You can also listen to this podcast on iono.fm here.
SIMON BROWN: I’m chatting now with Professor Adrian Saville. He is of course from Gibs. Adrian, appreciate the early morning. Stagflation is a word that gets flung around with sort of the horror memes from the 1930s [1970s] – high inflation, low growth. In all the world you have inflation running wild, growth going absolutely nowhere with squeezed individuals and potentially something that as a global economy we are looking at, at this point in time.
ADRIAN SAVILLE: Morning, Simon, it’s good to be with you. Welcome to the full month of May. Yes, stagflation draws from the two terms, as you suggest – economic stagnation, where you’ve the curse of unemployment, and inflation which is the silent evil that confiscates while you sleep.
If you put those two together, stagnation plus inflation, you get stagflation. You said the 1930s – the real 1970s was where oil in particular really kicked the economic engine.
In the early ’70s you had a 300% increase in oil prices and, by the end of the decade, oil prices were up by a factor of 10. So forget about R30/litre – think of R300/litre and what that might mean. To fill up the tank cost R15 000.
Read:
War revives stagflation dangers for global economy
Misconceptions about oil at $100/barrel
Gold steadies as traders weigh inflation risks, oil-supply shock
Spiralling oil prices could spell trouble for SA agriculture … and consumers
SIMON BROWN: I’m walking to work! That’s just it. Of course, it was the ’70s – and again it was oil. That is what the big story here is. There has been a lot over the last, what, six years. We can go back to the pandemic. A lot has happened there, but it is around that oil. And that is the risk, because it caps growth and pushes inflation – and squeezes the economy.
ADRIAN SAVILLE: When you try this term ‘stagflation’, perhaps we should just pull ourselves back a little and remember that the ’70s had headline inflation rates of 25% in the UK.
We know we’re close to that as things stand, so we can cool down on the drama; it doesn’t change the fact that we’ve got the critical ingredient driving these twin evils.
What you’re pointing out is that you’ve got this sort of multi-headed monster. Policymakers are a little, can I say, ‘Trumped’ – or stumped on how to deal with this because, first, you’ve got government balance sheets which are hugely strained.
That’s the 1970s … But then you’ve got central bankers who are not going to move interest rates. So they’re going to be very hands-off because of the political implications.
That resonates with the 1970s and now. And the third [thing] that hasn’t happened yet; the way that this was being resolved was very aggressive tax rates. Hold on to your hat for a moment.
Marginal tax rates went to 90% in the UK and 80% in the US. It seems almost surreal.
So we don’t quite have that drama, but we certainly have all of the components of proper pain – where you have rising inflation, sagging economic growth, structural problems and strained government balance sheets. But it’s not the same for everyone. Different economies will feel this pain differently.
Read:
The next financial shock could happen too fast for regulators
Iran conflict clouds South African economic outlook, Sarb says
Energy prices can reshape monetary policy decisions
SIMON BROWN: I take your point that this is not that horror. I remember petrol restrictions. You couldn’t buy petrol over weekends and at night, and speed limits were reduced. We’re perhaps not there, we’re not at those crazy tax rates, those crazy inflation rates, but we are in a place where as a global economy we haven’t been in for a very long time.
A lot of that is thanks to – and I go back to your earlier point – that debt burden, which is in many senses the elephant in the room. And this is a big elephant.
ADRIAN SAVILLE: The big elephant in the room is the US, where debt-to-GDP now sits at 125%. They continue to run fairly at risk, where the changing of the guard is going to accommodate inflation. It is going to be very reluctant to push interest rates aggressively. Debt is on the table. Inflation joins it.
And then the big gifts of the last 20, 30 years to global inflation have been snatched away. Most obviously that came in the form of China with its huge productivity gains, the trade benefits, which took us into much tamer inflation – and fuelled growth. So the animals that were two-legged and drove good growth, good inflation, are now missing.
Read/Listen:
The end of oil?
Everyone needs to trade with each other
The fuel price challenge
The point that I was making about this impacting different economies in different ways is of course that with oil prices going higher, that inflation impact will come into the likes of oil-importing and other commodity-exporting economies which are going to really feel the pain. Think Kenya as an obvious case in point or, for that matter, South Africa.
There are some that, if they do this well, could be in for proper windfall gains. There are some we know will do this well from a fiscal perspective. Think Norway. And there are others that could get real proper gains from this. Think Angola.
SIMON BROWN: Yes. Angola, of course – I hadn’t even thought of that.
We’ll leave it there. That’s Professor Adrian Saville from Gibs.
#Stagflation #looms #debt #extra #wrinkle