In 2021, vaccination will rhyme with inflation

The end of the crisis seems to be looming with the acceleration of vaccination all over the world. Unfortunately, it is accompanied by a “slight” problem, which our authorities will find it difficult to resolve by the simple magic of printing money.

As popular wisdom says, it’s right before sunrise that the night is freezing cold. Economic crises also obey this paradox, and the Covid will undoubtedly be no exception. Europe celebrated the arrival of spring by multiplying strong health measures, and they will certainly have catastrophic economic repercussions… but for a time only.

Forecasts from pharmaceutical companies make it possible to anticipate massive vaccination of the Western population as early as the summer. That done, we could find ourselves facing an epidemic that vanishes overnight.

How will the economic actors react then? The example of the United States, where vaccination is several months ahead of the Old Continent, gives us valuable indications.

After a year of various restrictions, the American experience shows that consumers rush to their bank cards as soon as the future brightens. The savings, accumulated since the start of the pandemic for lack of leisure, vacations, and the desire to consume, then find their way into the real economy.

Stimulus plans, present in the United States as at home, do not spoil anything: everyone knows that the money easily earned seems less valuable and is quickly spent.

The resumption of control of the coronavirus epidemic will therefore sign a significant rebound in demand. It might be tempting to reinvest, in this spring, on the old stars stock market at the beginning of 2020… but economic time has not been suspended to resume identically.

VShis year, we will have to deal with reduced production capacities and its corollary: inflation.

It may be complicated …

Latent tension in production capacities

This need to consume which requires only a little visibility to be expressed will come up against an obstacle: companies are no longer able to produce as much as before.

Over the past year, companies have been zombified by the public authorities. While most of them were able, thanks to generous state aid, to avoid bankruptcy, the recovery in summer 2021 will not be a continuation of “the economy of before”.

The reason is simple: between investment freeze, partial unemployment and social plans, production capacities will have changed a lot during these 18 months.

If the health crisis had only lasted a few weeks, our economy could have resumed its course and continued on its past trend. The production capacities would have remained unscathed, the factories could have started again at the same pace, and the employees would have found their way back to the office.

It is impossible today. Talents have left companies and will hardly be replaced. Of business units have been closed, the least profitable services have been interrupted, and this offer will leave a gaping hole in our economic fabric.

For their part, consumers are always more numerous (excluding Brexit, the European population is growing by nearly a million inhabitants per year), older, and richer. In France alone, the savings surplus at the end of the crisis is estimated at over € 200 billion.

A strong gap between the demand of impatient and solvent consumers and the supply of still numb companies is therefore to be expected. It is already evident in many goods and services.

In France, finding a craftsman available in the spring of 2021 is a challenge. In Europe and the United States, finding a new car will soon be an impossible task due to a shortage of electronic components. All over the world, buying raw materials is more and more complicated – and expensive.

As soon as the health crisis ends, we must therefore expect an economic scenario comprising phases of shortages with interruption in the supply of goods and services, and inflation with selection of customers by increasing prices – and sometimes even both simultaneously.

A situation that will last for many months

Like the markets, the real economy “goes up the stairs and down the elevator”. The production capacities that were destroyed in the past months had been patiently built up year after year, even decade after decade.

It is therefore illusory to count on a rapid return in production rates.

Raw materials are a perfect illustration of this. All companies that produce extractable raw materials (gold, copper, lithium, petroleum, etc.) are in a permanent race against the exhaustion of their available resources.

Every ounce of gold out of the earth, every pound of lithium or every barrel of oil is gone. To maintain the activity in a sustainable way, it is therefore necessary to invest ever more in production capacities, acquire new exploitation rights, or even modernize its production apparatus to maintain a constant flow while the resource is less and less. available.

All of this is costly, and has not been done in the past 12 months.

The producers of raw materials are in a delicate situation at the start of the year. If the problem were only financial, it could be swept aside with the back of the hand by the central banks who no longer have any qualms about running the printing press … but it is also temporal: a mine is not created in one day, regardless of the amounts invested.

It takes years to go from the idea of ​​a new production site to the rotation of the first trucks. In the best case, the projects have been frozen for a year and will therefore be delayed as much; but many of them cannot even be restarted.

The scenario of stress on supplies is therefore likely to unfold at least until the end of 2021, and perhaps even until 2022 – it has already started.

Since 1er January 2020, industrial raw materials are already on the rise: + 27% for nickel, + 56% for copper, etc. Even other raw materials are not spared. In the USA, lumber is up 80% since the start of the year!

The rise in raw materials will lead, by ripple effect, to an increase in the price of manufactured goods.

The only thing missing is an increase in the price of services and salaries for the vicious circle to be definitely set in motion.

For central banks and some analysts, this last step will not take place. We would be protected by an all-powerful circuit breaker: unemployment, which should keep inflation from racing. We will see tomorrow that the situation is not so simple.

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