Is Global Reflation Just a Mirage? Three Charts Suggest We’re Not There Yet
The buzz around a potential global reflationary wave has been building for months. After a period of sluggish growth and stubbornly low inflation, the prospect of a synchronized economic upswing, fueled by pent-up demand and expansive fiscal policies, has been a tantalizing prospect for investors and policymakers alike. However, a closer look at some key economic indicators suggests this anticipated reflationary boom might be more wishful thinking than reality.
Several factors initially pointed towards a reflationary environment. Governments worldwide unleashed unprecedented stimulus packages, central banks maintained ultra-low interest rates, and the rollout of vaccines promised a return to normalcy. These combined forces were expected to ignite a surge in consumer spending and investment, driving prices and economic output higher. But the data tells a different story. Three charts, in particular, highlight why the reflation trade might be premature.
First, consider global manufacturing Purchasing Managers’ Indices (PMIs). While PMIs have generally remained above the 50-point threshold that separates expansion from contraction, recent readings indicate a softening trend. This suggests that the initial burst of post-pandemic manufacturing activity is losing momentum. Supply chain disruptions, rising input costs, and renewed lockdown measures in some regions are all contributing to this slowdown.
Second, inflation readings, while elevated in many countries, appear to be driven more by temporary factors like supply bottlenecks and base effects rather than sustained demand-pull inflation. A chart comparing core inflation (which excludes volatile food and energy prices) to headline inflation reveals a significant divergence. This suggests that the current inflationary pressures may prove transitory, rather than the start of a sustained upward trend.
Finally, examining global trade volumes paints a mixed picture. While trade rebounded strongly in the initial phase of the recovery, growth has recently plateaued. This stagnation in global trade suggests that the demand-side momentum needed to fuel a sustained reflationary cycle may be lacking.
While the global economy has undoubtedly made strides in its recovery from the pandemic-induced recession, the anticipated reflationary boom remains elusive. The evidence from key economic indicators, such as PMIs, inflation data, and trade volumes, suggests that the current environment is characterized more by uneven growth and transitory inflationary pressures than by a robust, synchronized upswing. Investors and policymakers should temper their expectations for a rapid reflationary surge and remain vigilant in monitoring the evolving economic landscape. The road to full recovery is likely to be longer and more winding than many had initially hoped.
