings; how some have been deposed; some slain in war, some haunted by the ghosts they have deposed; some poison’d by their wives: some sleeping kill’d; all murder’d: for within the hollow crown…”

But this is just self-inflicted flagellation wallowing 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 has bounced back with far greater vim and vigour than most financial commentators had predicted in dark and depressing terms.

So let’s be clear: the global economy has in many cases bounced back to its pre-pandemic levels and that is good news based on solid facts and not on the gurgling of illiterate soothsayers and ignorant “prophets”.

However, as we start this year there are some vital issues that we must watch carefully in order to steer our economic ship through uncharted waters. Moving on from a period of exuberant spending, we now must pass through the next stage of increased economic and fiscal disciplines that have to be enacted, while other unexpected pressures have been put upon us.

The pandemic, we hope, will be maturing into an endemic that we should all learn to live with and not panic about. Yes, there will be other variants and strains but we hope that our ability to manage them will also have improved.

There are then some key points which we should highlight:

Inflation

Not since the 1970s have the major economies suffered from sustained periods of eroding inflation. While inflation can have positives (such as devaluing the government’s debt), it can be devastating to the personal wealth of many as fixed incomes in retirement could be scraped away. The question that we as yet cannot answer is the extent that the current bout of inflation is a temporary phenomenon, which will adjust after 12 months, or a more sustained underlying continuation of inflation.

Commodity prices

This obviously links into the issue of inflation, but what we are seeing now are huge (let’s say doubling) price rises in gas and power generation. The issue of standard supply and demand, though, has been distorted by governments interfering in markets to the extent that they have contributed to this industry-wide distortion. If sustained, then these prices will certainly act as a sea anchor dragging the potential speed of future growth.

Supply Chains

The demand for greater precision and efficiency in industrial management has meant that the economic strictures of just in time delivery became an elastic band stretched to provide its maximum effectiveness; this, though, was destroyed when the elastic snapped and trading efficiency became a slothful chaos with containers, ships and even employees not to available and often in the wrong place at the wrong time.

Company margins

We have already seen many companies passing on rising costs to the consumer and, herd-like, they will try and do it together so as not to be highlighted as a single culprit. Some companies can pass on such rises, but others will suffer, especially where government strictures have been capping rises – this of course causes further pain later when such support is removed. Of course,  today’s populist politicians are not concerned about it and are happy to leave it to future incumbents.

Consumer power and spending

For many capitalist nations, it is the confidence of the private consumer that is so crucial. The key here is the word “confidence”, without which consumers don’t spend so much, companies invest less, and the economy starts to retreat. The UK, for example, will see an increase in its income tax taken through the introduction of a further rise in National Insurance. This will not help.

Governmental financial constraints

Part of the success of the recovery story has been the ability of many governments to shake the “money tree” and watch seemingly free money pump into the system through further variations of quantitative easing. This though will be debt for future generations which today’s politicians wash the guilt for off their hands with the alacrity of Pontius Pilate.

So the dramatic recovery of 2021 is unlikely to be repeated, but growth will very likely continue, albeit not at the rate that some delusional Chancellors and finance ministers have been forecasting. Already the Chinese recovery seems to be slowing down but their data is somewhat opaque and we shall have to see if this is a trend to be repeated elsewhere.

The major economies are not about to stop, but they are very likely going to be suffering from a squeeze that will inevitably have its greatest effect on all of us at the bottom rung of the economic ladder – consumers. Yes, there will be some painful belt-tightening, but this is where we need to find enigmatic leaders who will inspire us to believe that the future is brighter, even if the more immediate period is more unsettled. So it is S, S & S – not Stopping but softly Squeezed which if properly managed will lead us to some Success.

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