A new macroeconomic normal

Two exogenous shocks have disturbed the macroeconomic equilibrium that has existed for several decades. The first in 2020 was the pandemic; the second in 2022 has been Russia's invasion of Ukraine.  Both will alter the global economy in profound ways. 

The pandemic has had both a short and a long run effect. In the short run governments mostly in the developed world sought to less covid's impact with strong economic stimulus. While the intent was to prevent people falling into poverty, a by-product was a fueling of demand as those who continued to be employed found themselves with additional disposable income.  However, the nature of that extra demand shifted from services, which were hard to access due to the pandemic lock-downs, to goods. That led to a spike in prices as demand exceeded supply. The surge in demand also led to supply chain bottlenecks with perversely further restricted supply - containers stacked up on docks meant that the normal functional of logistics operations were disrupted.  

While some thought that the shift from services to goods was temporary there is reason to think that it may be much more long lasting. Even though covid is moving towards endemicity, people's willingness to socialize and make use of services that involve coming into close proximity with potentially infectious others will not recover to pre-pandemic levels for some time if ever. The increases demand for goods may therefore be permanent rather than transitory. 

The second long term change stems from Russia's invasion of Ukraine. Political risk calculations are now front and center of firms economic decision making. Factory locations will be reconsidered and new overseas investments, both for production and markets will no longer be viewed though a purely economic lens. In the short to medium term this will results in reconfiguration of supply chains and lead to additional supply chain bottlenecks. In the longer term access to cheap labor will be constrained and that,  together with  re-shoring of manufacturing, will lead to higher prices.  In particular the reduced flexibility of fewer off-shoring options will shift power away from management and back to labor, which will add to inflationary pressure. 

Finally, while not so much a shock as an increasingly urgent pressure, the need to develop energy independence from autocratic regimes combined with the need to move away from fossil fuels will create a medium term increase in energy prices. Energy costs have almost doubled in Europe and will rise further in coming years. 

Over the last thirty years, most of the developed world has enjoyed a stable and predictable economy. That predictability has almost certainly come to an end.