Barclays Research expects a series of supply shocks to fan inflationary forces

In this year’s edition Barclays Equity Gilt Study, Barclays Research analysts delve into several supply shocks the world is likely to face in coming years and how they might impact the global economy. Analysts find that on almost all fronts, the world is likely looking at a more inflationary environment than in the last three decades.

“The world economy is still changing at an incredible pace,” says Ajay Rajadhyaksha, Global Chairman of Research. “Some changes – such as the green transition – are coordinated and by design. Some are driven by realpolitik or happenstance. But they have three features in common: the shifts are structural, very likely to prove inflationary, and will last for years to come.”

The Green Transition: Barclays analysts argue that achieving carbon neutrality will require an unprecedented transformation for the global economy. A wholesale reallocation of resources is achievable, but the journey will be bumpy, involving new taxes and tougher regulation. Studies suggest that the transition will be inflationary initially and could come at the cost of a small decline in GDP, before turning deflationary over time.

Labor Shortages: Changes in working practices during the pandemic raised questions over whether tight labour markets would become a recurring feature of the macro landscape. Barclays analysts argue that the supply of labour is likely to remain limited, as working populations grow older and as societies resist reforms that might help to alleviate pressures, such as raising pensionable ages, or lifting curbs on immigration.

Food Security: Growth in population requires smart use of scarce resources to feed ourselves and future generations. Yet extreme weather events are becoming more frequent and more severe, posing real threats to agribusiness and to infrastructure. Barclays analysts point out that technological breakthroughs, such as vertical farming and gene editing, are vital, in order to boost crop yields and quality.

Global Chip Manufacturing: The battle for technological supremacy between the West and China has the potential to disrupt the complex and globalized chip manufacturing supply chain. Barclays analysts expect any shifts to be gradual as Taiwan’s dominance in advanced semiconductors, and China’s cost advantage make abrupt and radical moves unlikely.

The Barclays Equity Gilt Study is a flagship annual publication that combines market-leading macro analysis with a unique multi-asset dataset spanning over 100 years. It provides uniquely rich data and commentary on long-term asset returns in the UK and USA. Data for the UK goes back to 1899, while the US data, provided by the Center for Research in Security Prices at the University of Chicago, runs from 1925.