In times of turbulence, firms dedicated to financial advice and wealth management turn a deaf ear to preparing their economic forecasts. Leopold Torralbachief economist Arcano Partnersbelieves central banks will be limited by rate hikes so as not to stifle growth or unleash inflation. While he predicts that uncertainty will continue over time, he sees the worst recession or even recession scenarios far away; yes, he sees a possible pullback of globalization in the heat of the war in Ukraine.
with the results Pandemic As we continue to impact supply chains, we have been pushed into the rise in energy prices in recent months, highlighted by the war in Ukraine. What should governments do to moderate the impact in the fiscal and fiscal space?
In finance, central banks should take care to establish balanced monetary policies; It neither accelerates inflation too much nor slows growth too much. As long-term inflation expectations are currently out of control, raising interest rates but not keeping them above neutral levels will put a lot of pressure on growth. More or less this is expected in the United States, and above all in Europe: raise them, but not to extreme levels.
Fiscally, governments owe public debt to the most affected segments, families and companies (low taxes, subsidies, etc.) to avoid an exaggerated negative impact. This can be done through pandemic-style jointly-responsible European funds, or by the ECB buying bonds on the market longer or more intensively.
Will the central banks of developed economies cut their interest rates and borrowing programs as planned, despite the UN’s warning that a step in this direction could create serious problems for developing economies?
The rate hikes announced for now make sense. In the case of the United States, it is higher due to higher inflation and higher expected growth, but the forecast levels are not exaggerated. There will be weaker and slower rises in Europe; Inflationary pressure—exempt energy—is lower, and central banks tend to pay more attention to this inflation. Debt purchase cuts are normal given that economies in general have already normalized.
But in any case, keyword “flexibility”. Central banks may turn to bond purchases if the situation deteriorates excessively in terms of growth and/or increases in bond yields. Given the high level of public debt to GDP and the danger it may pose to structural growth, central banks know that the best way to reduce this rate is to have moderate interest rates and inflation above the 2% structural target for a time. (but yes, no more than 3% for very long, which is starting to affect growth more negatively).
Is there a risk of the repercussions of the pandemic, the energy crisis, and the invasion coming together? Ukraine pushing economies into stagflation [parón en el crecimiento sumado a un nivel elevado de precios] or recession?
The normal thing would be not to come neither stagflation nor recession, for several reasons: the inertia of the post-pandemic recovery is high, the overall level of savings is still important, the restrictions should be eased, the Chinese real estate crisis will help slow inflation (due to reduced demand for material premiums), countries will implement some shock fiscal measures, the war should not last for months and interest rates Even if it rises, it won’t be very high. Specifically, with regard to stagflation, neither growth should be zero nor expected long-term future inflation should go wild; There is a certain temporary element in this price increase. As of the third quarter of 2022 inflation should start to slowand it will almost normalize in 2023.
What has been the reaction of investors to the crises that have come one after another in recent months?
Uncertainty is the worst-case scenario for investors, and with it at such high levels, the listed risk assets initially suffered – we saw in the stock market – but later recoupled some of their losses. But uncertainty will remain for a while, which means volatility, which is never friendly to solid stock market gains. Structurally reversible, but tactically, some caution in the short term logical.
What outcomes can we expect from the current scenario in key sectors for citizens’ lives, such as healthcare or real estate?
There are multiple extraordinary factors affecting industries. there will be a pandemic positive for the healthcare industry because it increases the general sensitivity to health. While residential real estate does not logically benefit from uncertainty in the short run, a rise in construction costs (due to rising material prices) or a rise in interest rates, in the medium term yes, the potential for employment and wage growth (since Spain is farther from pre-pandemic normalization), the positive financial health of banks, historical It will benefit from reasonable housing prices and expected low real interest rates (excluding inflation) for patterns. They make homes particularly attractive as an investment, as they offer reasonable rental returns and good protection against inflation.
Other preferred sectors, in this case more structurally, defense and renewableBecause of the West’s incentive to reduce its energy dependence and increase its military defence. Finally, certain segments of the industry may also benefit from potentially relocating supply chains to their markets of origin to increase future security of supply.
The war led to the imposition of unprecedented sanctions. RussiaBy companies that interrupt or paralyze their activities both in the financial field and in the country… Are we facing a withdrawal from globalization and a possible consolidation of a world of economic blocs?
Unless some very unexpected event prevents it (like a possible Valkyrie operation) [en referencia al complot dentro del ejército alemán para asesinar a Hitler]), really globalization can pull back a bit. The West realized the danger of over-reliance on energy and raw materials from potentially unstable regions, and at the same time, countries like China saw that large dollar reserves could be used against them in the event of a conflict with the West. It could return to a phase conceptually similar to the Cold War with three main blocs: the United States, Europe and parts of Asia (led by China, Russia as a supplier of natural resources). By trying not to isolate itself completely, China could become a kind of hinge of convenience, because the reality is that most of its exports, which are so important to its economy, go to the West. And the United States and Europe, along with parts of Asia, would tend to integrate as much as possible, logically; exempt from Trump-style decision-making profiles, of course.