Key Points:
- Globalization is facing challenges due to the COVID-19 pandemic and geopolitical unrest.
- Companies are prioritizing availability over cost optimization and reorganizing supply chains.
- This shift in supply chains is leading to higher inflation as costs increase for logistics and management.
- The stability of the post-Cold War era played a significant role in globalization’s disinflationary effects.
- Geopolitical disruptions could potentially destabilize global trade and erode the peace dividend of the last 30 years.
- A paradigm shift in inflation could also impact monetary policy, requiring central banks to recalibrate their support to avoid exacerbating price pressure.
- Yield curves are now reflecting the policy outlook rather than the likelihood of a recession.
- An inflation regime change driven by geopolitical tensions could lead to a reversal of balance sheet expansion, or quantitative tightening.
- Supply-led inflation could occur as geopolitical instability disrupts efficient resource allocation.
- Investors may face significant risks to long-maturity bonds in a worsening geopolitical outlook and supply chain disruptions.
Globalization is facing challenges on various fronts as the COVID-19 pandemic continues and geopolitical tensions escalate. The decades-long trend of disinflation is reversing as companies prioritize availability over cost optimization. This shift in focus is resulting in the reorganization of supply chains, including regionalization, nearshoring, and reshoring. However, these changes come at a cost and ultimately lead to higher prices for consumers.
The stability of the post-Cold War era played a significant role in the disinflationary effects of globalization. The collapse of the Soviet Union and China’s entry into the World Trade Organization facilitated cost-convergence between commodity and labor markets, reducing inflationary pressures in advanced economies. However, cracks in geopolitical stability could disrupt global trade and erode the peace dividend of the last three decades.
This potential regime change in inflation also has implications for monetary policy. Central banks have had the freedom to engage in unconventional monetary easing, such as quantitative easing (QE), thanks to globalization’s disinflationary effects. However, renewed inflationary pressure could reverse this dynamic, requiring central banks to calibrate their support to avoid exacerbating price pressures.
The shape of yield curves is now reflecting the policy outlook rather than the likelihood of a recession. Inverted yield curves, historically seen as a predictor of recessions, are currently influenced by central bank policies, particularly their bond-buying programs. This suggests that the policy stance of central banks is driving the shape of the yield curve.
In the face of increasing geopolitical instability, supply chains are becoming more expansive, driving up inflation. However, a less expansive supply chain may have benefits once disruptions cease and inflation falls. Investors may face significant risks to long-maturity bonds in a worsening geopolitical outlook and further disruptions to supply chains.
