Growth, stagflation or recession

The panic and uncertainty brought on by COVID seem to have passed, but nothing could be further from the truth. Neither has COVID come to an end, nor has the long-awaited economic stability arrived. Too many negative indicators accompany too many unresolved geopolitical, health and economic problems, which are clearly damaging our economy. We, the public, are adults – perhaps far more so than many of our politicians – and telling us the truth is not incompatible with us voting for them; perhaps quite the opposite. Cutting spending is not anti-social; it is being responsible. It is said that the president of Real Madrid was a magician because he knew how to tackle the crisis by cutting wages and avoiding major expenditure. He is credited with something that is lacking in many of our leaders: responsibility.

By Miguel Ángel Temprano

12 May 20222 Reading time: 3.30 mins

Just two years ago around this time, we were going from the panic and the resulting paralysis caused by our knowledge of both the virus and its consequences – which led us to the point of paranoia, even cleaning tuna tins – to uncertainty about the future. Today we find ourselves in a similar situation, but either we don’t want to, or we simply don’t realise it.

The COVID issue is far from resolved, even though our daily routine might make it seem that way. The news coming out of South Africa regarding COVID is more than a little worrying; inflation has shot up to levels that we’ll have to wait and see when they’re brought under control; the Chinese, who are inevitably hiding something with their lockdowns, are once again causing bottlenecks in supply chains; and finally, but surely the worst is that a madman, at the helm of the world’s second-largest nuclear arsenal, has set out to wage war against a people whose national pride fills him with genuine envy.

“Although our day-to-day behaviour might suggest otherwise, COVID is neither over nor is it going to end any time soon, affecting not only our health and the way we live, but also our finances”

Let’s start with COVID. If you recall – and it wasn’t that long ago – last December the Omicron variant, the most contagious virus known in human history, was detected in South Africa. The fact that it’s South African is a trivial matter. This country has the highest rate of people living with HIV, a virus that doesn’t kill directly, but leaves your immune system so weakened that other pathogens finish you off. But if you manage to survive, it has been shown that, in the right conditions, if you become infected with SARS-CoV-2, you become a human reservoir for the virus. Put simply, many people living with HIV – and there are a great many of them – become the perfect breeding ground for the virus that causes COVID, allowing it not only to survive, but to mutate at will.

Well, there, and very recently, two new Omicron sub-variants have been detected: BA.4 and BA.5. But the danger here is that they are giving rise to new lineages. To put it plainly, in terms of vaccines, they are starting to behave like the flu; in other words, entirely new vaccines are needed, not boosters or booster jabs. And this is no longer a straightforward task, even with the new modified mRNA technology. It’s the perfect scenario for this problem to never go away, with the impact that has on everything, including the economy.

“The health news coming out of South Africa is more than just alarming, not to mention that something is going on in China that they’re not telling us about”

Let’s leave inflation for later and move on to the Chinese. Hasn’t any of you ever wondered if they’re daft? I have. And my answer is obvious: of course not. So, what’s this ‘zero-COVID policy’ all about? Would anyone in their right mind wreck their economy just to achieve ‘zero flu’? Well, no, because that’s impossible. So why are the Chinese doing it? Well, the answer would be a topic for a separate discussion, but the consequence is that the closures of their factories directly affect our production. Just as it did at the start of the pandemic, but we’ve learnt from experience, so we can expect another logistics crisis when they reopen en masse.

The shortages of finished and semi-finished products that crippled our production and are now crippling our factories once again are leading to a rise in prices – in other words, inflation.

We are used to talking about inflation, but this is caused by the economy overheating – that is, excess demand – which is resolved by withdrawing monetary stimulus, namely by raising key interest rates and/or reducing the money supply in circulation. However, the inflation currently affecting Europe does not stem from this source; it is caused by a supply shortage, meaning that no matter how much you scale back stimulus measures, you will not succeed in bringing prices down. This inflation can only be corrected by increasing supply, which has been reduced due to bottlenecks and the war in Ukraine, which is decimating many supply chains.

“Inflation in the US stems from excess demand, whilst in Europe it stems from a supply shortfall. The outcome is the same, but the way to tackle them is different”

But the fact is that inflation is not now driven solely by this factor; it is also driven by rising energy prices, and every economist knows that when energy price inflation persists, it turns into second-round inflation; in other words, it spreads to wages and durable goods, which is then not so easy to bring down.

I have been thinking and saying for a long time that we are in a state of stagflation. And I say this because, whilst it is not a measurable term but rather a quip by a certain economy minister from the 1960s, I believe that growing at less than 4 per cent – even though our Minister for the Economy is determined to convince us otherwise – and having inflation of over 8 per cent clearly fits the definition of high inflation coupled with poor economic performance.

Our politicians think they are Churchills, delivering that famous speech to the British people when the island was under threat from Nazi troops and he, along with his party colleagues led by former Prime Minister Chamberlain, denied the reality of the situation in order to rally his people to a fight that seemed lost.

But neither Sánchez nor Calviño are Churchill, nor do they bear any resemblance to him, and the Spanish people do not need to be harangued about anything; we simply need to be told the truth, plain and simple. Like everyone else, they knew we weren’t going to grow by 7 per cent, as claimed in the budget, and that it is highly unlikely we will even reach the 4.5 per cent now forecast, which means there will be no choice but to drastically cut spending, so as not to further increase the staggering public debt caused by continuous budget deficits. Quite simply because, without the support we’ve received from the ECB, the price of our sovereign bonds is going to skyrocket. And if you don’t believe me, just ask Zapatero.

Whilst the US has fully recovered to its pre-pandemic levels across all indicators – including employment and GDP growth – some European countries, such as Spain, still have a long way to go before they can return to many of their pre-pandemic figures, such as GDP.

The US is a net exporter of gas and oil – the exact opposite of Europe. But what’s more, we pay our energy bills in dollars, a currency that is appreciating rapidly against the euro. And this is happening because the recovery of the US economy has caused it to overheat, forcing the Fed to rapidly withdraw its monetary stimulus measures.

But it is by no means clear – or, in fact, quite the opposite – that our inflation is under control in the same way as the US’s, and that our economy needs this withdrawal of stimulus measures, but unfortunately the appreciation of the dollar is going to force us to move in the same direction as the Americans – that is, to pursue a policy of tapering – which could slow our economy down even further, and the Spanish economy in particular.

“We’re going to be forced to follow the US path of scaling back monetary stimulus, not because it’s best for our economy, but because the appreciation of the dollar is killing us”

The explanation is simple: our main ‘inflationary factor’ is the price of energy, which in itself

Prices are already soaring due to shortages, but if, on top of that, the currency we use to pay for them becomes more expensive, the effect is explosive. So perhaps it is not the best idea to scale back monetary stimulus, but if we do not, inflation will continue to rise, and as we all know, inflation is a tax on the poor.

It is said that the stock markets anticipate what will happen in the economy, so here goes.

The Euro Stock 50, Europe’s benchmark index, is at January 2020 levels. Yes, it has recouped all its losses, but it has also, so far this year, lost all the excess gains it had made. So far this year, it has fallen by approximately 15 per cent, whilst the US benchmark index, the S&P 500, has fallen by 13 per cent over the year, but remains well above its pre-pandemic level.

And to top off the forecasts, for the first time in decades, bonds – that is, the credit that is

The value of loans granted to businesses and governments by private individuals and non-bank institutions has fallen by 10 per cent so far this year.

“We are unlikely to see a simultaneous fall in the value of bonds and equities for decades.”

And as it can’t all be good news, I’d just like to draw your attention to another factor. All previous recessions have been preceded by one of the following three factors: a problem in the supply chain; an energy crisis; or a rapid reduction in monetary stimulus. Well, we now have all three at once. So it’s hardly surprising that many economists are forecasting a recession next year. All I’ll say to you is what I told a relative of mine who’s self-employed: earn as much money as you can now; don’t hold back, lest you soon find yourself having to spend a lot of time sunbathing. And to investors, I’ll say what I’ve been saying lately in every media interview I give: liquidity is an investment asset, and right now it’s the most profitable and the safest. And may God find us all in a state of grace.