Is the global economy headed for stagflation? - LEVENT YILMAZ

Is the global economy headed for stagflation?

I wanted to start today's column by reiterating that things have not been going well in the global economy for a while now and that it carries certain reverberations for Turkey since it’s an integral part of the global economy. As the Russia-Ukraine war has made some of the current risks even starker, we are sure to continue discussing these aftershocks in the coming period.


Let me answer this one right away: no, because the effects of the sanctions imposed on Russia due to the Ukraine invasion have added to the upward price trend due to supply-demand imbalances in energy prices, especially oil and natural gas.

It’s no secret that new investments in fossil resources, especially due to the green transformation, are at a level that is almost non-existent. This situation, in particular, prevents the oil supply from reaching the desired level. Now, the risk of Russian oil leaving the global system has made things more difficult on the energy front.


Unfortunately, there is no good news on the global food prices front. Prices are rising unabated. According to the latest data of the United Nations Food and Agriculture Organization (FAO), food prices increased by 5.3% compared to the previous month and skyrocketed by 24.1% compared to the same month of the previous year. Let’s also not forget that the prices of certain grains and vegetable oil, which ticked upwards due to reverberations from the Russia-Ukraine war, have not yet been accounted for in these rates. Therefore, food prices are still going to trend up.


We are in a period where global inflation is quite high and unfortunately it seems like it will be with us for a while more. Supply constraints due to energy and food prices and disruptions in supply chains carry a significant impact on this particular issue.

Added to these are the repercussions of the Russia-Ukraine War. The U.S. Federal Reserve, in its latest interest rate decision, states the following: “The impact of Russia's invasion of Ukraine on the U.S. economy is largely uncertain, but in the short term, the occupation and events related to it will create additional upward pressures on inflation.”


Recession means inertia. Technically, when an economy shrinks for two consecutive quarters, it's called a recession. All previous growth forecasts are revised downwards, depending on the recent developments. In other words, the risk that both the post-pandemic economic process and some developments arising from the Russia-Ukraine war will bring the global economy to a recession is now on the agenda. According to a study by the Dallas Fed, the world economy could enter a recession this year as Russia's oil exports are withdrawn from the markets.


The situation in which stagnation and high inflation are experienced simultaneously in an economy is called stagflation. This is something that economists would never want to see happen because inflation is expected to decrease during recession periods and monetary and fiscal policies to be implemented to combat recession are implemented by taking on some inflation. 

Conversely, the monetary and fiscal policies that are needed to be implemented to combat high inflation may also cause the economy to contract. In other words, both stagnation and inflation are serious problems during the stagflation period. So things would only get more difficult and economies would take a lot longer to stabilize.


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