Stagflation is unlikely to be a problem for investors in the long-term because of easing inflationary pressures and slowing growth in China, according to Jupiter Asset Management’s Ariel Bezalel.
There have been some looming fears that slowing global growth combined with stubbornly persistent inflation could be the early signs of stagflation: when economic growth slows whilst inflation and unemployment remains high.
However, Bezalel, manager of the £4.4bn Jupiter Strategic Bond fund, said that stagflation is not a long-term concern.
He noted that inflation is still transitory and will come down when supply chain disruption eases and supply is able to catch back up with demand.
“The global supply chain has been running on a ‘just in time’ model which has been severely disrupted by the pandemic,” he explained. “This has been one of the primary causes of the inflationary pressures which have arisen this year.
“The world is now more connected than ever, and this means that when a factory shuts down in China, the knock-on effects are both immediate and wide-ranging.”
He warned that the disruption to global supply chains could take a while to repair if new Covid variants emerge and economics have to lockdown again.
However, in the long term, he argued that there are “powerful structural forces” at play that will keep inflation in check.
The first is the level of global debt. “The Covid pandemic has pushed global debt to levels not seen since the second world war,” the manager said. “Over the last year alone global debt has increased by $40trn to $280trn.
“This is over three times more than global GDP and history has shown that when government debt-to-GDP levels reach 50-60% this has a detrimental effect on growth and acts as a headwind for inflationary pressures.”
The second structural force is globalization – which keeps wages lower as production is moved to poorer countries.
He said: “As much as some commentators like to believe globalisation is going into reverse, the hard data suggests otherwise.
“While it can be argued that the pandemic has severely disrupted some of these forces, I believe that this is only temporary and as the world emerges from the lockdowns these trends will continue to act as a deflationary force.”
He cited the emerging weakness in consumer prices and commodities as an example. The price of lumber and iron ore have both dropped more than 50% from their peaks.
“I suspect the fall off in the likes of copper and iron ore are due to a sharp slowdown in China,” he added. “The most recent US CPI figures show that inflation is indeed moderating, with used car prices and air fares falling back to normal levels.”
US Consumer Price Index month-over-month
Source: US Bureau of Labor Statistics
“Of course, inflation is just one half of the stagflation equation, with global growth being the other factor,” Bezalel continued, adding that there are many signs that global growth has peaked.
He said China appears to be slowing down based off the latest economic data, with retail sales rising just 2.5% year-on-year in August against economists’ forecasts of 7% and industrial production below target, disrupted by lingering COVID-19 outbreaks and the fallout from the Evergrande crisis.
“In fact, Goldman Sachs economists are predicting that third quarter GDP is set to register no growth,” he added.
Going forwards, he expects markets to be “increasingly volatile” as central banks attempt to taper fiscal stimulus.
“However, the longer-term structural forces are likely to see inflationary pressures dissipate as economies normalise,” he finished.