As we try and shed our feelings of embattlement, with lockdown finally easing across most of the UK, the macro environment is radically different from the one which faced us when we entered lockdown in March, writes Abhi Chatterjee, Dynamic Planner Chief Investment Strategist.

Today, we are faced with an economy which is re-starting – with all its screeches and grinding gears – helped by the lubrication and deluge of ‘helicopter’ money, be it in terms of cheques to individuals or furlough schemes and loans to corporations. Here in the UK, this has been called the ‘Bounce Back Loan Scheme’ or BBLS.

The current situation has both similarities and dissimilarities with the last global financial crisis of 2008. Like then, governments and central banks across the planet reacted promptly in a coordinated manner to bolster the economy and put forward the balance sheets of central banks.

The difference now in 2020 is that 12 years ago it was just one sector – the financial sector – which had to be bailed out. This time it is all sectors across the board, apart from a few, that need bailing out.

Economics 101 says that with an increase in money supply to a system, ceteris paribus, all things being equal, inflation should increase.

Post-2008, when the money taps were opened by the central banks, threats of inflation came to the forefront. However, while we waited and waited, the inflation that was predicted never arrived. The debate regarding the why and wherefores rages on. Now, as was then, once the fiscal stimulus has been delivered, inflation has started to dominate discussions once again.

But is there only one possibility, just inflation, or does its alter-ego, deflation, get to dominate media headlines this time around?

Anyone can see the reasons for inflation, given the enormous largesse being doled out. However, inflation, which has recently been below the central bank targets, fell further during the lockdown. Even with the fiscal stimulus provided by central banks, the barriers posed by social distancing to shopping and increased precautionary saving has led to falling prices – evident from the falls in inflation in the developed economies.

Along with lower oil prices, lack of demand may quite possibly lead to companies discounting prices to reduce inventory and generate cash for their running costs. While this may not be the case for essential goods, the prospect of cheaper prices of non-essential purchases may prevent immediate expenditure by consumers.

Also, during this period, numerous companies have been looking into methods of increasing productivity and growth through the implementation of technology and digital transformation. If this continues apace, there is a possibility that growth in our economies takes on a different dimension and requires us to rethink our theories.

To quote from American-based Professor Yossi Sheffi’s Anna Karenina principle – every economic crisis comes with its own ‘roster of causes, cascade of effects and its own litany of misery’.

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