LONDON (Reuters) – Nothing is decided at half time.
That appears to be as true for post-pandemic world economic policy and financial markets as for the European football championships now underway. Approaching mid-year in 2021, investors are still not convinced how the game will end up.
The stakes are sky high. Having spent trillions of dollars supporting locked-down economies through the COVID-19 shock, government debts have mounted to new records. But these have been kept affordable by central banks flooring borrowing costs, itself a situation many see as only truly durable if re-emergent inflation subsides again over time.
Rich countries’ commitment to continue investment spending on infrastructure and a “green transition” after the pandemic seems mainly to avoid a repeat of premature fiscal austerity, slow growth and flatlining wages after the banking crash 12 years ago. But it ups the ante on public debt even further.
The consequences of this new world splits economists and investors – but could define the era and have huge political implications.
If additional debt-financed spending can lift economic potential without stoking inflation, decades of trepidation over unchecked public debt loads moving from crisis to crisis may well have been wide of the mark and a different regime of high but manageable public debt at hand.
But if inflation does continue rising, stokes rapid wage gains and forces central banks to pull the rug, the sort of doomsday debt scenario and market crises feared by fiscal conservatives for a generation hove back into view.
Investors may have to pick a side. Right now, record high stocks and subdued bond yields on maturities going out decades – with still modest inflation expectations for at least 30 years embedded in them – show markets still comfortable with the former world.
If sustainability hinges largely on cheap servicing costs and a willingness of private creditors to roll over debts, then the signs are good to date. But markets can be fickle.
Nothing appears decisive yet – despite the steep growth rebound, spiky inflation prints and even policy murmurs of recent months.
G7 leaders meeting in Britain this month certainly want everyone to believe that “this time it’s different” – in what’s been dubbed in some circles as the “Cornwall consensus”.
“We will continue to support our economies for as long as is necessary, shifting the focus of our support from crisis response to promoting growth into the future,” the communique read. “This has not been the case with past global crises, and we are determined that this time it will be different.”