The global economy has a good chance of escaping another 1970s-style stagflation – and that’s about all the good news will do.
A historic spike in commodity prices after Russia’s invasion of Ukraine, adding to already high pandemic inflation, has investors and economists looking for parallels with the energy shocks of ages ago. four decades and the prolonged downturns that followed.
They are right to be concerned, says Maurice Obstfeld, former chief economist of the International Monetary Fund. “The longer this period of continuous shocks is,” he said, the more likely economies become to suffer “something like the experience of the 1970s.”
Overall, this fate can still probably be avoided, say most economists. But their reasons for thinking so are not entirely encouraging for companies and workers.
Weaker economic growth and possibly even a recession could be the price to pay to defeat inflation, with emerging economies being particularly vulnerable. “We should be more worried about a significant deceleration in global economic growth” than runaway inflation, said Kazuo Momma, a former monetary policy chief at the Bank of Japan.
That’s partly because central banks like the US Federal Reserve learned the lessons of the prolonged inflation of the 1970s – enough to avoid going down that “dark path” again, according to Mark Zandi, an economics economist. chief at Moody’s Analytics.
“They’d rather push us into a recession sooner than enter the stagflation scenario and a much worse recession later,” Zandi says. Another key reason why economists do not foresee a 1970s renaissance is that workers will not be able to negotiate their wages as they did back then.
In the United States and the United Kingdom, unions have shrunk considerably. Even in Germany, where they play a bigger role, caution is in order at the moment before pushing for big wage increases. This means that a repeat of the so-called wage-price spiral, which was key to the inflation episode of the 1970s, is less likely. It also puts households at significant risk, as incomes fail to keep up with rising prices at supermarkets or petrol stations.
There are still reasons to leaf through the history books. The 1970s saw twin energy peaks linked to the 1973 OPEC oil embargo and the Iranian Revolution six years later.
The weeks since Russian President Vladimir Putin ordered troops into Ukraine have seen the cost of crude rocket past $130 a barrel, alongside a much wider range of price increases. Russia is a key producer of commodities ranging from wheat and fertilizers to nickel, and US sanctions have rattled those markets.
In the 1970s as now, shocks hit economies that were already experiencing inflation problems. For example, Data is expected to show that the consumer price index in the United States accelerated 7.9% in February from a year ago, which would be the highest since 1982.
There were also several sources of inflation. In the 1970s, there was the abandonment of the gold standard, leading to a devaluation of the dollar and the hangover from the stimulus measures of the 1960s. In the past year, the legacies of Covid-19 frayed supply lines, heavy government spending and accommodative monetary policy drove prices up. Europe was already facing an energy crisis even before the Russian invasion.
One difference is that developed economies are much less energy intensive than they were back then. “Oil consumption as a percentage of GDP is much lower and energy efficiency has improved,” says Paul Donovan, global chief economist at UBS Wealth Management.
And it’s not just energy: “We also use a lot less basic products. Wheat is only 20% of the price of a loaf of bread. »
Yet some of these numbers could change in the current crisis. In Europe, which gets most of its oil and gas from Russia, the “energy cost burden” on the economy is likely to be the highest since the 1970s, according to Alex Brazier, a former Bank of England official who is now managing director of the BlackRock Investment Institute.
The latest wave of commodity-driven price increases means an even tougher balancing act for central bankers, who must juggle the risks of sustained inflation and slowing or reversal of growth .
In the United States, at least, investors are still expecting interest rate hikes from the Fed of six quarter points this year, starting next week. Citigroup economists predict that at some point the central bank will hike by half a point.
Relying on the Fed to rein in prices could cause unnecessary economic damage, said Isabella Weber, an economist at the University of Massachusetts Amherst. She said there should be at least a serious conversation about government controls on the prices of essential goods. The suggestion drew a vitriolic response from mainstream economists when Weber first made it in December, in part because of memories of 1970s price controls in the United States. But she said the case is even stronger now, as food and energy prices soar.
There are signs that key policymakers, in government and beyond, are keen not to repeat the mistakes of the 1970s by letting prices and wages soar. In the United States, President Joe Biden has warned companies against abuse. When he announced a ban on Russian oil imports on Tuesday, Biden said his administration would examine the gasoline industry for any signs of “excessive price increases or increased profits.”
On the wage side, in some countries – such as the US and the UK – bargaining power has declined so much since the 1970s that workers have little negotiating leverage. Germany, where unions remain relatively stronger, provides a telling example of some lessons learned. After the oil shock of 1973, the unions reacted to inflation of almost 8% by imposing double-digit wage increases. It helped tip the economy into its worst slump since World War II – and effectively ended full employment.
Now unions and employers are looking to the government for help. IG Metall, Germany’s largest union, and the employers’ association Gesamtmetall pushed in a March 4 statement for a “comprehensive package of measures” to offset inflation.
Other countries like France and Spain are also using fiscal policy to cushion the inflationary blow, with subsidies to help households with higher inflation bills. Some economists also support a similar approach in the United States.
It all adds up to a more resilient global economy than it was in the 1970s, according to Christopher Smart, chief global strategist at Barings. He believes that any period of stagflation is likely to be short.