The world economy has a decent shot at escaping a full re-run of 1970s-style stagflation — and that’s about as far as the good news goes.
A historic surge in commodity prices after Russia’s invasion of Ukraine, coming on top of already-high pandemic inflation, has gotten investors and economists searching for parallels with the energy shocks of four decades ago and the prolonged slowdowns that followed.
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They’re right to worry, says Maurice Obstfeld, a former chief economist at the International Monetary Fund.
“The more protracted this period of continuing shocks,” he said, the more likely it becomes that economies suffer “something like the 1970s experience.”
Among developed economies, the risk is perhaps greatest in the euro-area. The European Central Bank unexpectedly said Thursday that it will accelerate its wind down of monetary stimulus with inflation already running almost three times its target.
“This is the biggest risk, that we might repeat the experience of the 70s,” Otmar Issing, the ECB’s first chief economist, told Bloomberg Television. “And this is the worst combination for a central bank.”
On the whole, a repeat of history can still probably be avoided, say most economists. But their reasons for thinking so aren’t entirely encouraging for companies and workers.
Weaker economic growth and perhaps even recession may be the price paid for conquering inflation, with emerging economies particularly vulnerable.
“We should be more worried about significant deceleration of the global economic growth” than runaway inflation, said Kazuo Momma, who used to be the head of monetary policy at the Bank of Japan.
That’s in part because central banks like the U.S. Federal Reserve have learned lessons from the prolonged inflation of the 1970s –- enough to preclude going down that “dark path” again, according to Mark Zandi, chief economist at Moody’s Analytics.
“They’d rather push us into a recession sooner than get into the stagflation scenario and a much worse recession later,” Zandi says.
Read the full article here by Shawn Donnan, Rich Miller, Jana Randow and Philip Aldrick, Advisor Perspectives.
