José Ramón Díez Guijarro (Bankia Estudios) | Investors are discounting a rise in nominal growth in the medium term. This is once the increase in group immunity linked to vaccines reduces the likelihood of mini-recessions such as the current one, where the link between mobility and contagion needs to be broken in the short term.
Nominal growth is positive for profits and wages. In addition it is the least virulent route to reducing the high levels of debt accumulating after the last two recessionary cycles.
Recently the IIF estimated that global debt will increase this year by $15 trillion (10 times the size of the Spanish economy) to a total of $277 trillion, levels not seen since after World War II.
In the short term, the escape valve for the structural leverage process will continue to be the activism of the central banks. In the OECD, this will lead in 24 months (between December 2019 and December 2021) to a doubling in size of their balance sheets (up to 74% of GDP in the case of the ECB). A good part of that increase corresponds to purchases of bonds in secondary markets, which has lead to the accumulation in the ECB’s assets of more than 25% of the public debt in circulation.
So the central banks are becoming the voice and part of the solution to the debt problem. This is either because at any given moment they will have to decide how to “manage” those financial assets accumulated on their balance sheet. Or, returning to nominal growth, because of the doubts over their ability to bring inflation close to the established targets.
In the more recent past, the monetary authorities have had enough to deal with trying to combat the risk of deflation linked to the structural changes of recent decades: globalisation, ageing population, digitalisation, loss of bargaining power of the unions, etc. And now, practically without any solution of continuity, they have to face a crisis which may lead to new permanent “shocks” in inflation. These would derive from changes in the consumption patterns of the agents and from the acceleration of the digitalisation process. Or indeed from the very unexplored territory the ECB is entering with the intensive use of non-conventional monetary policy measures.
For the time being, we are witnessing a readjustment of relative prices derived from a very asymmetric impact of the Covid-19 crisis on supply and demand conditions depending on the type of goods and services. But it is too early to perceive any major changes, when the main central banks are precisely trying to adapt their strategies to the new reality.
Probably because they anticipate changes in the inertia present in the performance of prices since the oil “shocks” of the 1970s. It is not at all clear whether there will be a risk of deflation linked to secular stagnation. Or, on the contrary, whether monetary and fiscal activism and the process of deglobalization will end up causing an upward surprise in price behaviour. A surprise which would be beneficial in easing deleveraging after the last two crises. That said, in economics, as in many other aspects of life, you must be careful what you wish for – because it can become a reality.