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Business cycle scenarios – from Goldilocks to Double Dip

How will the economy develop in the coming months?imago images / imagebroker

When investment professionals and economists talk about their expectations for the economy and the capital markets, they are often dealing with certain scenarios. In the professional world you then know what is meant and what developments the professionals are expecting. Some of these expressions are also mentioned in the outlook for the current year. These are currently the most important economic and stock market scenarios.

# 1 Goldilocks

An environment that investors can only wish for: the economy is growing neither too strong nor too weak, but slightly above the historical average. The economy is neither in danger of crashing nor overheating – it is in perfect balance. Inflation is low, so are interest rates. The name for this all-round positive stock market environment goes back to the English fairy tale “Goldilocks and the three bears”. A Goldilocks scenario seems rather unlikely for 2021. However, it is not excluded, say some market observers: Because the economy is growing from a low level after the Corona crash, the plus could be particularly large. At the same time, the monetary and fiscal policy stimuli ensure that interest rates remain low without inflation rising so far.

# 2 reflation

Economists assume that US election winner Joe Biden will create a reflationary environment in the United States this year. Central banks and politicians are fighting the threat of deflation with an expansive monetary and fiscal policy. They flood the markets with money and thus accept a sharp rise in national debt. The announced US President-elect’s stimulus package goes in this direction. The Federal Reserve’s monetary policy should also remain very relaxed. The US Federal Reserve has also already announced that it will at least temporarily tolerate it if inflation rises above the target mark.

# 3 stagflation

The suitcase word is made up of the words “stagnation” and “inflation”: Economic output stagnates or grows only very slowly, while consumer prices rise, so money loses purchasing power. This could be triggered by rising production prices that companies pass on to consumers. Some economists fear stagflation for the current year. Their argumentation: The production costs could skyrocket due to the supply chains that have become fragmented as a result of the pandemic, the loose monetary and fiscal policy could fuel the inflation rate. So far, however, both effects have not been observed.

Monthly inflation rate in Germany compared to the same month of the previous year


source: tradingeconomics.com

# 4 disinflation

In this scenario, too, the rate of inflation plays an important role. In a disinflationary environment, the rate of price increases decreases. Inflation is falling, but the overall price level is not falling. At the moment, this scenario does not play a major role. The major central banks are trying (so far largely unsuccessfully) to raise inflation, not to lower it.

# 5 double dip

In business circles, this does not mean the effervescent powder candy of the same name, but a scenario in which the economy first falls into a recession, at least partially recovers from it and then crashes again. Many economists, including the well-known US economist and crisis prophet Nouriel Rubini, warn that the Covid-19 pandemic in Europe could result in another economic slump this year. Most economists assume, however, that the worst is over and that the economy will continue to recover over the course of the year as society progresses.


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