Stagflation danger stalks global economy beset by war fallout

LONDON: The world economy is increasingly succumbing to the threat of stagflation reminiscent of its 1970s ordeal, a mounting headache for global finance chiefs already navigating the fallout from the war in Ukraine.

With China’s economy slowing sharply, and the Federal Reserve’s (Fed) stepped-up vow to crush inflation raising worries of a widespread hard landing, warnings of the consequent dangers are intensifying.

A Group of Seven finance ministers and central bankers, who met yesterday in Germany, are now indicating outright concern that stagflation can no longer be swerved.

“The war in Ukraine has had additional implications for the economy,” German finance minister Christian Lindner, the host of the gathering, told reporters as talks began near Bonn. “That means a boost in inflation, coupled with a loss of post-pandemic recovery momentum. That’s why we’ll have to discuss what we can do to avoid stagflation scenarios.”

That followed comments on Wednesday by his United States counterpart, treasury secretary Janet Yellen, that “higher food and energy prices are having stagflationary effects, namely depressing output and spending and raising inflation all around the world”.

The noxious triple combination of surging inflation, stalling growth and rising unemployment is the worse-case scenario for central bankers and lawmakers, who will have to choose which ailment to fight.

Having spent 2021 betting inflation would fade, policy makers are now indicating that prices are their primary concern even if that battle curbs demand and hiring.

While the prospects for a global recession remain low, this year at least, the pace of events is catching policy makers and investors off guard, as financial markets slump and growth forecasts continue to be revised lower.

The past week laid bare the scale of the slowdown as China’s data for April showed consumer and business activity hit a wall amid the government’s aggressive Covid-zero policy. Japan, the world’s number three economy, shrank in the first quarter as soaring import costs inflated by a weaker yen weighed on trade and virus restrictions hit consumers.

In the United States, Fed chairman Jerome Powell said he would keep raising rates until there was “clear and convincing” evidence that inflation was in retreat.

Meanwhile, United Kingdom price growth hit a 40-year high, and Bank of England governor Andrew Bailey warned a surge in food costs could have “apocalyptic” consequences globally.

Earnings reports from retail giants Walmart Inc and Target Corp showed a slowdown in spending on general merchandise items, another sign of cooling global consumption.

The alarm hammered markets. The S&P 500 Index slid 4% on Wednesday, its biggest one-day loss since 2020. Its 17% year-to-date decline is the worst start to any year since at least the 1940s.

“We’ve been warning of a pincer movement between Fed hawkishness and Eurasian recession,” said Freya Beamish, head of macro research at TS Lombard, using Eurasia as a reference to Asia and Europe.

“This pincer means stagflation for Eurasia until the Fed is satisfied that US inflation is under control, which likely means US recession next year, with inflation still high.” The biggest shock is coming from China, where analysts continue to downgrade their outlooks.