Liam Dann: Champagne crisis a reminder of economic challenge ahead

Champagne is in short supply in New Zealand. Photo / 123RF

OPINION:

The International Monetary Fund (IMF) has released its latest World Economic Outlook report and it highlights just how difficult it will be to forecast business conditions in the year ahead.

But it doesn't highlight this in quite as interesting a way as the weird state of the champagne market right now.

So let's start with that. I'll come back to the IMF.

There were two champagne stories in the business media last week.

One was about a shortage.

Local supermarkets have had to put signs up on their depleted shelves, warning of the shortage.

It's being blamed partly on congestion at the port in Auckland and partly on global shipping delays.

"It's not good for the consumers that they can't get the product, and when they can they are going to have to pay more," said Nick Hern, chief executive of premium drink brands importer and distributor EuroVintage.

If delays continued, the company would have no choice but to increase its prices, which would ultimately be passed on to the consumer, he said.

Meanwhile, Business Insider reports that global champagne sales have dropped by almost 20 per cent.

There is actually a global champagne glut.

Drinkers in the Northern Hemisphere haven't exactly been in a celebratory mood and are more likely to be reaching for the spirits (which saw 33 per cent increase in demand last year).

We currently have a supply problem and a demand problem in the champagne market at the same time.

What will the net effect for the consumer be? Is champagne going to be cheaper or more expensive?

What sort of time frames are we looking at for this volatility around price and availability?

Unless you're planning a wedding (or you're an extremely high-end alcoholic), champagne shortages don't matter in the scheme of things.

But thanks to the pandemic, similar waves of conflicting market forces are rippling through all sorts of sectors - from building products to technology and even the labour market.

This added layer of disruption means there is extra complexity to forecasting anything right now.

If you are actually doing business, it makes it harder to budget when both revenue and costs are so variable.

Then there are the practical logistical challenges of getting stock.

It is also causing serious headaches at a macro-economic level.

That's because what's happening with inflation is so crucial to the economic outlook.

Inflation flows through to interest rates. When it's too high, rates rise.

After more than a decade of low inflation and low interest rates, any sudden movements higher are expected to spook investors and potentially even cause a financial market crash.

Fund managers the world over are watching inflation like hawks, waiting for the exact moment to pull back to more defensive positions.

We can identify the risk is out there but it's a near-impossible task to pick the timing in advance.

History suggests that investors will stay bullish until the last possible moment and then retreat at once, causing a crash.

That's without all this Covid complexity.

With Covid, we have what ANZ economist Liz Kendall describes as a "murky underlying pulse".

Kendall was commenting on last week's local inflation data, which came in much stronger than expected (although still below the middle of the Reserve Bank's target band).

"Inflation continues to be affected by measurement difficulties that have made
forecasting today's print more difficult than usual, and will make interpreting the
underlying pulse murky for a while yet," she wrote.

Everything, unfortunately, depends on the pace of the Covid recovery.

Which brings me back to the IMF report.

The IMF concludes that global economic growth will rebound by 5.5 per cent this year.

That bold forecast is somewhat tempered by the startling caveat that things could turn out to be either better or worse than that depending on three "unknowns" about the pandemic.

It could be the middle of 2022 before vaccines have been distributed widely across the entire global population. Photo / AP

Specifically:

How will restrictions needed to curb transmission affect activity in the near term before vaccines begin delivering effective society-wide protection?

Second, how will vaccine-rollout expectations and policy support affect activity?

Third, how will financial conditions and commodity prices evolve?

"The baseline forecast requires forming a view on these unknowns" the reports says.

That sounds like a fancy way of saying: all bets are off.

I'm not trying to pick on the IMF. There's useful analysis in the report.

Its base case for Covid recovery seems as reasonable as any. It assumes broad vaccine availability in most advanced economies by the middle of this year.

But it also assumes that it will be the middle of 2022 before vaccines have been distributed widely across the entire global population.

It assumes that lockdowns will continue off and on for some time and that it will be the end of 2022 before we really see Covid-19 fade into the background as an economic irrelevance.

The IMF concludes that will mean central banks leave rates on hold for at least that long.

But they might not be able to if inflation spikes.

New treatments and new vaccines could accelerate the recovery time frame.

But the report also assumes strong multi-lateral cooperation in the next two years - which seems optimistic.

So yes, it could go better, it could go worse ...

And if it goes too well. Inflation might resurface and make things worse.

All we can really say right now is that the world is treading a very narrow pathway to a stable post-Covid era.

It's clearly not time to pop the champagne just yet.