IT IS NEARLY half a century since the Organisation of the Petroleum Exporting Countries imposed an oil embargo on America, turning a modest inflation problem into a protracted bout of soaring prices and economic misery. But the stagflation of the 1970s is back on economists’ minds today, as they confront strengthening inflation and disappointing economic activity. The voices warning of unsettling echoes with the past are influential ones, including Larry Summers and Kenneth Rogoff of Harvard University and Mohamed El-Erian of Cambridge University and previously of PIMCO, a bond-fund manager.
Stagflation is a particularly thorny problem because it combines two ills—high inflation and weak growth—that do not normally go together. So far this year economic growth across much of the world has been robust and unemployment rates, though generally still above pre-pandemic levels, have fallen. But the recovery seems to be losing momentum, fuelling fears of stagnation. Covid-19 has led to factory closures in much of South-East Asia, hitting industrial production. Consumer sentiment in America is sputtering. Meanwhile, after a decade of sluggishness, price pressures are growing (see chart). Inflation has risen above central-bank targets across most of the world, and exceeds 3% in Britain and the euro area and 5% in America.
The economic picture is not as dire as the situation during parts of the 1970s, when inflation in the rich world ran to double digits. But what worries stagflationists is less the precise figures than the fact that an array of forces threatens to keep inflation high even as growth slows—and that these look eerily similar to the factors behind the stagflation of the 1970s.
One parallel is that the world economy is once again weathering energy- and food-price shocks. Global food prices have risen by roughly a third over the past year. Gas and coal prices have hit record levels in Asia and Europe. Stocks of both fuels are disconcertingly low in big economies such as China and India; power cuts, already a problem in China, may spread. Rising energy costs will exert more upward pressure on inflation and further darken the economic mood worldwide.
Other costs are rising too: shipping rates have soared, because of a shift in consumer spending towards goods and covid-related backlogs at ports. Workers are enjoying greater bargaining power this year, as firms facing surging demand struggle to attract sufficient labour. Unions in Germany, for instance, are demanding higher pay; some are even going on strike.
Stagflationists see another similarity with the past in the current economic-policy environment. They fret that macroeconomic thinking has regressed, creating an opening for sustained inflation. In the 1960s and 1970s governments and central banks tolerated rising inflation as they prioritised low unemployment over stable prices. But the bruising experience of stagflation helped shift intellectual thinking, producing a generation of central bankers determined to keep inflation in check. Then, after the global financial crisis and a period of deficient demand, this single-minded focus gave way to greater concern about unemployment. Low interest rates weakened governments’ fiscal discipline, and enabled vast amounts of stimulus during 2020.
Now as in the 1970s, the worriers warn, governments and central banks may be tempted to solve supply-side problems by running the economy even hotter, yielding high inflation and disappointing growth.
These parallels aside, however, the 1970s provide little guidance for those seeking to understand current troubles. To see this, consider the areas where the historical comparison does not hold. Energy and food-price shocks worry economists because they could become baked into wage bargains and inflation expectations, causing spiralling price rises. Yet the institutions that could underpin a new, long-lived era of labour strength remain weak, for the most part. In 1970 about 38% of workers across the OECD, a club of mostly rich countries, were covered by union wage bargains. By 2019, that figure had declined to 16%, the lowest on record.
Cost-of-living adjustments (COLA), which automatically translate increases in inflation into higher pay, were a common feature of wage contracts in the 1970s. But the practice has declined dramatically since. In 1976 more than 60% of American union workers were covered by collective-bargaining contracts with COLA provisions; by 1995, the share was down to 22%. A paper published in 2020 by Anna Stansbury of Harvard and Mr Summers argued that a secular decline in bargaining power is the “major structural change” explaining key features of recent macroeconomic performance, including low inflation, notwithstanding the decline in unemployment rates over time. As dramatic as the pandemic has been, it seems unlikely that such a big shift has reversed so quickly.
Moreover, stagflation in the 1970s was exacerbated by a sharp decline in productivity growth across rich economies. In the decades after the second world war, governments’ commitment to maintaining demand was accommodated by rocketing growth in productive capacity (the French called the period “les Trente Glorieuses”). But by the early 1970s the long productivity boom had run out of steam. The habit of stoking demand failed to help expand productive potential, and pushed up prices instead. What followed was a long period of disappointing productivity growth. Since the worst of the pandemic, however, it has strengthened: output per hour worked in America grew at about 2% over the year to June, roughly double the average rate of the 2010s. Booming capital expenditure could well mean such gains are sustained.
Another important break with the 1970s is that central banks have neither forgotten how to rein in inflation nor lost their commitment to price stability. In the 1970s even some central bankers doubted their power to curb wage and price increases. Arthur Burns, then the chairman of the Federal Reserve, reckoned that “monetary policy could do very little to arrest an inflation that rested so heavily on wage-cost pressures”. Research by Christina and David Romer of the University of California at Berkeley suggests that Mr Burns’s view was a common one at the time. But the end of the era of high inflation demonstrated that central banks could rein in such inflation, and this knowledge has not been lost. Last month Jerome Powell, the Fed’s current chairman, declared that, if “sustained higher inflation were to become a serious concern, we would certainly respond and use our tools to assure that inflation runs at levels that are consistent with our longer-run goal of 2%.”
The new fiscal orthodoxy likewise has its limits. Budget deficits around the world are forecast to shrink dramatically from this year to next. In America moderate Democrats’ worries about excessive spending may mean that President Joe Biden’s grand investment plans are pared down—or fail to pass at all.
What next for the world economy, then, if it does not face a 1970s re-run? Rocketing energy costs pose a serious risk to the recovery. Soaring prices—or shortages, if governments try to limit rises—will dent households’ and companies’ budgets and hit spending and production. That will come just as governments withdraw stimulus and central banks countenance tighter policy. A demand slowdown could relieve pressure on the supply-constrained parts of the economy: once they have paid their eye-watering electricity bills, for instance, Americans will be less able to afford scarce cars and computers. But it would add a painful coda to nearly two years of covid-19.
Another important respect in which the global economy has changed since the 1970s is in its far greater integration through financial markets and supply chains. Trade as a share of global GDP, for instance, has more than doubled since 1970. The uneven recovery from the pandemic has placed intense stress on some of the ties binding together economies. Panicking governments could hoard resources, further disrupting economies.
Past experience, therefore, is not the clearest lens through which to view the forces buffeting the global economy. The world has changed dramatically since the 1970s, and globalisation has created a vast network of interdependencies. The system now faces a new, unique test.
Officials say GDP grew at its slowest place in a year in the third quarter, amid power cuts, property woes and COVID-19 concerns.
China’s economy grew at the slowest pace in a year in the three months that ended in September, buffeted by power shortages, supply bottlenecks and sporadic outbreaks of COVID-19, increasing pressure on policymakers amid rising concern about the health of the property sector.
Data released on Monday showed gross domestic product (GDP) grew 4.9 percent in the third quarter, compared with a year earlier, the slowest since the third quarter of 2020. The growth was also below economists’ expectations with a Reuters poll of analysts expecting GDP to rise 5.2 percent and a poll by the AFP news agency predicting growth at 5 percent.
“We must note that current international environment uncertainties are mounting and the domestic economic recovery is still unstable and uneven,” National Bureau of Statistics (NBS) spokesman Fu Linghui said on Monday.
China’s economy, the world’s second-largest, expanded 7.9 percent in the second quarter, and 18.3 percent in the first quarter, which benefitted from comparison with the COVID-19-induced slump of early 2020.
Meanwhile, industrial production growth slowed further to 3.1 percent on-year in September.
“Growth was dragged down by a slowdown in real estate, amplified recently by spillover from Evergrande’s travails,” Oxford Economics’ head of Asia economics Louis Kuijs told AFP.
The struggles of property giant Evergrande – struggling with debts amounting to more than $300bn – have been made prospective buyers cautious.
Kuijs noted there was an “additional hit in September” from electricity shortages and production cuts due to the strict implementation of climate and safety targets by local governments.
He added that the damage was visible in the slowdown of industrial output.
Victor Gao, vice president of the Center for China and Globalization in Beijing, told Al Jazeera the latest data was on the “lower side” but added that China remained “confident” it could reach growth of about 8 percent for the year.
“That would make China one of, if not the, best performers among the larger economies in the world,” he said.
Chinese leaders, fearful that a persistent property bubble could undermine the country’s long-term ascent, are likely to maintain tough curbs on the sector even as the economy slows but could ease some measures if needed, policy sources and analysts said.
“In response to the ugly growth numbers we expect in coming months, we think policymakers will take more steps to shore up growth, including accelerating infrastructure development and relaxing some aspects of overall credit and real estate policies,” Kuijs told the Reuters news agency.
Premier Li Keqiang said on Thursday that China has ample tools to cope with economic challenges despite the slowing growth, and the government is confident of achieving full-year development goals.
Retail sales picked up to 4.4 percent – from 2.5 percent in August – with fewer virus containment measures in China, which has imposed swift local lockdowns over a handful of coronavirus cases.
Good morning. Euro area economy vulnerable to shocks, China growth slows, Bitcoin rallies and Squid Game’s value. Here’s what’s moving markets.
European Central Bank President Christine Lagarde warned that the globalized nature of the euro area’s economy makes it highly vulnerable to systemic shocks from supply chain disruptions. Lagarde also said the current spike in inflation is unlikely to last, while vowing to continue aiding the euro-area economy as the fallout from the pandemic lingers. Supply bottlenecks, cost pressures, and a reopening letdown are already set to plague region’s third-quarter earnings season.
China’s economy weakened in the third quarter, weighed by multiple headwinds from a property slump to an energy crisis. Gross domestic product expanded 4.9% from a year earlier, down from a previously reported 7.9% in the preceding quarter. People’s Bank of China Governor Yi Gang said authorities can contain risks posed to the Chinese economy and financial system from the struggles of China Evergrande Group.
Bitcoin rallied early Monday after falling over the weekend, ahead of an anticipated U.S. exchange-traded fund approval. It fell both Saturday and Sunday to nearly $59,000 before climbing over $62,000 on Monday. Bitcoin is in focus as the first futures ETF tied to the token may debut Monday, according to a filing. Analysts expect profit-taking and volatility surrounding the decision.
Netflix estimates that its latest megahit, “Squid Game,” will create almost $900 million in value for the company, according to figures seen by Bloomberg, underscoring the windfall that one megahit can generate in the streaming era. The show stands out both for its popularity, and its relatively low cost, at just $21.4 million, less than Dave Chappelle’s new special “The Closer”. The viewership details are likely to cheer investors, who have regained enthusiasm for Netflix after several bumpy months, partly because “Squid Game” has been so popular.
European futures are steady while contracts on U.S. stock benchmarks are pointing lower after last week’s strong performance. Oil advanced after an eighth weekly gain with the market facing a global energy crunch ahead of winter. Meanwhile, Koninklijke Philips will be among the European companies announcing results on Monday while State Street will report in the U.S. Also, Apple will finally unveil its redesigned MacBook Pro, the first revamp in five years.
What We’ve Been Reading
This is what’s caught our eye over the past 24 hours.
And finally, here’s what Cormac Mullen is interested in this morning
Hedge funds have given up betting against short-term Treasuries, at least one gauge of positioning shows. Net leveraged-fund futures and options positions in two-year notes turned positive for the first time since April 2018, according to the latest Commodity Futures Trading Commission data. Two-year Treasury yields have surged some 25 basis points since early June as traders brought forward wagers on Federal Reserve rate hikes. The flip to net-long could suggest fast-money funds see a pause coming in the short-term yield spike, though some of the positioning is likely part of broader bets on the direction of the U.S. yield curve. In the interest-rate market, a full hike is now priced in for September next year, with traders about 50/50 in calling for one in June. That’s an aggressive move in a short space of time now given so much uncertainty over the path for inflation and growth until then.
Cormac Mullen is a cross-asset reporter and editor for Bloomberg News in Tokyo.
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Oil prices hit their highest in years on Monday as demand continues its recovery from the COVID-19 pandemic, boosted by more custom from power generators turning away from expensive gas and coal to fuel oil and diesel.
Brent crude oil futures rose 87 cents, or 1%, to $85.73 a barrel by 0111 GMT, the highest price since October 2018.
“Easing restrictions around the world are likely to help the recovery in fuel consumption,” analysts from ANZ bank said in a note on Monday.
“The jet fuel market was buoyed by news that the U.S. will open its borders to vaccinated foreign travellers next month. Similar moves in Australia and across Asia followed.”
They added that gas-to-oil switching for power generation alone could boost demand by as much as 450,000 barrels per day in the fourth quarter.
Still, supply could also increase from the United States, where energy firms last week added oil and natural gas rigs for a sixth week in a row as soaring crude prices prompted drillers to return to the wellpad.
The U.S. oil and gas rig count, an early indicator of future output, rose 10 to 543 in the week to Oct. 15, its highest since April 2020, energy services firm Baker Hughes Co said last week.
China’s economy, meanwhile, likely grew at the slowest pace in a year in the third quarter, hurt by power shortages, supply bottlenecks and sporadic COVID-19 outbreaks.
The world’s second-largest oil consumer issued a new batch of oil import quotas for independent refiners for 2021 that show total annual allowances were lower than last year, a first reduction of import permits since these firms were allowed into the market in 2015.
(Reporting by Jessica Jaganathan; Editing by Kenneth Maxwell)
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