Raghuram Rajan, the guru who foresaw the 2008 financial crisis, puts UK on red for potential future troubles
- Inflation will bite if lockdowns return, top economist warns
- He says interest rates could rise faster than most expect
- And that could cause an almighty stock market decline
The market guru credited with predicting the 2008 financial crash has warned Britain could face rampant inflation as businesses continue to be hammered by lockdowns.
Raghuram Rajan, former governor of the Reserve Bank of India and former chief economist at the International Monetary Fund, said companies can continue to raise prices as they face high costs from repeated lockdowns, and find they can successfully pass those costs on. to the consumer.
He said central banks would keep a close eye on prices over the next year and could be forced to raise interest rates quickly if they felt inflation was spiraling out of control.
Insight: Raghuram Rajan warned of global collapse when he was chief economist at the IMF in 2005
And he warned of a stock market sell-off if fund managers realized they no longer needed to put money into riskier investments to generate decent returns.
Rajan’s red warning to the UK comes as speculation continues about the return of some lockdown restrictions in the autumn or winter as Covid cases could rise in cold weather.
The world-renowned economist famously warned of a “catastrophic collapse” in world markets when he was chief economist at the IMF in 2005. He was mocked by US policymakers at the time, but his analysis proved correct – and he is now considered a leading thinker on economics.
He was widely touted as a top candidate to replace Mark Carney as Governor of the Bank of England in 2019, but later said he was not applying for the position, which ultimately went to Andrew Bailey, then the head of the Financial Conduct Authority – the City watchdog.
Rajan told The Mail on Sunday that companies could easily become addicted to a cycle of price increases if they did not fully recover from the pandemic.
He said world economies would face “ongoing” inflation as workers use higher prices to negotiate better wages, pushing prices up even further.
He said: “Businesses have been uncomfortable with raising their prices for a while, and we’ve had some temporary price increases.
‘But those can become stubborn as the transition’ [out of the pandemic] long enough.
“We are seeing global supply chains deteriorate as a result of the back and forth of the pandemic. Different parts of the world are affected at different times. These backlogs mean companies spend three times as much on orders to make sure they don’t get caught. Companies will then raise prices if there is a decent amount of demand and it is not suppressed by rising prices.’
Rajan warns: “It starts to get worrying when companies feel confident that they can raise prices and make sure it sticks. And then the workers see everything going up and they say, ‘Hey, why aren’t my wages going up?’ And they go to their bosses to ask for a raise. And that’s what the monetary authorities are afraid of.’ He said the government could help keep costs down for businesses by being more candid about the conditions under which it would reintroduce a lockdown.
He said, “You just have to be as transparent as possible about what the decision-making process is and maybe try to set some parameters.” And he said of ministers: ‘If they set rules about when they will introduce lockdowns and so on, they will not unnecessarily disrupt local business and global tourism.
‘You could say, for example, that you only impose a lockdown if the cases rise above a certain level.’
Rajan said central banks around the world are likely to begin winding down their money printing programs soon to pave the way for rate hikes in 2023.
But he warned that interest rates would not creep up slowly like they did after the financial crash. He said: “It’s too early to say how quickly they’ll raise rates, but I don’t think they’ll be able to take on the kind of measured pace they took before.”
“They will probably do more this time around, especially if inflation picks up strongly. They may want to act pretty quickly and take over from there. But it all depends on what the environment will look like a year from now.’ He said a change in the Bank of England’s acceleration could lead to a fall in share prices. Investors would no longer have to hold risky assets to generate decent returns if interest rate hikes were in the offing.
If they thought central banks would raise interest rates to keep inflation in check, they could ditch risky stocks and put money into safer assets, such as bonds.
But Rajan pointed out that US bond yields are still at historic lows, suggesting that investors have not yet funneled money into these safe-haven assets.
“My sense is that money managers still believe that interest rates will remain low for a long time to come and are still looking for yield,” he said.
“So there will be some adjustment and whether that will be devastating is a guess. It can happen in some areas [of the stock market] more than others.
“You’ll see it happen once the monetary authorities take it seriously to change the interest rate environment.”
DO NOT BLAME BREXIT FOR LACK OF DIRECTORS
Brexit is not the main reason behind the shortage of truck drivers and waiters in the UK, Raghuram Rajan said.
The economist said companies in the US and elsewhere have also struggled to recruit workers, suggesting the trend cannot be explained solely by problems in individual economies.
McDonald’s has said the shortage of truck drivers has prevented it from selling milkshakes, has temporarily closed Nando’s restaurants after chicken delivery delays and BP has been unable to get petrol to some pumps. Meanwhile, restaurant and hotel bosses have complained that they are struggling to fill vacancies.
When asked about the causes of the job shortage, Rajan said: ‘Anyone who thinks they understand exactly what is happening is overestimating their knowledge. There are many moving parts. The evidence is mounting that many companies have moved on and need different types of employees.
And in some cases, employees have moved on and don’t want to go back to their old jobs.