There are two basic questions that we must clear up in order to understand the evolution of the economy in the coming months: whether contagions are going to slow down the recovery and how long inflation will last. The course of the recovery will depend on the direction both circumstances take. We are going to try to answer some unknowns.
The infections are growing again, even before the new South African variant is discovered, which is once again sowing panic throughout the world. The reason is that the effectiveness of the vaccines disappears after the fourth month.
The objective now is to win the race against the virus. For this reason, the President of the Government, Pedro Sánchez, hastened to announce the third dose for people over 60 years of age, which will be extended to the rest of the age groups. With a vaccination rate of 80 percent, well above the European average, it is hoped to be able to maintain infections at controlled rates. Above all, mortality, which is being much lower than on previous occasions.
Either way, It is expected that there will be no need to resort to massive closures of bars or restaurants thanks to the implementation of measures such as the Covid passport. “The economic impact will be much less than on the previous occasion,” said the vice president of the ECB, Luis de Guindos, this week in elEconomista. “I am convinced that the European economy will continue to expand. Economic activity has been adapting to this type of measure and governments are much better prepared than before,” he said.
Most believe that the impact of the virus on the economy will be much less than the previous occasion
An opinion corroborated by other experts in the absence of knowing the evolution of the new strain and its incidence after Christmas, after which a significant increase in those infected is expected.
The most general impression, at this time, is that the impact of Covid on the recovery will be much less than on the previous occasionBut how will inflation evolve? Here are more doubts. The difference between the consumer price index (CPI), at 5.4 percent, and the underlying rate (excluding oil and processed food products), at only 1.4 percent, is four points, which confirms that energy and raw materials are the cause of inflation.
The president of the ECB, Christine Lagarde, considers so far that it is a cyclical increase, linked to the release of the retained demand that occurred after the mobility restrictions.
Nevertheless, rising energy costs seem to be here to stay with us for a long time. The prices of gas and oil did not show signs of abatement, as did those of oil, despite the American decision to release part of its strategic reserves. On Friday there was a 10 percent drop in crude oil due to the fear that the new strain is uncontrollable, but for now it is a cyclical rebound. Gas, meanwhile, registered this Friday with increases close to 5 percent.
The problem is in inflation, the ECB will withdraw all stimuli if it does not fall before spring
From De Guindos’ speech during the delivery of the annual elEconomista awards, it follows that prices are not behaving as expected and that we will have to be vigilant in the coming months. “All inflation factors in Europe are transitory. (…) However, we must act so that they do not become permanent,” he warned.
Forecasts are being missed because the factors are very volatile. The same happens with growth, it undergoes significant ups and downs, which the official institutes are unable to predict, as happened to the INE in the second quarter. “I only know that I do not know anything”, sentenced the vice president of the ECB in the groups after the event, between jokes and you will see.
In the case of consumer prices, most economists predict that the increases will last until the second half of the year at least and some extend it even until the end of the year.
Inflation is already generating social unrest, with protests in various sectors. The metal workers of Cádiz staged street riots until they achieved increases of 2 percent, which will be revised in three years to adjust for inflation. Farmers threaten to collapse the roads again because the increased costs of fertilizers and other supplies fail to translate them into prices, as is the case with Transportation for fuel.
The greatest risk to the economy is in the so-called second-round effects, that is to say, in which the increases in consumer prices are transferred to wages and cause an inflationary spiral.
In the Spanish case, the Spanish government’s decision to tie pensions to inflation threatens to overburden public spending, at a time when debt is at record levels due to the pandemic (122 percent). AIReF also warns that this will be around 190 percent by the middle of the century due to this type of measure.
What will happen if inflation remains at 3 percent levels after spring, the deadline given by the president of the ECB for it to normalize? It would be an exaggeration to speak of a rise in interest rates, since this is not expected until the end of 2023 or even later. But It would not be unreasonable to expect the ECB not to extend its debt buyback program.
Lagarde announced a gradual reduction of this emergency plan created by the pandemic until the end of March next year. With the mandate of this Institution to maintain prices at levels close to 2 percent, it is unlikely that the stimulus program will be renewed if inflation persists, and even more after the arrival of the leader of the German liberals, Christian Lindner, to the Ministry of Finance. Finance.
As is known, Lindner is known for his staunch defense of deficit and inflation control. Its role will be decisive in the coming months, in which Europe will have to return to budgetary discipline and put an end to the escape clause of the Stability Pact introduced because of the pandemic.
If the markets smell danger, the country risk premium will increase significantly and, therefore, the cost of debt financing. We are walking on a volcano, that of public debt, with the lava of inflation in full swing, which at any moment can explode and destroy thousands of businesses. The replicas of the Cumbre Vieja can carry over into the real economy.
Predictive models are failing because of the virus, which takes unexpected paths, as we have seen with the South African variant. Should it become vaccine-resistant and out of control, the economy would once again plunge into a depression similar to the one experienced in 2020, and concerns about inflation would be offset by falling growth. But this, for the moment, seems out of the question. Be that as it may, caution, very complicated weeks and months are coming.
Facebook
Twitter
Linkedin