Is a new era of instability ahead?

Episode Summary

Executive Summary: Barclays analysts debate whether the Great Moderation has ended. Jonathan Millar argues the world has entered a more volatile regime due to persistent inflation, labor scarcity, supply-chain reshoring, geopolitics, and energy insecurity. Ajay Rajadek counters that these are largely cyclical shocks and that technology, globalization, and policy normalization will eventually restore low inflation and steadier growth.

Main Topics: End of the Great Moderation (Priority: 5/5): The central question is whether the post-2020 economy has permanently shifted from low inflation, stable growth, and fewer recessions to a more volatile environment. Labor market and wage inflation (Priority: 5/5): One side sees lasting labor scarcity, reduced participation, and stronger wage pressure as structural changes; the other sees wages as temporary, tied to current inflation and cyclical slowdown. Global supply chains and deglobalization (Priority: 4/5): The debate focuses on whether pandemic disruptions and onshoring have permanently raised costs and volatility or whether supply chains will normalize as technology and trade adapt. Central bank forecasting and policy credibility (Priority: 4/5): The speakers discuss how badly policymakers missed the inflation surge and whether that indicates a deeper loss of economic predictability or just extraordinary shocks. Geopolitics and energy insecurity (Priority: 5/5): Europe’s gas crisis, the Russia-Ukraine war, sanctions, and constraints on U.S. shale and ESG-related capital limits are presented as potentially enduring sources of instability. Temporary shocks versus structural change (Priority: 5/5): The discussion repeatedly contrasts cyclical factors—pandemic, lockdowns, war, demand swings—with structural shifts that could permanently alter inflation and growth dynamics.

Key Arguments: Jonathan Millar argues the Great Moderation has ended because inflation, rates, GDP, markets, and labor conditions have all become more volatile and less predictable. Ajay Rajadek argues the current turbulence reflects extraordinary but temporary shocks; once inflation is defeated, the economy should resemble the pre-2020 era again. Millar contends wage growth is structurally higher because labor force participation has fallen and workers are scarcer, making 2% inflation hard to restore. Rajadek counters that wage growth is partly a response to current inflation and should slow as economic activity and inflation cool. Millar says global supply chains are being reorganized toward onshoring, which raises costs, increases bargaining power for local labor, and creates lasting volatility. Rajadek argues supply-chain problems are easing and that globalization and technology will continue to restrain prices over time. Millar emphasizes Europe’s energy shock as a multi-year problem driven by permanent geopolitical rupture with Russia and costly transition away from Russian gas. Rajadek accepts Europe’s energy pain but argues much of the shock has already occurred and is unlikely to repeat at the same magnitude. Both agree policymakers were caught off guard by inflation, but disagree on whether this reflects a new inability to understand the economy or merely unprecedented shocks.

Data Points: U.S. jobless rate: roughly the same as just before COVID - Used to compare pre-pandemic and current labor market conditions. Employment Cost Index wage inflation: 2.7% pre-COVID vs. about 4.5% now - Millar cites this as evidence that wage pressure has structurally increased. Job creation: about 400,000 jobs per month - Presented as current U.S. job growth that exceeds what is needed to keep unemployment steady. Working-age adults: 4.2 million more than before - Despite this increase, the labor force remains below pre-pandemic levels. Inflation: 9% - Rajadek notes wages are rising less than current inflation, suggesting wage gains may not be the main driver. ECB natural gas price comparison: 8 times U.S. level - Illustrates Europe’s severe energy shock relative to the U.S. Oil price comparison: roughly $300/barrel equivalent vs. $40/barrel in the U.S. - Millar uses this analogy to show the scale of Europe’s gas crisis. Oil price move: up 60% from 12 months ago - Rajadek argues the economy has already absorbed much of the energy shock. Oil price move since early June: down 15% - Rajadek notes recent moderation in oil prices. Fed unemployment forecast peak: 4.2% - Rajadek cites this as evidence the labor market may soften without severe damage. Inflation expectations: next decade market pricing dropped massively over the last month - Used to argue markets still expect a return to low inflation.

Pivotal Quotes: "the Great Moderation really has ended" — Jonathan Millar: His opening thesis that the post-2020 economy has shifted into a more volatile regime. "these are all temporary factors. Yes, they have lasted for longer than expected, but they are all cyclical in nature, not structural." — Ajay Rajadek: His core rebuttal to the claim that the global economy has permanently changed. "a New Era of Instability" — Podcast / Barclays research title: Referenced as the associated research piece supporting the argument that the environment may be permanently more volatile.

Implications: Listeners should expect continued debate over whether inflation, geopolitics, and supply-chain changes mark a lasting regime shift. The answer matters for rates, wages, investment strategy, and portfolio risk across regions, especially Europe.