(Bloomberg) — The world economy has a decent shot at escaping a full re-run of 1970s-style stagflation — and that’s about as far as the good news goes.
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A historic surge in commodity prices after Russia’s invasion of Ukraine, coming on top of already-high pandemic inflation, has gotten investors and economists searching for parallels with the energy shocks of four decades ago and the prolonged slowdowns that followed.
They’re right to worry, says Maurice Obstfeld, a former chief economist at the International Monetary Fund.
“The more protracted this period of continuing shocks,” he said, the more likely it becomes that economies suffer “something like the 1970s experience.”
Among developed economies, the risk is perhaps greatest in the euro-area. The European Central Bank unexpectedly said Thursday that it will accelerate its wind down of monetary stimulus with inflation already running almost three times its target.
“This is the biggest risk, that we might repeat the experience of the 70s,” Otmar Issing, the ECB’s first chief economist, told Bloomberg Television. “And this is the worst combination for a central bank.”
On the whole, a repeat of history can still probably be avoided, say most economists. But their reasons for thinking so aren’t entirely encouraging for companies and workers.
Weaker economic growth and perhaps even recession may be the price paid for conquering inflation, with emerging economies particularly vulnerable.
“We should be more worried about significant deceleration of the global economic growth” than runaway inflation, said Kazuo Momma, who used to be the head of monetary policy at the Bank of Japan.
That’s in part because central banks like the U.S. Federal Reserve have learned lessons from the prolonged inflation of the 1970s –- enough to preclude going down that “dark path” again, according to Mark Zandi, chief economist at Moody’s Analytics.
“They’d rather push us into a recession sooner than get into the stagflation scenario and a much worse recession later,” Zandi says.
Another key reason economists don’t anticipate a 1970s revival is that workers won’t be able to bargain up their pay like they did back then.
In the U.S. and U.K., labor unions have shrunk dramatically. Even in Germany, where they play a bigger role, there’s caution right now about pushing for big wage hikes.
That means a repeat of the so-called wage-price spiral, which was key to the 1970s inflation episode, is less likely. It also puts households at risk of a big squeeze, as incomes fail to keep up with higher prices at supermarkets or gas stations.
There are still reasons for flicking through the history books. The 1970s featured twin energy spikes linked to the OPEC oil embargo of 1973 and the Iranian revolution six years later.
The weeks since Russian President Vladimir Putin ordered troops into Ukraine have seen the cost of crude propelled past $130 a barrel — alongside a much wider range of price jumps. Russia is a key producer of commodities from wheat and fertilizers to nickel, and U.S.-led sanctions have roiled those markets.
In both the 1970s and today, the shocks hit economies that already had inflation problems. For example, data released Thursday showed the U.S. consumer price index jumped 7.9% in February, the most in 40 years. Bloomberg Economics sees a peak of around 9% in March or April
There were also several sources of inflation. In the 1970s there was the departure from the gold standard, leading to dollar devaluation, and the hangover of 1960s stimulus. Even the Peruvian anchovy, a key ingredient in cattle feed, played a role when a 1972 collapse in catches caused by the El Nino weather pattern fed through to higher feed and beef prices.
In the past year, Covid-19’s legacies of frayed supply lines, large government spending and easy monetary policy ignited prices. 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 share 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’re a lot less commodity-intensive, too. Only 20% of the price of a loaf of bread is the wheat.”
Still, some of those numbers may shift in the current crisis.
In Europe, which gets the biggest chunk 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’s now a managing director of the BlackRock Investment Institute.
The latest wave of commodity-driven price rises means an even harder balancing act for central bankers, who have to juggle the risks of sustained inflation and a slowdown or reversal of growth.
In the U.S., at least, investors still expect six quarter-point Fed interest-rate hikes this year, starting next week. Economists at Citigroup Inc. predict at some point the central bank will deliver a half-point hike.
Relying on the Fed to rein in prices may 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.
That suggestion drew a vitriolic response from orthodox economists when Weber first made it in December, in part because of the memory of 1970s price controls in the U.S. But she said the case is even stronger now, as food and energy prices soar.
There are signs that key decision-makers, in government and beyond, are eager not to repeat 1970s mistakes by letting prices and wages spiral up.
In the U.S., President Joe Biden has warned companies against gouging. When he announced a ban on Russian oil imports on Tuesday, Biden said his administration will be scrutinizing the gasoline industry for any signs of “excessive price increases or padding profits.”
On the wage side, in some countries -– like the U.S. and U.K. -– negotiating power has fallen so much since the 1970s that labor has little leverage to bargain with. Germany, where unions remain relatively stronger, offers a telling example of some lessons learned.
After the 1973 oil shock, labor unions responded to inflation of close to 8% by pushing through double-digit pay rises. That helped tip the economy into its worst slump since World War II –- and effectively ended full employment.
Now, unions and employers are turning to the government for help. IG Metall, Germany’s largest union, and employer association Gesamtmetall lobbied 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 inflation shock, with subsidies to help households with higher inflation bills. Some economists back a similar approach in the U.S. too.
All of this adds up to a global economy that’s more resilient than it was in the 1970s, according to Christopher Smart, chief global strategist at Barings. He reckons any period of stagflation is likely to be short.
Still, he says, Russia’s invasion of Ukraine has triggered “a real crisis that’s going to last years and maybe decades.”
EXPLAINER: Why War and Its Oil Impact Revive Stagflation Fears: QuickTake
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
