COVID-19 to Raise Stagflationary Pressures on the Global Economy
Although at a psychological level people have grown accustomed to the coronavirus and the pandemic, which is encouraging from an economic point of view, rising cases across the world continue to put significant pressure on different sectors. It’s been more than a year and the situation is more complex since countries with high vaccination rates still face issues.
The financial industry, similar to tech, remains one that shows little slowing, as companies can easily adapt even during a time of pandemic, via work-from-home and also, cheap access to capital. However, when thinking about the global economy, not everyone can go through the pandemic in the same positive way.
Changing conditions as compared to 2020
A year ago, the spread of the virus forced governments into imposing strict lockdown measures, leading to a deflationary spiral and a sharp drop in economic activity. Both developed and developing countries saw their GDPs weaken to levels not seen in decades, prompting interventions from central banks and fiscal authorities to provide support.
Vaccines have been developed and even though new strains of the virus emerged, the world managed to gradually get back to more normal levels. Now that cases are rising, economic activity is showing signs of peaking, but not a significant drop as a year ago.
Even in the USA, the country with the fastest economic bounce, economic indicators have leveled off. The latest NonFarm Payrolls report disappointed, showing that new jobs creation could be under pressure.
However, the main difference as compared to a year ago is the rapid rise in inflation, especially when it comes to commodities. High inflation combined with weak GDP growth equals stagflation, a situation in which wages are eroded by elevated prices and consumers no longer afford the same standard of living.
Interest in financial markets to remain elevated
Since the pandemic started, investment methods such as Forex trading become more popular, as people were looking for new work-from-home opportunities. Financial assets are sensitive to developments in the economy and as a result, it is possible to speculate on price volatility via online brokers.
Alongside currency pairs, other asset classes like stocks, commodities, and bonds have been in high demand, given ultra-low interest rates force people and companies to move away from cash. In FX, even the most important currencies like the US dollar, Euro, Pound, or Yen, have been more volatile as compared to the past few years, creating an environment where both retail and institutional traders can look for opportunities.
Central banks facing major challenges?
An important contribution in creating favorable financial conditions can be attributed to central banks. Deflationary pressures in 2020 led to reductions in interest rates and new asset purchase programs, but now that inflation is above targets, all the stimulative measures might be gradually removed.
Relying on the “transitory inflation” narrative could soon be tricky, in case prices will remain elevated, on the back of supply chain disruptions and rising demand as the economic activity does not suffer the same as it did in 2020.