Europe Stares at Stagflation, Says UBS –

Europe Stares at Stagflation, Says UBS

According to UBS, Europe is on the brink of’stagflation’. The phrase stagflation refers to a combination of economic stagnation and inflation. Countries facing stagflation are those experiencing slow economic growth while simultaneously experiencing high inflation and rising unemployment. Earlier this century, economists had said stagflation was impossible. But in the 1970s, when oil embargoes stopped the economy from growing and prices rocketed north, stagflation became a reality.

However, despite these warnings, many central banks around the world have been underestimating the impact of global stagflation. In May, chief economist of Allianz, Mohamed El-Erian, warned that stagflation had become a “unavoidable” reality. Indeed, stagflation has been one of the primary causes of the recent global slump, and persistent inflation could result in an even harsher recession. Furthermore, persistent inflation will increase the likelihood of a Federal Reserve interest rate hike in the future. A global recession could result, and financial crises in some emerging markets could be the result.

While the US and Singapore labour markets are currently in a healthy state, the EU has three primary conditions for a stagflationary scenario. One of these is rising inflation, and the labour market continues to support wage growth – although some workers may find their real wages contracting. In December, the Ministry of Manpower reported that the ratio of job vacancies to unemployed people rose to 2.11 compared to September’s figures.

As the Russian-Ukraine conflict threatens to alter the international landscape, the prospects for growth in the region are bleak. Meanwhile, professional investors are growing increasingly concerned about the future of global growth. A recent Bank of America survey of more than $1 trillion in assets found that 62 per cent of respondents were concerned about stagflation. That is nearly double the number in February, suggesting that markets are nervous about a stagflation-like state. Although many economists in Singapore are cautious, the current economic climate has ‘exposed’ stagflation as a possible danger.

The global economy has seen a slowdown over the past decade, but it is likely to bounce back in the second quarter after a ‘ghost-like’ virus pandemic in Ukraine. Meanwhile, rising food prices threaten to spark social unrest in importing countries. With such a’stagflation’, the eurozone could end up at its lowest level since the 1970s. In the meantime, the S&P 500 stock index is already down 13 percent this year and could fall 20 percent or more in the next year.

While the US Federal Reserve has long relied on high interest rates to keep inflation at bay, the invasion of Ukraine has disrupted global energy markets, threatening Europe with recession. Countries like Singapore had to respond to the early 1980s recession with radical policies such as freezing and cutting wages. Although these measures are painful, they could be the necessary medicine to cure a severe economic crisis. Stagflation would also put MAS in a quandary.

About the Author: Allison Kraus

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