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No fear of stagflation

Luxembourg, 04 November 2021 – Dark clouds have gathered on the economic front: Economic growth is slowing significantly. All the while, prices are climbing rapidly. Warnings of “stagflation”, i.e. stagnation + inflation, are in the air. But there is no reason to panic. “The forces that are currently driving prices and dampening the economy should soon subside”, said Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM. Nothing stands in the way of a year-end rally.

Markets have been fairly robust so far, despite some well-known problems such as the debate over the US debt limit, the missed payments of Chinese real estate developer Evergrande and rising inflation rates. This is hardly surprising. After all, the US government is not facing bankruptcy despite the disputes about government debt. No one doubts that Beijing could bail out Evergrande if it wanted to. And inflation is less of a threat than it seems.

At first, the latest figures seem worrying: in October, the inflation rate in Germany reached 4.5%, while it stood at 4.1% in the euro zone. The main factor, however, was the sharp rise in the cost of energy products. Then supply bottlenecks followed: shortages of raw materials and intermediate products are causing prices to climb faster. Expensive energy is likely to increase the inflation rate yet again in November.

Supply bottlenecks and raw material shortages are also weighing on economic growth. Catch-up effects in consumption enabled the German economy to grow by 1.8% in Q3/2021, while the euro zone even managed 2.2%. Things are not look quite so good for the Q4, however, especially as the approaching corona wave in the autumn is likely to put additional brakes on the economy. Recent sentiment indicators have therefore been on a downward trend. The spectre of “stagflation” is haunting the economy.

It should soon disappear, though. In Germany, as in the euro zone, the inflation rate is likely to peak toward year-end. “As the economy normalises, the supply side will recover,” Gerlinger pointed out. “Shortages and bottlenecks will gradually be overcome.” Over the course of the coming year, the inflation rate is therefore set to decline, partly because the oil price is likely to end its high. Some special effects such as the reversal of the VAT reduction in Germany will no longer apply either. A wage-price spiral in the wake of significant wage increases would then be the key risk although this does not seem realistic when looking at labour markets at present. According to the ECB Survey of Professional Forecasters, inflation is currently expected to reach 1.9% in 2022 and only 1.7% in 2023.

Once the backlog of materials and supplies is cleared, this will not only put pressure on prices but also strengthen the economy – particularly in Germany, where companies are sitting on filled order books. Industrial production combined with strong consumption should ensure higher growth rates in the coming year, following a weak final quarter in 2021. In the US, the economic upturn is not expected to come to an end at present either, which is why the US Central Bank will soon tighten monetary reins.

In the end we are not likely to see a prolonged period of stagflation, but merely a dip in the upswing caused by the post-corona boom. “A year-end rally on the markets is therefore not out of the question”, Gerlinger concluded.

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