Is this a real normalisation?
Recent months have been enough to make a market economist’s head spin. In just a few months, we have gone from recession to recovery, from recovery to acceleration, and now from acceleration to "normalisation". It’s like a film in fast forward that we would like to rewind so we can go back to the end of 2020 - a time of euphoria about a historic and an inflationless recovery, rather than already questioning ourselves about the pace of growth, and the start of an inflation trajectory, a trajectory so unusual that we cannot call what we are going through a "normalisation".
What do we actually mean when we talk about normalisation? It is the idea of slowing growth rates and a return to average of margin levels, along with a return to more conventional fiscal and monetary economic policies after the unprecedented support from governments and central banks.
Some will see a risk in using this idea of normalisation right now: first, because growth forecasts for next year are still well above both the historical average and potential growth. Second, because an orthodox view of monetary policies will not be coming back: if the Fed is to be believed, we will likely be living with zero interest rates until full US employment while the central banks’ balance sheets remain quite large as they continue to purchase public debt, which will also not return to its pre-COVID-19 level.
And what about the rising tide of inflation, which has reached levels not seen for a very long time? While this is mostly due to temporary factors related to commodities and pandemic-related supply chain disruptions, the re-emergence of supply constraints in a world of global competition is unusual and US wages are rising 3% to 4% without a return to full employment.
We are therefore in something of a paradoxical situation. The order of the steps as well as the return to more usual earnings growth (7% to 8% next year) is something we know. However, the resurgence of inflation and the numerous supply-side disruptions is quite unusual.
The risk is that the governments’ and central banks’ toolbox, which worked so well to get out of this self-inflicted recession, could prove ineffective when it comes to optimising the growth/inflation mix. The latter now looks like it can be more fully explained by imbalances and discontinuities, in the face of Keynesian tools that are better suited to regulating consumption and investment. This aligns more with adaptation than normalisation.
Monthly House View, 24/09/2021 release - Excerpt of the Editorial