REAL INDICATORS
"Oh Lord, save us from plague, hunger and war." In these horrible years, of black swans following one another, the medieval invocation resounds. We wish it was metaverse or a video game. Instead, they return the explosions of bombs and "the old lie", as Wilfred Owen called it, by Horace: dulce et decorum est pro patria mori.
La war towers over other misfortunes. Both from an ethical point of view, and it is for this reason that Pope Francis has put it in first place in the causes of suffering. Both from the economic one.
In fact, it affects the economy in many vital parts. First of all, it interrupts trade between countries: in the contemporary system of international supply chains, two-thirds of trade is in semi-finished products and some nations assume much greater importance than their weight on global trade or production; because they provide inputs without which entire activities are blocked, with cascading effects on the others.
Secondly, it spreads uncertainty, enemy number one of investment, and distrust, which discourages household spending. One cannot remain indifferent when, in the interconnected world, one observes killing and destruction. Again, it increases the cost of raw material, food and non-food, with an inevitable reduction in the purchasing power of consumers and the profitability of businesses. This is especially true when countries that supply so much of the planetary supply of energy goods, and wheat and corn are involved….
Finally, but first in importance, there is the elimination or mutilation of people, on both fronts (in any case «brothers», as Ungaretti calls them, with their real name). Because, looking beyond the sacredness of life, people are also the primary engine of growth.
To evaluate the economic consequences of the war unleashed by Russia all these elements must be put in the cauldron. However, we still don't know the dosage, because it depends on the fate of the armed conflict, on its duration and extent. And from what will be the conditions of the peace. The hands they have no military-strategic skills, but they can outline one scenario, with a threat in the background.
The threat has a name that is at least as bad as its meaning: stagflation. That is, lack of economic growth (stagnation), accompanied by rising costs and prices (inflation).
Instead, the scenario hinges on two cornerstones: the war does not last long and is limited, while the sanctions to Russia they remain. There duration it is important for the effect on trust and spending decisions: the shorter it is, the more discretionary spending there is. The sanctions, on the other hand, will not be easily lifted, also because they are useful to reduce the ambitions of world power of a small and poor economy (pre-pandemic per capita GDP two thirds of the Italian, in purchasing power parity, and one third of the Italian one at current exchange rates - using, charitably, the exchange rate of ruble pre-war).
The other key question is where will they go Russian oil and gas (ignoring, for simplicity's sake, the other commodities), given that the USA and the UK have banned their purchases and the EU wants to equip itself to do the same. They will hardly be kept underground, because Russia needs the revenue of their sale, since 75% of what families consume is imported. There China she positioned herself politically to buy them. This means that there will be diversions from one country to another, with an increase in logistics costs, but there will not be an embargo, as in 1973-74, when the cost of a barrel quadrupled and people went on foot on Sundays. Therefore, quotations will return to reflect the conditions of demand (increasing) and supply (curbed by OPEC +), more than the fear of the unknown that war has caused.
The war, like the pandemic, has however accelerated the transitions towards electric-digital and towards renewable energy sources. So the investments in those directions, public and private, will increase.
In the darkness of reason, however, there are some glimpses of light, different from those of missiles and bombs. The first is the responsiveness of policy decisions, also in Europe. If nothing else, the financial crisis first and then the pandemic trained the reflexes of decision makers; so that monetary easing will be withdrawn more slowly and budgetary measures will be launched to support production. The second glimpse is the drop in infections, which will help ease the restrictive health measures. The third is the solidity of the recovery at the start of 2022.
In fact, after the great difficulties in January, due to the recrudescence of the virus before and during the Christmas holidays, in February the PMI indices of output and orders (promise of future production) are back to rise. Especially in the tertiary sector.
INFLATION
Gasoline on the fire. The price increases of raw material have raised the temperature of rising costs (exacerbated by theweakening of the euro against the dollar). And it was a generalized increase, because Russia and Ukraine are major suppliers of commodities. Increase in costs that was already intense before the Russian invasion and fueled producers' lists and consumer prices. For gas and oil prices, the implicit imbalance between supply and demand today seems to be caused not so much by lower physical supply flows but by fears of future restrictions on the one hand, and by precautionary purchases (putting hay on the farm) from other.
The differential of increase in the transition from raw materials to producer prices and retail prices it is explained by two factors: labor costs and competition. Only in the USA labor costs are rising at a rapid pace, the highest since the beginning of the millennium. But even there, net of productivity, the dynamics are much reduced, although it remains above the Fed's inflation target. Conversely, inEuro area the increase of wages it is punctuated by contract renewals and remains low so far. On the other hand, the erosion of real wages is the way through which the major energy and food bills are paid to the producers of raw materials (dura lex hundred lex). A way that is deflationary, in the sense that it deflates purchasing power and demand, including for labour.
La competition it acts by depriving firms of the ability to determine final prices on the basis of their costs, i.e. it reduces the mark-up. The further downstream you are in the processes, the less power you have, in the presence of consumers who now have to be more careful about how they spend. Less markup equals edge erosion, and this too is deflationary, because it lowers the convenience to invest.
Competition unfolds through international competition (globalization) and between processes and products ( innovation). In the first place, the war took Russian-Ukrainian producers of semi-finished products (such as steel) off the market; but that is little consolation. Innovation, on the other hand, will receive a further boost from the necessity and convenience of sharpening one's ingenuity to save fossil fuels and invent new things that like them[LP1] .
RATES AND CURRENCIES
We now look at the 'reaction function' of economic policies, governments and central banks. Before the 'black swan' war we went towards the normalization: slowly rising rates, less Qe, while right-thinking people looked anxiously at lighter weights for deficits and public debts. But normalization can wait and right-thinking people will be (once again) disappointed. The forthcoming increase of a quarter of a point in the guide rate for the Fed it is symbolic. Somewhere else one will be careful not to implement monetary restrictions, which would be like salt on wounds, especially as it is increasing, with the fall of share prices, the cost of equity capital. THE markets have us [LP2] already thought out and, compared to pre-war levels, they did not push even more on i long rates, showing that they are more concerned about the recession than about inflation. The BTp/Bund spread follows a well-known script: it rises when rates rise and falls when they fall.
for budgetary policies, these they can only veer towards support to the economy, partly due to automatic stabilizers (less taxes and more income support) and partly due to discretionary measures to contrast the increase in energy prices. Especially in the case of worst-case scenarios (Russia cuts gas and oil), public budgets will be able to intervene with massive subsidies [LP3] (or tax cuts on energy products). And certainly, in that case, they will have to be accompanied by stringent savings measures, up to the famous 'Sundays on foot' almost half a century ago (first oil crisis). It is ironic to think that before, in the midst of the pandemic, we could hardly leave the house, while now, due to Russia, in the worst case scenario we may be able to leave the house but we may be denied a trip outside the city…
The war in Ukraine brought money back to i shelter goods. It took a war in Europe to send thegold towards 2000 ($/ounce), and the dollar – always a safe haven when it thickens the fog of war, – strengthened sharply against the euro. There are those who have done even better than the greenback: it is the Australian dollar which has gained everyone, both for the geographical distance from the conflict and, above all, for Australia's position as a major producer of raw materials.
I stock markets, as mentioned, I'm in fibrillation, and their paths are, in fact, a roller coaster. In the short term, they will go hand in hand with the good or bad news of the war. But, in a long-term perspective, they remain – we have been repeating it for some time – a privileged place for investor portfolios.
[LP1]Cipolla writes “like”
[LP2]It seems to me that they have "rethinked" it
[LP3]If these are permanent increases, subsidies are of little use, don't you think?
Pandemic, war and (here in the North West) drought for four months. Famine is missing, then the "Manzonian" mix is complete.