Are we heading toward a stagflation?

Hello everyone! This week I will be looking at the possible causes of why many economies around the world could be heading toward stagflation and analyzing what could be its possible consequences.

Economists and analysts around the world are predicting that the world economy could be sliding into stagflation next year. The most feared crisis in economics is stagflation, which is knocking on the doors of several countries, as governments try to get inflation and unemployment under control. Stagflation is a situation where there is high inflation in an economy accompanied by economic stagnation i.e slow growth and high unemployment. This situation is considered very dangerous in the financial world as once countries face this issue, it becomes very difficult to tackle it. After the pandemic slowed around the world, nations started lifting lockdowns pushing up post-pandemic demand, and helping recoups from the loss of unemployment in past few years. However, this positive growth was soon stuck by the precarious rise in the level of gas and oil prices across the world, as the energy market faced the brunt of Russia Ukraine war, which we see no signs of stopping anytime soon, creating uncertainty for the market. Since then inflation has been up and unemployment has seen an upward trend as the layoffs continue.

Key reasons contributing to high inflation-

Inflation around the globe has been climbing after countries opened up their economies and lifted lockdowns, raising global demand for goods and services. The increased investment and consumer spending on services contributed to increasing aggregate in economies and resultantly putting up inflation rates. However, this increase in inflation in late 2021 and early 2022 was at a plodding pace, as economies began to stabilise and economic growth picked up. The global market took a hit in February after Russia invaded Ukraine, which is one of the biggest and bloodiest wars that Europe has witnessed since the Second World war. This war had far-ranging impacts on economies around the globe and again slowed economic growth in many nations, that were still recovering from the pandemic shock. As Russia is a major oil producer and a part of OPEC+, the biggest oil cartel in the world, oil prices started showing an upward trend in the global markets, as the oil supply was squeezed. Even companies based in Europe saw a significant rise in their costs of production as the continent imports more than 40% of its natural gas supply from Russia, which the latter stopped in recent months.

Not only the Russia-Ukraine war, but the decisions by OPEC+ have also been a major headache for economies around the world as OPEC announced oil cuts by 2 million barrels per day in December to recoup from the losses it bore in the pandemic due to low oil demand. As the United States-led West had already imposed significant sanctions on other oil producers in the market such as Iran and Venezuela, the global economies were left with very few options to buy oil from.

Along with oil and energy prices, food prices have also rocketed to jaw-dropping levels as Russia and Ukraine, which jointly control a third of the world's wheat supply were at war, leading to significant food price rises in African countries that were dependent on the two countries' wheat imports. This led to the situation becoming extremely precarious in some nations such as Libya, Lebanon and Egypt.

Effects of Price Rise on Unemployment-

The price rise has had a direct impact on investment spending as investors are pulling out money from the market and businesses are postponing their future investment plans. This has resulted from very slow or even stagnant economic growth in many nations. Companies are also laying off employees to cut costs of production putting up unemployment in many nations. In the US alone, the tech sector has laid off more than 88,000 employees this year and some companies are still planning to lay off more workers in the future due to low demand and rising costs for their products. Even in India, the unemployment rate has risen to 8% in November reaching a three-month high, raising concerns for the fastest-growing economy in the world. This time it's not just oil prices that are rising, along with oil and fuel, food prices, metal prices, prices of industrial goods and many other commodities that have witnessed prices rise. The war in Europe and the West's sanctions have further created supply chain problems and crippled the global economy.

Analysis-

The combined risk of high prices and unemployment is raising concerns in the financial world of possible stagflation by next year. The rising price levels and unemployment in developed as well as developing economies have further raised the threat to the global economy which sees itself in a precarious position currently. Though the inflation level in India has come down to 5.88%, showing that both the monetary as well as fiscal policy has played its trick in bringing down inflation in the South Asian economy, however, the danger of an economic slowdown has still not faded away as the global economy still remains in a fragile state. The spree of rising prices of natural gas in Europe has still not calmed down and the lingering concerns of economic slowdown in China, the world's second-largest economy put the world economy at an even greater threat of a global economic slowdown. Demand in China has been stagnant for a few months now due to the country being in lockdown as COVID makes a comeback in the nation.

Therefore, the figures for unemployment and inflation do not indicate a future of growth for the global economy as the world awaits the new year countdown to 2023.

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References:

https://www.foxbusiness.com/economy/stagflation-to-plague-global-economy-2023-keeping-stocks-edge. (n.d.).

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Mintgenie. (n.d.). Stagflation will rule 2023, keeping stocks in peril. Mintgenie. Retrieved December 17, 2022, from https://mintgenie.livemint.com/news/markets/stagflation-will-rule-2023-keeping-stocks-in-peril-151669603795327

Choo, D., & Bookmark Bookmark Share WhatsApp Telegram Face. (n.d.). The big read: Stagflation nightmare - will prices keep rising even as a European war puts damper on economy? CNA. Retrieved December 17, 2022, from https://www.channelnewsasia.com/business/big-read-stagflation-nightmare-will-prices-keep-rising-even-european-war-puts-damper-economy-2574706

Aulakh, G. (2022, December 14). India does not face risk of stagflation: FM. mint. Retrieved December 17, 2022, from https://www.livemint.com/economy/india-does-not-face-risk-of-stagflation-fm-11671032931259.html