The massive stimulus to restart economies following the Covid-19 crisis isn’t likely to trigger inflation, say Bob Stoutjesdijk, Rikkert Scholten and Martin van Vliet of Robeco’s Global Macro team.
Governments and central banks have launched multi-trillion dollar fiscal and monetary stimulus packages to cushion the impact of the coronavirus. While these measures were an absolute short-term necessity, there are concerns about the longer-term implications for inflation.
Money growth in particular has accelerated sharply in the US, where direct cash injections by the government have caused M2 – currency in circulation and deposits held by households and businesses – to expand by 17.7% since February of this year. Global M2 has expanded by 6.6%.
So, will this prove the famous adage of monetary economist Milton Friedman that inflation is generated by “too much money chasing after too few goods”? Not if there is insufficient demand. One of the immediate effects of the pandemic was a steep rise in unemployment. Even with jobs returning as economies reopen, we expect longer-lasting implications for the labor market that might affect consumer demand as well as compensation, and hence can influence inflation.
In July 2019, US Federal Reserve Chairman Jerome Powell said that in the past 20 years, “the relationship between unemployment and inflation has become weaker and weaker” due to the stabilization of inflation expectations. His conclusions are confirmed by other research which found that a significant relationship between inflation and unemployment no longer exists. The change in relationship between US unemployment and wage growth is illustrated in the charts below:
The supply-side view from the labor market is one of three important ingredients for the inflation outlook, with consumption and corporate behavior being the other two. Typically we would expect to see an economic over-reaction that in turn leads to a demand-deficient recession over time, known as the ‘Keynesian supply shock’.
The immediate effect of the lockdowns was essentially the cessation of activity in contact-intensive businesses. As consumers spent less on those items, they redirected some of their spending towards other sectors. Some are clear substitutes for the goods and services directly affected: consumers unable to eat out spend more on food prepared at home.
Other sectors are more complementary: for example, consumers who cannot go to the gym spend less on sportswear. The question is whether, overall, consumers reduce their total spending by more or less than pre-crisis levels in the affected sector. If the forces of complementarity are strong enough, they will spend less, spreading the effects on consumer demand and making them longer lasting.
This process also has implications for corporate behavior. Elevated levels of unemployment and depressed global demand will force corporates to rethink their business model, hoard cash and cut costs. The easiest and fastest way to cut costs is to reduce investment, implement hiring freezes and dispose of assets, all options being disinflationary in theory. More importantly, research shows that changes in corporate behavior actually kick in after the recession has already begun.
We expect many of the stimulus programs to be extended over time but with consistently less generous terms given the large fiscal cost. As such, we expect a longer period with elevated levels of unemployment weighing on consumer spending, and corporates being risk averse in terms of hiring and investment. Hence, our expectation for demand-pull inflation is low for the next five years out.
We think a number of secular trends are relevant to the longer-term outlook on inflation, particularly in globalization and technology. The Covid-19 crisis has exposed some of the vulnerabilities of globalization via disruptions in deep global integrated supply chains.
Times were already tough for globalization years before the coronavirus hit: the level of growth in global trade volumes fell from 5.5% per annum from 2001-2005 to 1.9% p.a. for 2016-2019. Globalization passed its peak in years ago. In addition, studies on a range of countries have concluded that globalization did have a decreasing effect on inflation, but this effect was found to be quite modest.
Looking ahead, we expect the trend of stalling globalization to continue. The increasing automation of labor (‘man versus machine’) and a switch to and the current competition of labor-intensive production in emerging markets versus new capital-intensive production in developed markets is something that we would not classify as inflationary.
New technology obviously had a direct downside effect on the price of a number of retail goods, most obviously audiovisual and communication goods. It seems logical that a steeply rising technology trend also affects non-tech inflation components such as housing, retail trade and education or labor’s bargaining power.
So, how will differing economic scenarios, ranging from weak growth (i.e. a deep recession) to a strong expansion, affect our inflation expectations? We see four scenarios:
Our inflation expectations for both developed and emerging markets for the next five years based on these different scenarios is shown in the charts below. In all cases, we expect some recovery of inflation over the next five years, but only moderately so.
In all, we don’t expect much inflationary impact from the massive increase in money supply engineered by fiscal authorities and central banks, or from secular forces, at least in the next few years. The disinflationary forces stemming from the disruption to demand will simply be too strong.
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.