Economic recovery and return of inflation

With war now adding to the pandemic recession, the economic costs of conflict in Eastern Europe threaten to stall the gradual global recovery from the COVID-19 pandemic. Risk Director of APS Bank Giovanni Bartolotta addresses some of the emerging risks.

As Chief Risk Officer for APS Bank, you have had a front row seat during and after the pandemic, advising at board and management level. How is this year going?

No one could have predicted the unprecedented pandemic and fallout, including a second global recession, followed then by 1970s-style price inflation. Just a year ago, many central banks around the world were predicting a temporary spike in inflation, with the European Central Bank predicting price increases of 1% for 2021 and the Federal Reserve predicting a steeper 1.8% increase. As it stands, inflation in Europe is now regularly above 6% and in the US around 8%.

What factors contribute to this inflation?

Initially, this was mostly attributed to transient supply chain disruptions, or rather supply chains finding their place in the new, less globalized world economic order. But with raw materials and product components seeping into the economy, against stronger demand, it is now clear that the elements of ‘permanence’ are becoming more entrenched in global price trends. It is now clear that the widespread price increase is due to a significant expansion in aggregate demand, lingering energy supply shocks and the lingering effects of COVID-19 in China, which is slowing manufacturing.

COVID-19 relief measures put in place by governments have helped to mitigate the economic fallout. Was there also a negative impact?

Ironically, the various measures put in place by governments to revive economies have inadvertently worsened the current situation. Measures such as prolonged quantitative easing, large government deficits and ultra-low interest rates have injected large amounts of liquidity into the global economy, while artificially creating purchasing power and causing pressure inflationary. It is possible that the COVID-19 relief measures were in place longer than necessary, as GDP growth recovered quickly from the sharp but short COVID-19-induced recession, triggering inflation .

…we should expect to see inflationary pressure begin to correct. The higher cost of raw materials and product components will also act as a drag on economic growth, preventing the economy from overheating.

What measures have been taken to counter this rapid inflation peak?

With the notable exception of the Eurozone, monetary and fiscal policies have started to tighten in recent months, so expect inflationary pressures to begin to correct. The higher cost of raw materials and product components will also act as a drag on economic growth, preventing the economy from overheating. The risk now shifts to finding the right balance in the pace of tightening, which, if too aggressive, could thwart the nascent global recovery. A repeat of the global recession of the early 1980s – induced by overly aggressive interest rate hikes – is now on the cards.

From pandemic to war, it feels like the world is teetering from one crisis to the next. How will this war in Ukraine amplify the inflation problems?

The beginning of the invasion of Ukraine was another unprecedented crisis. Besides the deplorable trail of destruction and loss of life, this war has also consolidated pressure on global energy prices, further raising inflationary expectations and lowering prospects for economic growth, raising the specter of stagflation. world, which means high levels of inflation against low growth. .

Weaker growth will have various implications for some European economies, including a slower return to more acceptable debt/GDP levels due to lower than expected tax revenues, as well as increased investment in alternative energy sources and the defense sectors, will also contribute to a slower deleveraging of the level of public debt, acting as a brake on the growth of other economic activities.

In your role as Chief Risk Officer, where do you see risk assessment and policy?

Recent world events have brought two priorities to the fore; a decision to reduce Europe’s dependence on Russia for oil and gas, and a return to military defense spending. Heightened geopolitical uncertainty, exorbitant energy and commodity prices and the indecisive response of central banks to this latest crisis could dampen the outlook for global economic growth. As the Bank’s CRO, I will continue to assess the evolving situation and its potential implications on the Maltese economy, refine and strengthen the Bank’s risk management framework to respond to the uncertainty and to position the Bank (and its clients) on a solid footing. once the clouds on the horizon have dissipated.

Giovanni Bartolotta served as Chief Risk Officer at APS Bank for over three years. Prior to joining APS Bank, he spent 14 years at FIMBANK plc as Executive Vice President and Global Head of Risk. His move to Malta was preceded by a 10-year stint in London with major global investment banks, including Kleinwort Benson, JP Morgan Chase & Co and Bear Stearns International. An experienced banker with in-depth knowledge of global markets, corporate finance, risk and compliance, Bartolotta holds a BA in Economics from Bocconi SDA, University of Milan and is currently a member of the Maltese Association of credit management.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of APS Bank plc.

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