HyperNormalTimes

Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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October 13, 2021

Just in time to just in case threatens economic recovery

What did you do when you thought the UK was going to run out of petrol?

Judging by the line of cars in West London waiting to fill up, I suspect the average vehicle in the UK currently has a pretty full tank (and maybe a spare can in the boot) and is probably also making fewer non-essential journeys just in case. There are about 40m vehicles in the UK. Let’s just say, on average, each car has an additional £25 worth of fuel in it, just in case. That would mean an incremental £1bn is not being spent on anything else over the last few weeks.

Now imagine you own and operate a distribution business, a retail outlet, or a manufacturing company. You have honed your efficiency over the last few years and worked to reduce your investment in working capital. Your suppliers are raising their prices and are starting to put certain items on allocation. Shipping costs are going up, and your third party logistics provider can’t find enough drivers and has reduced the number of weekly drops. As you plan your ordering, you add in a contingency, just in case. Suddenly, the world’s mindset has shifted.

Of course, all of these actions represent rational responses to our current supply-constrained economy. Be more resilient and agile has replaced maximising return on invested capital and multiplied across the whole economy, this is expensive and will dampen economic growth.

In September, Google searches for the term stagflation spiked up similarly to the UK wholesale gas price. We hear about the similarities to where we are now and the inflationary energy-constrained 1970s. This analogue is intuitively attractive. Energy costs have a disproportionate impact on economic activity. After the first oil shock in 1973, the UK economy almost ground to a halt. The stock market lost 75% of its value over the 24 months from January 1973.

The most significant recovery driver in 2009/10 from the liquidity crisis engendered by the GFC was the oil price collapse from $120 to $40. On the contrary, the spike in wholesale energy costs in recent weeks will be hurting economic growth.

Financial commentators have been focusing on the issues facing the supply side of our economy over recent weeks and see the threat of inflationary pressures. This is understandable, but only half of the story. While we worry that fractured supply chains might take a while to rectify themselves, no one is questioning the resilience of the demand side. There is a tacit belief that the effects of monetary and fiscal stimulus will lead to a continuation of the V-shaped recovery, which started in October last year.

The assumption that the Keynesian demand management policy will work and lift the economy effortlessly above its 2019 level is lazy. The consumer is not the same animal they were before lockdown. They might be sitting on higher levels of savings, but maybe along with their full tank of petrol, it’s there, just in case. The next wave of concern will not be the narratives of inflation or stagflation but slow down or even recession. Tapering and interest rate rises in Q4? I think not. 

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