How the pandemic became a stagflation

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It was a summer of unpleasant surprises for the world economy. The United States, Europe and China are growing at a slower pace than investors expected. The prices consumers pay are increasing at a very rapid rate in the United States. Even in the eurozone accustomed to weak inflation, prices in August were 3% higher than in 2020, the most on record in a decade. Economies grapple with parts and labor shortages, expensive and slow freight transport, and confusing variations in adoption lockdown.

spread of delta version To blame, but the way the pandemic is affecting the economy is changing. The world has become accustomed to the virus’s violent surge, as waves of infection suddenly halt activity and cause prices to plummet or even drop. Delta, on the other hand, looks like a steady inflationary force that is reducing growth less dramatically but increasing inflation. The version is weighing in on consumer spending in the wealthy world, but isn’t causing a recession. In many vaccinated countries, cases are no longer deterring consumers from progressing as much. Europe’s service sector has reopened amid a wave of contagion by Delta.

Consumers are less afraid of the disease, despite not having enough vaccinations to fill hospitals. A year ago, US restaurants had nearly half the number of customers compared to 2019. Now, despite hospitals being overcrowded three times, the service is down about 10% from that period.

In Japan, the state of emergency in Tokyo is not prompting shoppers to step away from stores. Only in countries with strict policies aimed at eliminating the virus are people stuck at home. Australia and New Zealand are facing further recession as a result of their lockdowns, and China’s services sector appears to be shrinking.

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Meanwhile, the proliferation of the delta variant is disrupting global merchandise supply, as consumers, especially Americans, are looking to buy more cars, gadgets and sports equipment than ever before.

Outbreaks of low vaccination rates in Southeast Asian countries are causing temporary shutdowns in factory production and logistics networks, which in turn exacerbate supply chain disruptions.

In the United States, retailers including Gap and Nike have prompted the White House to donate more vaccines to Vietnam, which is vital to getting their factories back online. The shortage is driving up the prices.

Changes in the relationship between the virus and the economy have implications for policymakers. They will not be able to replicate the pandemic’s trick of the beginning of the pandemic of restricting the movement of people as a way of stopping the spread of the virus, while issuing financial aid to create a compensatory surge in demand for goods.

Recovering the services sector is currently the only fast track to rapid growth, because that’s where the opportunity lies. US household spending on services in the second half was down about 3% in real terms from the level recorded in 2019.

If the spread of the delta variant hurts service industries such as leisure and hospitality, more financial aid would only create more inflation. It is also hard to argue that fear of the virus scares consumers away from shopping and that government restrictions to slow the spread of the disease are therefore of little additional economic cost.

A weak correlation between the need for cases and the movement of people and the growth of the service sector drives up the cost of the lockdown.

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If countries with high vaccination rates, such as the UK, also restrict services during the winter due to pressure on hospitals, the economic damage will be enormous, and the benefits will be low.

The wave of Kovid transition from the delta version may soon subside, which will ease the pressure on the world economy.

If it doesn’t, or if another variant takes its place, the tradeoffs involved in fighting the virus will become harder to justify. TRANSLATION OF ROMINA CACIA

© 2021 The Economist Newspaper Ltd. rights reserved. Translated by Alexander Habner, published under license. Original text in English is at WWW.ECONOMIST.COM

About the author: Sarah Gracie

Sarahis a reporter covering Amazon. She previously covered tech and transportation, and she broke stories on Uber's finances, self-driving car program, and cultural crisis. Before that, she covered cybersecurity in finance. Sarah's work has appeared in The Wall Street Journal, Bloomberg, Politico, and the Houston Chronicle.

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