The last thing anyone wants, as we finally come out of this crisis, is extreme “stagflation” – that vicious combination of high unemployment and rapidly rising prices that last appeared in the 1970s, defied economic conventions and the famous “Phillips Curve”. But that is what they are actually likely to get – in spite of reassurances from the IMF and ECB that the rate of consumer price inflation will be lower this year and next than in 2019.
Over the next few months, weak oil prices and depressed demand will actually put downward pressure temporarily on prices, but by the end of 2020, things will slip into sharp reverse.
To start with, the ECB has been printing money to the tune of an extra 7.5% (M3) – partly to pay for all the “generous” financial support being handed out by governments. In spite of demand for public spending and business loans, this is, in itself, going to devalue the euro. Then the principal oil producers cannot sustain low oil prices for long and will cut production – thus forcing oil prices back up.
The collapse of many businesses due to the lockdown will reduce price competition and also create serious supply shortages, whilst post-pandemic wage deals will ignore looming redundancies and defy talk of austerity.
Companies attempt to onshore production will also increase costs and, of course, few people will be able to afford services that have to incorporate social distancing.
To cap it all, travel by air will again become a luxury – as costs escalate by at least 30-40% from this Summer for the few airlines that have survived the lockdown.
Finally, if we look at a graph of public sector debt as a percentage of GDP for G20 countries, the first thing we see so very clearly is that all lines go back to a point of origin in 1971 when first Germany, then Switzerland and finally the USA left the Bretton Woods System. Since then, leading countries have been spending progressively each year more than they can afford and relying on rising GDP to provide taxation to keep the whole financial illusion in motion. Now, with a cut in GDP far greater than at any time in living memory, the blind confidence that sustains currency value will all come tumbling down under the weight of unsustainable debt. That will make the stagflation of the 1970s look like a children’s tea party.
According to Robin Chater, Secretary-General of the Federation of International Employers (FedEE), “What we are not going to get from governments is the truth about the economy. They are far too busy trying to keep the lid on the mess created by their over-reactions to the Pandemic – which, in the end, was largely of their own making. There was only one thing more contagious than COVID-19 and that was the reckless preoccupations with lockdowns that spread around the World. Wisdom was all there for people to see in the way that South Korea and Singapore handled the situation, but only a few other governments, like Cyprus, chose to learn from them. Now, many politicians are still so intent on blaming China for the deaths that have happened in their own countries that they have quite missed the fact that it was largely their own mismanagement that actually led to the tragedy that befell their people.”
What is FedEE?
The Federation of International Employers (FedEE) is the leading organisation for multinational companies, and is currently chaired by the Ford Motor Company. It was founded in 1988, with financial assistance from the European Commission. Today it is an independent body with blue-chip Corporate Members all around the globe.