Inflation Confidence
MSQ Capital’s Managing Director Paul Miron explores the world’s hottest and most controversial topic.
3 min
OPINION
The Government — particularly Josh Frydenberg — is breathing a sigh of relief as the most recent positive economic data demonstrates a strong Australian economy.
Inflation is now both locally and internationally the hottest and most controversial economic topic for the year. Put simply, it’s because the entire global economic recovery hinges on the ability of central banks to keep interest rates low for an extended period in order to give the global economy the push it needs towards a full recovery.
The most recent Australian inflation figures have come in lower than anticipated at 1.1% per annum. This re-affirms the RBA’s carefully articulated argument about maintaining low interest rates until the economy reaches a level of full employment. Unemployment is now down to 5.6%, consumer spending is racing back to pre-Covid-19 levels, and trade figures are strong due to high iron ore prices — all of which contributed to a $30b windfall in the current budget figures.
It seems the ‘Achilles’ heel’ to all this good news is inflation uncertainty.
The topic of inflation has not been part of our vocabulary since the era when Paul Keating was treasurer in the 1980s and Australia experienced “the recession we had to have”.
An analogy that best describes the importance of inflation is that like watering a plant, both too little or too much water may kill it. And so it is the right balance of low constant inflation increases business profits over the long term — increasing business productivity. Such strategy helps to reduce unemployment, increases tax revenue and naturally erodes the real value of debt.
Too much inflation can have the opposite impact. The most powerful tool left to control high levels of inflation is the RBA’s use of contractionary monetary policy (increasing interest rates). However, this is not without risk — done prematurely, it will have a negative price impact on assets such as shares and property, further stunting economic growth and possibly spiralling the economy into a recession.
Governments and central banks will need to put on a brave face and maintain confidence in their ability to steer the global economies through these tricky times. A loss of confidence from consumers and businesses is enough of a catalyst for a self-fulfilling prophecy for inflation issues to emerge unfavourably.
This is, in itself, a very thought-provoking concept as inflation is not purely driven by economic data and activity. It is also driven by the future expectation of businesses and workers, which drive businesses to make decisions such as increasing prices on goods and services and employees hitting up bosses for a pay rise.
Covid-19 has completely skewed economic data
Worth contemplating when attempting to interpret economic data is the “base effect”. Covid-19 forced the economy to a complete standstill, with all the major economic indicators falling off a cliff. Once the economy has been rebooted from a virtual standstill, the economic indicators are all being overly exacerbated during the economic recovery. As an example, we have had two quarters of GDP growth at 3%, however, our economy is still nowhere near the same levels as it was pre-Covid-19 despite the data implying otherwise.
Be prepared that the next inflation figure will be an absolute whopper, as it will reflect people returning to work and spending money on normal items such as childcare, entertainment and transport.
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Paul Miron has more than 20 years experience in banking and commercial finance. After rising to senior positions for various Big Four banks, he started his own financial services business in 2004.
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2 min
Could a recession be the best time to launch a tech startup?
A recent study suggests that is the case. The authors found that tech startups that began operations during the 2007-09 recession—and received their first patent in that time—tended to last longer than tech startups founded a few years before or after. And those recession-era companies also tended to be more innovative than the rest.
“The effect of macroeconomic trends is not always intuitive,” says Daniel Bias , an assistant professor of finance at Vanderbilt University’s Owen Graduate School of Management, who co-wrote the paper with Alexander Ljungqvist, Stefan Persson Family Chair in Entrepreneurial Finance at the Stockholm School of Economics.
Drawing on data from the U.S. Patent and Trademark Office, the authors examined a sample of 6,946 tech startups that launched and received their first patent approval between 2002 and 2012.
One group—about 5,734 companies—launched and got their patent outside of the 2007-09 recession. Of those, about 70% made it to their seventh year. But the startups that launched and got their first patent during the recession—about 1,212 companies—were 12% more likely to be in business in their seventh year.
These recession-era firms were also more likely to file a novel and influential patent after their first one. (That is, a patent the researchers determined was dissimilar to patents in the same niche that came before it, but similar to ones that came after it.)
So, why did these recession-era firms outperform their peers? Labor markets played a big role.
A widespread lack of available jobs meant that the startups were able to land more productive and innovative employees, especially in their research and development groups, and then hold on to them. More important, the tight labor markets also meant that the founding inventors—the people named on the very first patent—were more likely to stick around rather than try for opportunities elsewhere.
For startups started during the 2007-09 recession, founding inventors were 25 percentage points less likely to leave their company within the first three years. On average, about 43% of founding inventors in the entire sample left their startup within the first three years.
“Our study really highlights the importance of labor retention for young innovative startups. Retaining founding inventors cannot only help them survive, but also thrive,” Bias says.
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