Inflation risks minimal from coronavirus stimulus packages
Economist Ian Shepherdson says that although the world is facing a recession, inflation risk is not an imminent threat to the financial world.
While JP Morgan’s latest economic forecast warns that coronavirus may cause a global recession, Ian Shepherdson, chief economist at Pantheon Macroeconomics, says that the breakneck economic downturn will have knock-on effects for several months, if not years.
“The global economy is in recession,” Shepherdson says. “The economies of Europe, the US, UK, Japan—they’re all shrinking right now.”
To counter this, the US is pumping $2trn (£1.6trn) into its economy with the CARES Act, including $300bn (£243bn) in individual cash payments and $425bn (£344bn) in corporate loans.
Unlike the Obama-era American Recovery and Reinvestment Act, which was a direct stimulus package, the CARES Act has been termed a “relief package”—meaning it’s not designed to restore the economy, but rather cushion it from a further fall.
Several European countries, along with the UK and Canada, have announced similar measures.
“I don’t think anybody believes the government’s finished yet with their stimulus packages,” Shepherdson says. “I would expect another one from the US in a couple of months, possibly as big as the CARES Act.”
At the moment, the greenback has remained a safe haven, strengthening throughout the coronavirus crisis.
“Inflation risk is also not something you need to think about in the midterm, either, because what economies are seeing now is a massive disinflationary shock—we’re seeing demand in some sectors dropped literally to zero,” Shepherdson says.
Shepherdson also said that as interest rates in the developed world continue to plunge, there’s “no chance” of them rising in the foreseeable future, effectively leaving nothing to hedge.
“What we’re seeing is a massive downward shock inflation,” he says. “Recessions always push inflation down, but recessions usually unfold over quite a long period—the economy starts slowing down before it goes into recession, then it goes into recession, then it tends to pick up slowly and during that period, inflation is still going down.
“But, this is an overnight stop, the likes of which you’ve never seen before,” Shepherdson continues. “I’m assuming that we’ll see, rather than a gradual downshift in effect, we’ll see a sudden drop over the next few months.”
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