In a previous post, we mentioned that stagflation is a risk that central planners are ignoring. However, this risk is not just an isolated challenge focused on economies like Mexico, India or Argentina. Even in countries like Germany and Japan the trend of inflation, particularly in non-replicable goods, is diverging from economic growth. Inflation is picking up, while growth is slowing down.
Central banks continue to pump liquidity to disguise the rising risks to the global economy, but the coronavirus epidemic is showing to investors three important lessons:
Containment of the epidemic is taking significantly more time than what many market participants estimated. Calls fro a rapid recovery that would not only offset the first-quarter impact but improve it, are disproved.
The impact on supply chains is significantly larger than most analysts expected. China is now 17% of the global economy and provinces that count for 89% of the country’s exports remain in lockdown.
Global excess capacity is a mitigating factor on rising inflation only for replicable and highly competitive goods. There is clearly ample capacity to offset supply chain disruptions in energy commodities, metals, and industrial goods but there are severe problems surfacing in sectors that are very dependent on Chinese supply, particularly auto parts and technology components.
Market participants started to realize last week that the coronavirus effect was not going to be a two-month issue that would be followed by strong growth. In a recent PriceWaterhouse Coopers report, it showed that the global impact could reach at least 0.7% of GDP. This estimate uses Eric Toner´s infected and casualty estimates (John Hopkins Center for Health Security) and the economic impact using McKibbins & Lee methodology (the ones that estimated the SARS impact).
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