Grubišić: Although the inflation rate is falling, prices continue to rise, but not at the same pace

Capital markets are undergoing significant changes, interest rates are rising, and favorable borrowing is slowly becoming a thing of the past. Following the pandemic and the emergence of inflation, as well as the so-called bear market and the recent collapse of certain banking systems in the US and EU, a recession is expected; the only question is how deep it will be. In light of this, a panel discussion on the further movement of inflation and interest rates of central banks in the US and Europe was held today at the Algebra campus. In the discussion, Andrej Grubišić, an economic analyst and partner at Grubišić & Partners, emphasized that the first inflation has reached the real estate, bond, and stock markets as a result of years of money printing in Europe and the US.

– Only later did we have a transfer to the real economy, supported by other opportunities – the coronavirus pandemic and the war in Ukraine. Money printing has certainly contributed to the inflation we are still fighting. Although the public narrative is that the inflation rate is falling, prices continue to rise, but not at the same pace. We also still have anti-inflation programs from governments – said Grubišić.

Grubišić referred to the decrease in the inflation rate in the US and Europe, as well as in Croatia. Last week’s data from the Croatian Bureau of Statistics showed that inflation in Croatia weakened for the fourth consecutive month in March 2023, but consumer prices were still 10.7 percent higher compared to March of last year. In the US, inflation in March fell to its lowest level in the last two years, while inflation in the eurozone is also recording a month-to-month decline, but that does not mean that prices have stopped rising.

Regarding the increase in interest rates as measures by the US Fed and the European Central Bank to curb inflation, Grubišić points out that they are now at levels where they should be.

– We have become accustomed to zero interest rates; this is a fairy tale from which we have just awakened. If money is cheap, you have low interest rates and high inflation – said Grubišić.

However, the money printing that caused inflation was necessary because we are still under the influence of the 2008 crisis, as companies are still not strong enough and need state assistance, said Marko Jurčić, an economic analyst at the Croatian Employers’ Association and former economic advisor to the President of Croatia.

Europe is lagging behind China and the US

The discussion also addressed the distancing of the Chinese economy from the West. Thanks to the US law CHIPS and Science, supply chains in the microelectronics segment have been moved from East Asia (specifically, China and Taiwan) to the US to strengthen domestic semiconductor production in that country. Jurčić expressed concern that the European Union is lagging behind both China and the US and is only now beginning to develop the semiconductor industry and build factories for their production.

– If you are always lagging, you are always a few steps behind, and Europe does not have its own agenda, at least not a coordinated one. We have nothing in our hands; we always react and lag behind. We are not decisive enough, and that is a bigger problem than semiconductors. If other countries are investing a lot of money to build these factories, and Europe is not, how can we expect European companies to compete? – Jurčić asked.

To maintain and enhance competitiveness within the EU, we must act faster and more agilely anticipate global trends, added Jurčić, a sentiment echoed by Srđan Kovačević, director of the Osijek company Orqa , which is engaged in the production of drones.

As a concrete example of the problems with microchips, Kovačević noted that due to disruptions in supply chains, the prices of chips have risen from five dollars to 70, even 100 dollars, but not for new generation chips, rather for older models. For this reason, Kovačević believes that semiconductor factories in Europe are of strategic importance.

– If we want to build resilience, we must intervene, work on correcting the market failures that have occurred. The EU must build facilities; this is a strategic decision because our economies largely depend on these capacities. Markets can help us create a competitive and healthy entrepreneurial environment, but they cannot solve everything. The market is always optimized for profit, not for resilience. It is time for the EU to work significantly on promoting and revitalizing the domestic industry, which is crucial for us and in reducing inflationary pressures – emphasized Kovačević.

New regionalization?

In addition to the lack of domestic production, the EU is also facing unprecedented demographic challenges; the population is aging, and the labor market is becoming increasingly uncertain and tense. We often hear that only the private sector, i.e., private investments, can lead us out of the crisis, which are decreasing year by year. To avoid the bleakest scenario, all industries will have to think more cautiously about future investments and turn to those that bring the highest and fastest return on investment, which, as all panelists agree, are industries with the highest share of high-tech components in their products.

Joe Fitter, a lecturer in the e-leadership MBA program at Algebra, director of the MBA Strategic Finance Academy, and head of the Kelley School of Business at Indiana University, pointed out that the world today is polarized and operates on the principle of ‘coopetitiona‘.

– The fact is that years of cheap and simple production have led to a large part of the industry becoming overly dependent on the Chinese market and labor force, so the question arises: what happens in the case of such a poorly diversified economy if there is some social unrest or natural disaster? We know that Taiwan is an area at high risk of earthquakes, and as much as 60 percent of advanced semiconductors are produced there. Companies will have to diversify their industrial production portfolio to other markets – let’s call it deglobalization or new regionalization – said Fitter.

Juričić also predicts a reduction in globalization, as well as possible nearshoring (relocating business to closer countries).

– This will bring about significant changes; you will lose part of the market, but great opportunities will also open up. I do not think we will continue to have the level of globalization we have now; interdependence will decrease and separate, but that is not negative, just different – said Jurčić.

Some dependencies will be broken, but new ones will emerge, added Grubišić, concluding that companies need to have a plan in case another ‘black swan‘ moment occurs – an unexpected and unpredictable, but very impactful event for the economy.