Inflation has been rising for several months with the global economic recovery. This development was considered temporary and was not of great concern to economic operators and investors. But with the surge in gas and electricity prices in recent weeks, the inflationary threat has taken on another dimension.
A temporary increase to last!
Several factors contributed to the rise in inflation. The first is the rebound in oil prices, which have tripled since the low in the spring of 2020 when the global economy stalled to reduce demand.
The skyrocketing cost of shipping has also impacted prices. For example, transporting merchandise in a container from China costs $10,000 compared to less than $2,000 on average over the past five years.
Production is also struggling to keep up with the surge in demand. This event leads to shortages that drive up prices.
However, all these imbalances were gradually reduced and, after an expected peak this autumn, inflation was to weaken sharply next year.
Nevertheless, the scenario is increasingly challenging as a new element has fuelled inflationary pressures and soaring gas and electricity prices. Since the beginning of the year, electricity prices in Europe have doubled due to insufficient supply and gas prices have tripled.
Companies caught by the throat
Manufacturers have to deal with more and more problems to meet the demand boom. First, it has a shortage of essential components, such as electronic chips, slowing down global automotive production. Second, firms must also bear the heavy rise in the price of productive goods. But today, the energy crisis is, for many industrialists, the obstacle of too much.
For productions requiring a lot of electricity or gas, the price spike is sometimes a financial headache without a solution. Unable to pass on the increased energy bill to their customers, several European producers of ammonia, an essential component of fertilizers, have temporarily closed plants rather than producing at a loss.
In other parts of the world, even energy shortages force producers to suspend their activities. For example, in China, power cuts affect more than half of the territory, which led to a slight decline in manufacturing activity in September.
Is the consumption the next victim?
With the current energy crisis and its disruptions in production, shortages and inflationary pressures are increasing. As a result, inflation is already at 3% in the euro area and 5.3% in the United States, will rise even higher and above all will remain high for longer.
Until now, the desire to catch up on the impossible consumption during confinement was more substantial than the increase in prices. And household spending is the engine of economic recovery.
But the new price increase could be indigestible for the household portfolio. This is because it concerns sensitive products such as fuels, gas and electricity. The increase in these consumer goods directly affects the morale of households and harshly drains the budget of the poorest. There is, therefore, a real risk that soaring prices will ultimately derail household consumption and global recovery.
Worried markets
For a long time, investors were calm in the face of rising inflation and began to change their tune. As a result, interest rates on the bond market are upwards.
The 10-year debt in the United States now offers more than 1.50%, and long-term rates have returned to positive territory in most European countries. This increase in bond yields automatically penalizes stock markets, especially since investors are starting to incorporate the deterioration of the economic situation into their forecasts because of the surge in prices.
Central banks have also had to change their reassuring discourse about inflation. Many, including in developed countries, have even tightened their policies to contain inflationary pressures. But, caught between rising inflation and falling growth, central bankers are now walking on eggshells.
We are at a turning point in global recovery. The peak in growth is behind us, but that does not mean that a new crisis is already knocking on the door.
On the contrary, the global economy still has enough room to expand. But it will be less dynamic and more uncertain. Concretely, the time is no longer to take risks to take advantage of the post-covid rebound for the investor.
This is why we favour a deliberate prudent strategy with 55% of bonds in our neutral portfolio, complemented mainly by equities from developed markets, less volatile than emerging markets. Find more about our portfolio.