Dust off the disco ball and roll up the dollar bills, because the 70s are back. In any case, according to one of Canada’s Big Six banks, the signs of 1970s-style stagflation are forming. National Bank of Canada (NBC) chief economist Stéfane Marion warned customers of the increasing risk of global stagflation. Rising oil prices, rising food costs and sluggish economic growth are all surfacing. This growing problem threatens to undermine the global recovery.
What is stagflation?
Stagflation is high inflation during a recession, when normally it should not be seen. In a healthy scenario, inflation is the result of rising productivity and a tight labor market. It is seen as a side effect of too much success. During stagflation, inflation rises with high unemployment and slow growth. It is often the result of lower confidence in a currency.
It may be obvious why this is a problem, but let’s make it clear for everyone. Rising inflation for essential goods means that spending is diverted from other areas of spending. Redirected money diverts revenue for certain companies, which can further slow growth.
One of the best-known periods of global stagflation was the early 1970s. Restrictions on oil trade led to rising energy costs, which seeped into most commodities. This made the already high inflation even worse, especially for food. As this was during a recession, it exacerbated the difficulty of unemployment. Keep this in mind when reading NBC’s story.
Early signs of stagflation have begun to appear
The bank is seeing some signs of stagflation appearing in the economy. As in the 1970s, it starts with a shock in energy prices. A shortage and rising costs of carbon permits in OECD countries are putting pressure on prices. This could hurt emerging economies and slow global trade.
While the pandemic recession is still raging, with high unemployment. NBC said, “the risks of a stagflation scenario are mounting.”
“This confluence of factors increasingly resembles a supply shock reminiscent of the early 1970s, when rising production costs shut down industrial capacity and reduced potential GDP for many quarters,” he said.
Rising global food prices could slow global economic growth
Global food prices are rising unusually fast these days, and that’s not a base effect. The United Nations Food Price Index (FFPI) shows that the basket price of food is up 30% so far from the 2020 average. NBC found this to be the largest increase in 47 years of data. It’s the highest growth since the 1970s, and that’s that period again.
“As if this wasn’t bad news for inflation, we are now dealing with rising food costs,” he said.
Food is one of the largest components of household spending in emerging economies. Heck, it’s also a big expense in advanced economies. As food prices rise, capital will be diverted to essentials. Emerging markets account for about 60% of global GDP, the economist estimates.
As inflation kills emerging market consumption, it will affect global trade. “Clouds are forming over the global economic growth forecast for 2022,” he said.
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