July 2020 / INVESTMENT INSIGHTS
COVID-19: What Now for Inflation and Globalisation?
The scramble for key health products in the wake of the pandemic has highlighted the reliance on global supply chains
The near worldwide COVID-19 lockdowns have highlighted our reliance on global supply chains. Will this change the extent to which the world has globalised over the past few decades? And if so, what does it mean for inflation?
In recent months, our lack of domestic production to meet the needs of society – especially amid a crisis – became plainly obvious. Governments and supermarkets battled to keep up with the crisis-induced demand for products such as ventilators, face masks and hand sanitiser.
An interconnected world – Globalisation has peaked1
The sheer extent to which the world has become interconnected over the past 30 years through growing international trade is staggering. Three key factors contributed to this:
- Rapidly evolving technology and global service provision
- A growing global workforce, thanks to expanding populations and migration
- Capital expenditure, led by industrialisation in China
While these elements worked in harmony for much of the 1990s and 2000s, the global financial crisis changed the dynamics in 2008. While technology use increased, a productivity gap emerged, consumers’ leverage shrank, and demographics turned in the developed world. At the same time, global business investment faded and China moved from rapid industrialisation to a consumption-led economy.
These structural changes have made for a shift to protectionism in a world of lower growth. All over the world, domestic politics favoured a prioritisation of domestic jobs and production.
Higher prices and internal focus
We cannot predict the future, but governments’ immediate reaction to the pandemic’s impact point to an acceleration of the de-globalisation trend. Much of the major fiscal stimulus measures that have been introduced include support to smaller businesses and the self-employed, servicing the needs of domestic consumers.
These elements point to higher inflation, but the structural factors driving deflation are not to be underestimated: technology is still unlocking capacity, there is still a surplus of natural resources and ageing workforces in developed economies. This is a long-term question that we will be analysing carefully as the recent interventions play out.
Who wins and who loses, individually and collectively, will become apparent as we see policy formation and consumer reactions to support domestic companies in times of crisis. It is another dimension of change that has been playing out for a decade one that requires forward-looking and imaginative thought in the way we manage your portfolio.
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