18 November 2021

Economic scenario – Autumn 2021: Entering a new era of growth and inflation

In response to the health crisis, the economic measures taken have been unprecedented, exceptional in scale and, more to the point, will have a durably reflationary impact on the economy.

The initial response was to shut down activity almost totally, all over the world, for several weeks, in the construction sector, industry and certain services. Making up for all the lost ground will take a long time, which will durably prolong the recovery.

Subsequently, given the urgency of the situation, the governments of the developed countries simultaneously injected funds into the economy, resulting in a rise of 10 to 30 percentage points in the ratio of public debt to GDP, depending on the country. This has clearly created a “positive demand shock”, leading to a change in long-standing growth and inflation trends.


1. The 3 levers of growth: lagging stocks/production, forced saving and the needs for investment

Both households and business will play their part simultaneously in this exceptional – and even durably exceptional – recovery, via three key channels:

  • first, there is a need to replenish stocks, which are historically low in all the developed countries, in both the wholesale and retail sectors. Mechanically, this reconstitution of stocks will result in production – and, therefore, in growth.
  • Second, during the crisis, as a result of the health restrictions, households involuntarily built up an excess of income over expenditure. We have estimated this reservoir of “forced” saving in the United States and the Eurozone at 11% and 7% of GDP respectively. Even with prudent hypotheses regarding how households may choose to use these savings, the rise in consumer spending will forcibly be sustained.
  • Finally, there is a dawning awareness that there are vast needs for investment in health, education, infrastructure and, of course, in the environmental transition. These demands for investment presuppose another injection of public funds. This impulsion by governments will provide the spur for companies to invest. The horizon is opening out at last.

In summary, the 3 levers of growth are lagging stocks, lagging consumer spending and lagging investment.


2. Inflation rate to remain higher

In the “pre-pandemic world”, the economic forces were unanimously disinflationist and even deflationary. From now on, these disinflationist forces will be counterbalanced by the appearance of inflationist forces that are both cyclical and structural.

The two main cyclical factors are:

  • Cyclical inflation due to the fact that demand exceeds supply. On the one hand, we are expecting a boom in consumer spending, financed by the surplus in saving, while, on the other hand, company stocks are insufficiently replenished. This imbalance will be rectified in part by a rise in prices. However, the demand shock is causing sustained supply-chain bottlenecks and labour shortages in some sectors. In the United States, several labour market indicators are even suggesting a risk that wage growth will fuel “overheating” of the economy.
  • The new economic policy architecture. In the previous decade, monetary injections did not metabolize into activity in the real economy: liquidities remained in the financial system, due to the aversion of banks to lend and of companies to invest. Now, by contrast, the highly accommodating monetary policies are financing public-sector contracts, with the result that liquidities are circulating in the real economy, helping to drive up prices.

Among the structural factors, we can cite in particular:

  • The environmental transition : the price of pollutant energies must be increased in order to encourage their substitution. This in turn leads to a risk of higher prices for energy-sector raw materials (oil, coal, gas and even electricity). As long as renewable energies are not available in sufficient quantities, the energy transition will continue to fuel inflation.
  • The new geopolitical situation, in other words the ambition of the most powerful countries to recover their strategic independence will progressively result in a “regional” relocation of supply chains, with resulting increases in labour costs.

So, overall, we maintain our central scenario of reflation. We are therefore anticipating a more favourable growth environment, especially as a result of productivity gains obtained through public and private investment. We are also expecting an environment of durably higher inflation, above the targets of the central banks, forcing them to engage in delicate balancing acts to avoid an over-rapid tightening of monetary policy, which would disrupt the stability of the financial markets.



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