Long-term inflation ‘a growing concern’
INFLATION is a growing economic concern.
Kevin Boscher, chief investment officer at Ravenscroft Group, said inflation was increasing and that there was concern in some quarters that it could become a longer-term trend.
‘We’ve definitely seen a pick-up in inflation numbers in the short term over the last few months,’ he told the Guernsey Press Business Podcast.
‘To a large extent that was predicted, because last year when economies were shut down there was a big deflationary impact of spending – effectively, investment stopped.’
Twelve months on, the base effects of that big drop were falling out – leading to the increase in inflation which was expected.
‘Having said that, it has surprised on the upside in the US in particular. There are some people who fear that what we’re seeing short-term becomes a much longer term trend and problem,’ said Mr Boscher.
‘The last time, really, the world had to worry about rising inflation was back in the ’60s and ’70s. So that’s going to be a major issue for the global economy and markets going forward.’
In the US, the consumer prices index increased at an annual rate of 5% in May – the largest 12-month rise since August 2008. In the UK, the Bank of England has said inflation is likely to exceed 3% along with strong growth for a temporary period before both will then fall back.
But Mr Boscher offered an upbeat assessment of the global economy as it recovered from the impact of the Covid-19 pandemic. But the challenge of ageing populations and sluggish productivity could remain a longer-term drag on growth.
‘The correlation of our economy to that of the UK and to that globally is pretty high. Finance is our key industry and finance is a key industry globally. And finance tends to do well when economic activity is improving.
‘So, Guernsey is in a reasonably good position, with some caveats on that. Certainly, I’m positive on the UK post-Brexit and post-Covid for a number of reasons,’ he said.
‘The UK is emerging from Covid really strongly, thanks largely to the vaccination programme. But also thanks to the fact there’s a lot of pent-up savings demand there because the UK has lagged pretty much since the Brexit vote in 2016.’
While there were some technicalities to sort out when it came to Brexit, the UK looked to be in a good position.
‘We should be able to benefit from that. But also financially the fact is that, although growth is picking up, there are many factors that mean long-term growth for developed economies such as Europe, UK, US remain fairly low compared to long-term history.
‘For example, the ageing demographic means there’s less people working and productivity has disappointed now for the last 10 or 20 years. So if that continues, then longer-term growth prospects for those countries remain somewhere between one-and-a-half and 2%.
‘That’s one reason why central banks are almost certainly going to keep interest rates very low for some time to come. Even if economic activity picks up. Even if inflation picks up, as we are now seeing.’
Finding ways to increase the size of the working population was an issue that needed to be addressed by economies globally. Immigration, which was particularly relevant for Guernsey, was one in a suite of potential options. Technology also had a role to play in driving up productivity, said Mr Boscher.
