Global stagf lation looms
The Ukraine war and China’s shutdowns top a laundry list of factors that amplify the danger of protracted inflation and reduced growth
In January 2008, nine months before the Lehman Brothers crash that triggered what we now recall as the global financial crisis, economist Joseph Stiglitz warned that “stagflation cometh”.
In the end, he was wrong, in part because he had no way of anticipating the extraordinary quantitative easing strategy adopted by central banks across the world that even today enables governments to cope with the surge of debt that remains the lasting legacy of the crisis.
Today, instead of Stiglitz, the harbinger of stagflationary doom is Nouriel Roubini, the New York University economist who in 2005 was among the earliest to raise the alarm about the US mortgage bubble that so nearly brought the global economy to its knees. If he is right, our past decade of “free money” might have bought us time but delivered no cure.
Stagflation is rightly feared. This combination of high inflation and economic stagnation not only creates severe hardship, but also seems hard to cure.
When the oil shock of the early 1970s first jolted inflation in OECD countries above 5 per cent, lifting it to a peak of around 15 per cent in 1980 when US Federal Reserve chair Paul Volcker stepped in to staunch the slide, it took 25 years for inflation to dip below 5 per cent again.
As International Monetary Fund (IMF) managing director Kristina Georgieva observes: “In economic terms, growth is down and inflation is up. In human terms, people’s incomes are down and hardship is up.”
As Roubini noted last month, there are three potentially shortterm stagflationary forces in play: two years of global economic disruption from the Covid-19 pandemic, Russia’s invasion of Ukraine and widespread shutdowns inside China as the government pursues its “dynamic zero-Covid” strategy.
These together have triggered what is arguably the largest commodity price shock experienced worldwide since the 1970s. Inflation in the United States has risen to 8.5 per cent, the highest since 1990. The IMF expects advanced economy inflation to stick around 5.7 per cent this year, and even higher in the developing world.
These three factors alone raise grave dangers of stagflation.
However, there is a daunting list of further long-term or structural challenges that Roubini thinks amplify the danger of protracted inflation and sharply reduced economic growth – in short, that a painful period of stagflation looms.
His first and largest concern is fundamental economic deterioration since the 2008 financial crisis. This has led to a sharp retreat from globalisation, rising protectionism and accumulation of debt.
When Stiglitz speculated that “stagflation cometh” in 2008, US government debt stood at US$9 trillion. By the end of 2021, this had risen to almost US$30 trillion. Worldwide, global debt has grown to around US$226 trillion, with several economies facing debt burdens that are higher than their gross domestic product.
Such debt burdens might have been bearable during an era of zero interest rates. As interest rates have to rise in response to sharpening inflation, though, this burden is set to become unbearable, with the potential for defaults in many economies.
His second challenge is the trend of reshoring, “near-shoring” or “friend-shoring”. This will impose more transition costs and lead to higher costs and inefficiency as production is misallocated to high-cost regions.
A third major challenge is the massive investment needed to mitigate or protect against climate change. McKinsey estimates the total global cost of mitigation is likely to be at least ¤200 billion (HK$1.7 trillion) to ¤350 billion per year by 2030 – less than 1 per cent of forecast global GDP in 2030, but still a significant diversion from “business as usual” spending.
Then there are the long-term costs linked with demographic change as our 1950s “baby boomers” slip into retirement. This will require higher healthcare spending with a smaller workforce to generate the funds needed. A rising political antipathy against immigration means it will be tougher to tackle these demographically linked labour shortages.
Another long-term structural challenge is the deepening USChina rivalry. This is creating direct costs as tariffs are imposed and leading to “fragmentation of the global economy, Balkanisation of supply chains and tighter restrictions”, particularly on the transfer of technology, data and information.
Another challenge is the postpandemic need to invest massively and worldwide in improved healthcare. This huge investment in protection against future pandemics, and in “resilience”, will generate costs that may be essential but contribute nothing to growth.
Then there is the expected surge in defence spending in the wake of Russia’s invasion of Ukraine. As Germany, for example, raises its defence spending above 2 per cent of GDP, this will count as a direct diversion from efficiency- or productivityenhancing investment. Roubini notes that this will be alongside the huge costs linked with protection against cyberwarfare.
These factors combined mean government resources are set to become heavily burdened away from productive investment and towards protective or defensive “insurance” investments as resilience and security become a higher priority than efficiency or productivity.
Stagflation might not be inevitable, but such a long laundry list of burdens on economies worldwide amounts to dangers that are unprecedented in the past four decades.
How does Roubini think stagflation might be averted? “A global cooperative approach is necessary to reach an orderly resolution [of these problems],” he says. Sadly, the current willingness of countries to cooperate globally is as low as I can ever recall. Stagflation looms.
Stagflation might not be inevitable, but such a long laundry list of burdens on economies worldwide amounts to dangers that are unprecedented in the past four decades