Is stagflation unavoidable?

Stagflation is ‘unavoidable’ and investors should prepare for a ‘significant slowdown in growth

The U.S. is staring down the barrel of 1970s-style stagflation as economic growth slows and inflation remains elevated.

What Is Stagflation?

Stagflation is characterized by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (i.e., inflation). Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).

The global stagflation shock of 2022: how bad could it get?

The double blow of pandemic and war has caused inflation to surge and growth to slow around the world.

Now, stagflation is again on the cards. After the double shock of Covid-19 and the Russian invasion of Ukraine, inflation rates have exceeded expectations, surging to the highest levels in decades in many countries, while economic growth forecasts are rapidly deteriorating.

The prospect of stagflation’s return strikes fear into policymakers because there are few monetary tools to address it. Raising interest rates may help reduce inflation, but increased borrowing costs would further depress growth.

Keeping monetary policies loose, meanwhile, risks pushing prices higher

Russia and Ukraine produce large amounts of the global supply of gas, oil, wheat, fertilisers and other materials, pushing energy and food prices higher, especially in Europe. This is the “largest commodity shock we’ve experienced since the 1970s,” World

In the event of a prolonged war, or additional sanctions on Russia, “prices could be even higher than currently projected,” he adds. Forecasts are looking chilly.

The consensus is now for global economic growth to average only 3.3 per cent this year, down from 4.1 that was expected in January, before the war. Global inflation is forecast at 6.2 %, 2.25 percentage points higher than January’s forecast. Similarly, the IMF downgraded their forecast for 143 economies this year — accounting for 86 % of global gross domestic product. Stagflation matters because few economists agree on how to stop it once it has started.

It also causes great, potentially long-term pain to businesses and middle class and lower-wage households. “In economic terms, growth is down and inflation is up,” says, IMF managing director. “

In human terms, people’s incomes are down and hardship is up.” The worldwide ebb The stagflationary shock of 2022 is truly global, with diverging growth and inflation expectations across most countries with many different factors exacerbating the trend in a synchronised way.

In country after country, similar trends can be seen playing out — a surprise surge in prices and decline in activity over the past few months — as expectations for the year deteriorate. Across Asia, strong growth forecasts have been revised down due to headwinds from the war in Ukraine, and renewed supply disruptions and weaker demand resulting from China’s new lockdowns and Xi Jinping’s zero-Covid policy.

Despite being confined to Europe, the effects of the war “are being felt worldwide as rising energy and food prices are impacting the most vulnerable, particularly in Africa and the Middle East”,

But unsurprisingly the economic shock of the war is being most keenly felt in Europe, especially in those countries heavily reliant on Russian oil and gas. The European region as a whole is highly vulnerable to disruptions to its energy supply, with 40 % of the EU’s gas coming from Russia.

Global risk rises in Q1 2022 with fears of stagflation amid Russia-Ukraine conflict

Russia’s invasion of Ukraine is the third asymmetric global shock following the 2008 financial crisis and the COVID-19 pandemic, which may shrivel the global economy’s recovery path,

Conclusion: “The spiraling rate of price increases is expected to remain a key risk factor for developing and underdeveloped countries, which may exacerbate the existing humanitarian crisis. Governments across the world need to reassess their policy framework to tackle the fallout from surging prices to meet economic redemption.”

CA Harshad Shah, harshadshah1953@yahoo.com

Source: https://www.ft.com/content/d490ef4e-3187-471e-84ff-9c065871a1a5


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