Rising prices far from the only economic threat
Experts watch risk of stagflation, with fears for jobs amid stagnation
Soaring inflation prompted downward revisions to forecasts for the global economy as high prices hit retail sales and eroded consumer confidence. But some experts are bracing for a growth-killing phenomenon known as stagflation.
Stagflation is characterized by slow economic growth and relatively high unemployment – or economic stagnation – accompanied by rising prices. Two of these conditions are familiar to economists and consumers in 2022, even as the labor market holds up reasonably well in major economies – for now.
Last month, the International Monetary Fund cut its global growth forecast for this year to 3.2%, down 0.4 percentage points from its April projection. Inflation figures prominently in growth downgrades by the IMF and other agencies.
Global inflation has been revised higher due to food and energy prices, and is expected to reach 6.6% in advanced economies and 9.5% in emerging markets and developing economies this year – upward revisions of 0.9 and 0.8 percentage points respectively, the IMF said in its statement. World Economic Outlook Report.
John Beirne, vice president of research at the Asian Development Bank Institute think tank, said the risks of stagflation could become a global concern if inflation continues to rise.
“High inflation in the EU and the UK increases the cost of living for consumers and also weighs on business investment and general sentiment,” Beirne said, highlighting the impact of rising prices in the region most exposed to more expensive energy from Russia-Ukraine. conflict.
With high inflation in Europe, “growth prospects are correspondingly weakened, amplified due to the high uncertainty in economic conditions,” said Beirne, a former economist at the European Central Bank.
Consumer price inflation in Britain hit a new 40-year high of 9.4% in June, according to data from the Office for National Statistics. The Bank of England, or BoE, said on Thursday that headline inflation in the UK is expected to peak at 13.3% in October.
The euro zone’s annual inflation rate jumped to 8.9% in July, from 8.6% in June, according to Eurostat, the statistical office of the European Union. In June 2021, the rate was 1.9%.
Christopher Bovis, Professor of International Business Law at the University of Hull, said: “The main reason for the current spike in inflation in the UK and EU is rising commodity prices. Behind this increase is the dual cause of the recent global economic dysfunction, the pandemic and the escalating Russian-Ukrainian dispute.”
Jim O’Neill, former chief economist at Goldman Sachs and former UK Treasury minister, credited expansive fiscal policy for supporting consumers during the pandemic and an era of so-called quantitative easing continued for a long time like two others factors behind the surge in inflation.
“Monetary policy should have been tightened much sooner and interest rates are still far too low,” O’Neill said. “Theoretically, and historically, short-term interest rates should be close to the inflation-adjusted GDP growth trend. So for the UK and EU, probably at least double what they are.”
Ricardo Amaro, Senior Eurozone Economist at Oxford Economics, said: “With services inflation expected to remain elevated over the summer, we believe core inflation will continue to be elevated for the rest of this year.”
In its latest statement, Britain’s statistics agency said retail sales fell 0.1% in June, after falling 0.8% in May. German business sentiment cooled, falling to 88.6 points in July from 92.2 points in June, the lowest level since June 2020, according to the Ifo Institute’s business confidence index.
In order to combat inflation, central banks have tightened their monetary policies to stabilize inflationary trends. On Thursday, the BoE raised interest rates to the highest level in 27 years. The three-quarter point rate hike pushes the bank’s key rate to 1.75%. The ECB also recently raised its key interest rates for the first time in 11 years by 0.5 percentage point to zero percent.
Amaro warns of the risk of excessive ECB tightening. “On the one hand, the inflationary shock is usually caused by volatile components such as energy and food prices and supply-side factors, on which monetary policy has little impact,” he said. he declared.
“Furthermore, growth momentum is weakening and we expect the eurozone economy to broadly stagnate through the winter months or worse, further signaling that the ECB’s tightening plans may involve trade-offs. difficult,” he added.