Economics in Pandemic
In series of stories on pandemic we recollected socio-political impact of the virus, and it seemed destructive. However, a cautious optimist in me saw many areas of opportunity, in calamity of our times. Similarly, another area which has a bearing on our daily life is economics (yes, that uncle in a family we only remember at the time of difficulty or tragedy), a table below captures a mystery in numbers, and we will attempt to make sense of it through this story (Trust me, my guess is as good as yours).
One of the critical fact in the table above is the direction of the banking rate for most of the countries, quite literally all of them equivocally chose for a ‘rate cut’. This indicates high liquidity with central banks coupled with no/low industrial/economic activity in an economy. Singular reason for such state, is pandemic caused by a virus.
However, if we glance on the inflation (CPI/HICP) numbers, in most cases we observe positive growth in numbers. This essentially means people are paying higher/premium for the same basket of goods & services as compared to same time last year (Year over Year comparison). In my opinion, it is a display of resilience by humanity, by not altering living standards, in face of a calamity.
Now if we put two numbers in perspective, countries with positive inflation (Y-o-Y) with lower banking rate (as compared to inflation), have registered a positive real rate of return. As per Investopedia, “A real rate of return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. For the moment, all with lower banking rate over positive inflation can breath easy in crazy environment.”
However, there are some unanswered questions, a positive inflation on basket of goods & services denote demand for key goods & services at similar or higher level compared to last year/pre-lockdown. Will that lead to a mismatch between ‘pent-up liquidity at central bank’ vs ‘anticipated economic activity’? Will this liquidity find its way to hard/soft commodities?, for the want of safety & higher returns. Hoping saner minds are already at work on this one.