Last week we at RaboResearch published our new estimates for the global economy. Advanced vaccination campaigns have given a positive growth impulse. But at the same time, disruptions in international value chains are increasingly casting a shadow over future growth in both the United States and Europe.
Increasing shortages of materials and suitable personnel, rising purchase prices and transport costs, prolonged production and delivery delays. You can hardly open a newspaper these days without reading a story about a company that is worried about its business.
It is obvious that there is a mismatch (between supply and demand), but the contrasts are enormous. While the number of jobs in the US in August was still more than 5 million below the level at the end of 2019, there is already talk of ‘The Great American Labor Shortage’, just to name such a contrast.
So how widespread and how long is the mismatch? And what does that lead to?
Let me start with the question of whether there is (already) excessive demand in the economy – the kind that leads to overheating. My answer to that is no. I base this on the fact that people do not lose their savings to finance additional consumption. Savings rates among American and European households have fallen in the past two quarters, but they are still saving more than before the corona crisis. In addition, employment in most countries has not yet returned to pre-corona levels.
This does not alter the fact that there may be long-term shifts in the labor market, whether or not as an (indirect) consequence of corona. Some people have moved into other jobs or even other industries and may be less inclined to return to their old jobs.
If companies are afraid of losing workers to other companies, a (perhaps justified) increase in wage growth in certain sectors can also fuel wage growth in other sectors – something that labor economist Richard Layard leap-frogging calls. But the extent to which depends mainly on the degree of organization of employees.
Union power in the US and Europe has been on the wane for decades and while globalization is stalling, corona has only made ‘working remotely’ easier. In our eastern neighbours, collectively agreed wages rose between 0.5 and 2.5 percent in August. That’s on the lower end of the bandwidth over the past ten years. A wage wave does not yet appear to be on the agenda in most countries.
And what about commodity prices? As long as overall demand in the global economy does not exceed supply, further broad-based commodity price hikes may not be very likely, but disruptions, such as factory closures in countries with a new wave of coronavirus, could throw more spanner in the works.
Many experts attribute the higher transport costs – especially in container transport – to the (temporary?) disruptions between supply and demand as a result of port closures. But the geopolitical tensions and lack of competition in this sector are also cited as structural factors. Higher raw material and transport costs could therefore prove more persistent. And that means that companies will increasingly pass on their higher costs to consumers.
If I tie the above elements together, I come to the conclusion that we are mainly dealing with a supply shock. Supply cannot (temporarily) keep up with demand. Both the magnitude and the persistence of this supply shock – the rise in commodity prices can now be measured with that of the oil crises of ’73-’74 and ’79-80 – currently pose a risk to purchasing power and thus to future demand development. In order to turn the time around, wages have to rise at some point.
In the US, inflation is already having an impact on consumer confidence; in August this fell to its lowest level since the end of 2011. So far, the eurozone has only slightly crumbled. We might prefer not to think about it, but the stagflation scenario (lower growth with high inflation) is lurking.