Dust off the disco ball and rolled up dollar bills, because the 1970s are back. At least the signs of 70s-style stagflation are forming, according to one of Canada’s Big Six banks. National Bank of Canada (NBC) chief economist Stéfane Marion warned clients of the rising risk of global stagflation. Rising oil prices, soaring food costs, and slow economic growth are all surfacing. This growing issue threatens to undermine the global recovery.
What Is Stagflation?
Stagflation is high inflation during a recession, when it typically shouldn’t be seen. In a healthy scenario, inflation is the result of rising productivity and a tight job market. It’s viewed as a side effect of too much success. During stagflation, inflation rises with high unemployment and slow growth. It’s often the result of lower confidence in a currency.
It might be obvious why this is an issue, but let’s just spell it out for everyone. Rising inflation for essential goods means diverting spending from other areas of spending. Diverted cash diverts revenues for certain companies, which can further slow growth.
One of the most well-known periods of global stagflation was the early 1970s. Oil trade restrictions resulted in rising energy costs, which trickled into most goods. This made already elevated inflation even worse, especially for food. Since this was during a recession, it exacerbated the difficulty of unemployment. Keep this in mind when reading the tale from NBC.
Early Signs of Stagflation Have Begun To Appear
The bank sees some signs of stagflation beginning to appear in the economy. Like in the 1970s, it’s starting with a shock to energy prices. A shortage, and rising carbon permit costs in OECD countries are causing a price squeeze. This can hurt emerging economies, slowing global trade.
All while the pandemic recession is still raging on, with elevated unemployment. NBC said, “the risks of a stagflation scenario are increasing.”
“This confluence of factors is looking more and more like a supply shock reminiscent of the early 1970s, when soaring production costs idled industrial capacity and lowered potential GDP for many quarters,” he said.
Rising Global Food Prices May Slow Global Economic Growth
Global food prices are rising at an unusually fast rate these days, and it’s not a base effect. The United Nations Food Price Index (FFPI) shows the basket price of food is up 30% year to date, from it’s 2020 average. NBC found this is the largest increase over the last 47 years of data. It’s the highest level of growth since the 1970s, which is that period again.
“As if this were not already bad news for inflation, we now have to contend with soaring food costs,” he said.
Food is one of the largest components of household expenses in emerging economies. Heck, it’s a big expense in advanced economies as well. As food prices rise, capital will be diverted into essentials. Emerging markets are about 60% of global GDP, estimates the economist.
As inflation kills emerging market consumption, it will drag global trade. “Clouds are forming over global economic growth forecasts for 2022,” he said.
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