To be sure, concerns around inflation are backed by data. Prices are rising at nearly record pace in the US led by the housing and labour market. In India, inflation has stubbornly remained above the central bank’s target of 4 per cent despite weak demand scenarios.
Much of this inflation in the global economy is rooted in the decimation of supply chains by the pandemic and the lockdowns it caused. Additionally, as some economies opened up, they saw demand roar back at a pace that supplies could not cope with.
The only question in 2021, therefore, that mattered was whether inflation is transient or not. Recent events suggest, investors may have been asking the wrong question all this while.
THE VIRUS AIN’T DONE YET
Concerns around inflation betrayed the market’s complacency that the pandemic will be more or less under control in 2021, because the world has vaccines to fight them. As the past four months have shown, the virus isn’t done yet.
In India, growth has already undergone several downgrades as the new fiscal year started on a tumultuous note with the vicious return of the virus that most policymakers and investors thought had gone for good.
Economists cut down their GDP estimate from high teens to high single-digit as the second wave took hold. While the second wave has abated for the time being, the risk of downgrades has not.
Brokerage firm Nomura Financial Advisory and Securities India, suggested that the slow rollout of vaccines in India keeps the country at risk of more GDP downgrades.
However, the more concerning thought for investors should be the lurking downgrades to global growth and, in particular, the US and China. China’s growth is slowing down given that the economy has recovered faster than any other after the pandemic. In addition to that, the regulatory purge of the technology sector means that one of the biggest drivers of China’s GDP will remain crippled for some time to come.
In the US, economists are already cutting 2021 growth estimates citing the renewed spread of the
variant of the virus. Tuesday’s reversal of the government on mask wearing for vaccinated Americans is a blow to President Joe Biden’s hope of celebrating July as a month of re-opening.
“We’re cutting US growth for 2021 from 7.2 per cent to 6.6 per cent due to the Delta variant. Doesn’t change the big picture. Whereas before we had the output gap close in Q3 2021, now it closes in Q4. We make a similar cut for the Euro zone, where the output gap doesn’t close at all by end-2022,” said Robin Brooks, chief economist at IIF.
During the peak of the second wave in India, investors were able to comfort themselves in the knowledge that more than half of Nifty50’s earnings came from the global economy, which was having its sunniest days in years.
With the Delta variant sweeping through most parts of the world and vaccines barely managing to keep hospitalizations from rising, lockdowns are returning to many parts of the world. That is a threat to Street’s assumption of 35 per cent plus earnings growth in 2021-22.