March 17, 2021
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De-globalisation’s macro impacts

  • Globalisation in recent decades both lowered and flattened the Phillips Curve, making domestic inflation more dependent on the global rather than the domestic output gap.
  • We believe that the drive for supply chain security is pushing this process into reverse and that the post-pandemic world will have a higher and steeper Phillips Curve.
  • Inflation will be higher for a given set of unemployment data, especially if there’s a global schism. Policymakers will respond more to output and risk overstimulating.

March 05, 2021
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Fiscal conquering monetary hegemony

  • The close relationship between national debt and wars is well-established. Although the current Covid crisis is not a war in the conventional sense, the government has extended its authority in a manner seldom seen outside a conflict situation.
  • War and similar crises shift the dial on economic policy towards a greater role for fiscal over monetary policy in demand management. In short, they push the envelope on what is thought possible and desirable vis-à-vis the role of the state.
  • Monetary policy’s space to stimulate is increasingly defensive as it accommodates fiscal stimulus up until the point it becomes inconsistent with the target. The fiscal hegemony is now de facto and de jure and this will determine relative economic performance.

March 03, 2021
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UK: Budget extending and pretending

  • Support schemes were extended through September to allow for even more protracted restrictions, while the Budget did little to close the deficit. The OBR’s decision to add no scarring effects from recent lockdowns avoids the awkward questions for now.
  • We remain much gloomier with a deficit 1pp larger in 2021-22. Policy news in the budget slightly re-profiles our inflation forecast through VAT’s delayed and staggered normalisation. Other things like a light greenwash at the BoE make no difference.