The great risk that arises in Europe and the United States at the bottom of economic reconstruction after the historic global recession caused by the coronavirus pandemic is stagflation.
A concept that refers to a rise in prices and interest rates without growth or increase in productivity , which would deepen social inequality, would toughen the payment of the bill of the new debt that is assumed (although it would help to reduce the weight of the debt). which has already been taken) and would deal a serious blow to corporate profits and, therefore, to the stock markets.
To approximate the relevance of this risk, we must stop at another economic concept related to prices on which the recovery has been built since the third quarter of 2020: reflation , which defines inflation and growth fostered by monetary and fiscal stimuli. .
The economic ideal designs that reflation must be limited in time because overheating appears among its consequences, which is precisely now flying overhead and which could translate into the dreaded stagflation. In this context, the Economist undertakes to monitor the main indicators that can set off stagflation alarms.
The first large economy to enter and exit the Covid crisis, China, has already reduced the rate of growth of its activity after completing the rebound in just weeks between April and May 2020, and in the same way it is feared that it will occur in United States and later in Europe. This logical slowdown, present in all GDP estimates, would pose a stagflation problem if prices continue to rise.
The official current of institutions such as the Federal Reserve (Fed), the European Central Bank (ECB), the European Commission or the United States Treasury defends that the inflation peaks that are being seen in recent months are “temporary” to avoid precipitate the withdrawal of stimuli and because they say they consider that they respond to the characteristics of the recovery, marked by a demand contained by the confinements that has coincided with a contraction in the supply also related in part to restrictions on mobility and health risks and by the explosion of consumption itself.
Bonzon (Julius Baer: “A sustainable reflation of the American and European economy is desirable”
“The fear of stagflation is less for those who are still convinced that there are conjunctural factors in the formation of prices, that there are, but to see how far”, reflected in this regard recently, Jesús Sáez, Natixis debt expert in a comment distributed to customers.
“We agree that a sustainable reflation of the US and European economy is desirable, as zero or negative interest rates are a sign of collapse in returns to capital and ultimately the capitalist system is undermined.” observes Yves Bonzon, Julius Baer’s CIO.
“Therefore, slightly higher interest and inflation rates would be a positive consequence of a reversal of the disinflationary or even deflationary trends with which the West has been plagued since the beginning of the century, although, on the contrary, rates of higher interest rates that only compensate for higher inflation [without growth] would be associated with a stagflation scenario “, he continues, and concludes:” A structural increase in inflation without an increase in productivity, and therefore in real wages, would affect cruelly and disproportionately to the lowest incomes. ”
At the moment, the growth forecasts for the economic activity of institutions, and also of investment managers or firms, show a strong and sustained pace in 2022 , after the rebound in 2021, in Europe and the United States, in general, which is even further for the hardest hit economies, such as Spain or Italy.
The monetary stimulus from central banks, in addition to the billion-dollar injections that politicians on both sides of the Atlantic have approved, make it difficult to anticipate a slowdown in growth so strong as to stall it. Thus, on the growth side, it seems difficult that a stagflation scenario could occur in the coming months.
Maurice Obstfeld, former chief economist of the International Monetary Fund, and professor of economics at the University of California, Berkeley, explains in an interview with the Economist how the stagflation scenario is not “a probable result”, but it does imply that it “requires an act balance is delicate for the Fed. They cannot go behind the curve. They have to avoid a sharp change in their communication or interest rate policy that destabilizes markets and causes a substantial slowdown in growth. ”
In his view, “they can do it, but in a scenario where they let inflation get out of hand and then have to slam on the brakes we could see something more like the confluence of high inflation and depressed growth during a moderate period of time. I do not see that as a long-term phenomenon, even if it occurs during a couple of quarters. So I would not call it stagflation, but it is a danger that could affect the economy temporarily, “warns the expert. Thus, it seems that everything depends on the subtlety with which the Fed is able to move in the coming months, taking great care to avoid generating a growth slump due to its withdrawal of stimuli.
Inflation will give a breather
On the inflation side, the stagflation scenario does not seem to be the most likely at this time either. Rates have gone well above what most experts anticipated last year at this time, reaching 5.3% year-on-year in the United States and 3% in the euro zone.
However, even being aware of how high these figures are, the big central banks, the Fed and the ECB, have been trying to keep the markets calm for months, noting that this is a temporary increase, driven by the necks of bottle that have been produced after the end of the confinements, and they expect everything to return to normal in the coming months.
The Fed’s forecast points to an inflation of 3.4% in 2021, but that will fall to 2.1% next year , and will remain at 2.2% in 2022, rates that are in line with its target, around 2%. For Europe, the possibility that inflation will skyrocket is even less worrisome for the European Central Bank, which expects rates of 2.2% for 2021, 1.7% for 2022 and 1.5% for 2023, well below its 2% goal by then.
And it is not just central banking: the market consensus believes these forecasts from central banks, expecting inflation to be 1.6% in 2022 and 1.5% next year. What’s more, this week the latest manager survey carried out by Bank of America was published, and the results reflect how, for the first time in 16 months, managers expect inflation to be lower within a year than it is now .
The market also has it clear, at the least for now, as expected, according to swaps inflation 5y5y (indicator of expectations that analyzes the ECB to interpret what rate are anticipating investors to within 5 years), rates of 1, 7% in the euro zone and 2.3% in the US.
Although all of the above suggests that there will not be an excessive rebound in price increases , neither in Europe nor in the United States, it is an issue that investors will continue to analyze very closely. Despite their estimates, inflation continues to be the main danger perceived by the managers surveyed by BofA.
Profits will continue to rise
Given the macroeconomic scenario and the forecasts of inflation, surprises and black swans apart, what the market foresees for the immediate years is a situation of balanced growth between the increase in prices, GDP and, by extension, growth rates. corporate profits, which are nourished on many occasions by this double variable.
In this sense, the forecast of the experts is clear: there will be no recession in profits in the coming years. “The slowdown in growth in August was due to the appearance of the Delta variant, which has once again imposed restrictions on mobility, delaying the opening of the economy,” they explain from Renta 4.
“If this were the case, we could think that once the vaccinations are completed, the reopening of the economy will be total and we will only have had a small delay, which is not so important for the valuations of the companies, which give more importance to the benefits That is to say, it would not be anything alarming since, in addition, growth continues today at quite good levels, with both European and American ISMs around 60 points “, they conclude.
The recovery of all lost profit will come this year to the S&P 500, whose earnings per share (EPS) will stand at almost $ 200, the highest level in history. In Europe, although three months ago the consensus still did not place its EPS above the figure reached in 2019, which was 25.9 euros. For the Ibex 35, we will have to wait, at least, for 2024 since at the moment the experts do not see the EPS equal to 2019 or in 2023, when it will close at 713 euros.
However, this picture is likely to change very soon as the market is lagging well behind the figures that companies are reporting and, proof of this, is that they have been forced to raise their earnings forecasts as the year passed . And this is a good indicator that the health of the microeconomy is going through a better time.
In the last three months, the EPS forecast for the Ibex, the Stoxx 600 and the S&P 500, for 2021, has increased by 18%, 9% and 5.5%, respectively, placing the improvement with With respect to the 2020 figures, more than 150% for the Spanish index, 60% for the European and 40% for the North American (see graph).
But this does not stop there since for the next two years the profit will continue to grow at a high single digit rate after the estimates have been raised in the last quarter between 3% and 7% for 2022 and between 3 % and 4% in 2023. Therefore, the speed remains high and well above the drag that can be, according to current expectations, the increase in prices on both sides of the Atlantic.
This does not mean that companies may be concerned about inflation. In fact, according to data obtained by Bank of America, in the last earnings season, the S&P 500 companies mentioned the word inflation 10 times more (900% more) than a year ago. In the Stoxx 600 this increase was 350%, reaching the highest figures of mentions since they were compiled in 2008.
“In general, companies trust their ability to pass on the rise in prices , thanks in part to excess household savings,” they point out from UBS. “And although the Delta strain is considered a risk to take into account, it is not currently limiting activity in developed markets or causing reductions in company forecasts,” they add.
“The best starting point for household balance sheets, which should underpin consumption, and considerable business investment are, in our view, the key differences that will improve the macroeconomic performance of this cycle compared to relatively slow growth. that followed the recession of 2008-09 “, they conclude from the bank.