Forex in this article
• Multiple risks of stagflation outside of pandemic and war
• Roubini counts a total of 11 stagflation factors
• Any deflationary factors are neutralized
In a recent article on Project Syndicate, Nouriel Roubini again warns of stagflation. Already a few weeks ago he was also known as Dr. Doom, an economics professor, confessed a grim stagflation scenario and warned of the impact of the Ukraine war on the global economy.
Roubini fears that the current stagflationary tendencies in the global economy will continue to shape economies in the medium term, leading to higher inflation, lower growth and even a recession.
In the short term, the recent supply shocks caused by the pandemic and the Ukraine war would have a massive impact on inflation and growth, but in the medium and long term they are by no means the only factors with which Nouriel Roubini draws his bleak future scenario: The New York professor, which, among other things, predicted the financial crisis of 2008, accounts for a total of eleven stagflation factors.
Stagnating Economy, High Inflation: The Factors
The corona pandemic led to supply bottlenecks and supply chain problems as well as a shortage of workers worldwide. China’s zero-COVID policy and the associated closure of economic centers such as Shanghai are currently causing production stoppages and delays again and again. The problems in the global supply chains are thus prolonged indefinitely. With the Ukraine war came rising prices for energy, industrial metals, food and fertilizers.
According to Roubini, in order to reduce future dependencies on production countries such as China, the established economies would aim to “withdraw from globalization”. The return to protectionist strategies is being promoted with the help of “near shoring” or cooperation between individual groups of countries. According to the economics professor, this means that production is shifting to regions and countries where higher costs would be incurred.
In addition, there is wage inflation due to the aging of society: not only in the established economies, but also in some important emerging countries, changing demographics will increase inflationary pressure and reduce growth potential. The pressure on the labor market will continue to grow due to the lack of immigration of workers.
The fragmentation of the global economy is also increasing as a result of the conflict between the USA and China, which Roubini also describes as the “new cold war”. Disrupted global supply chains and stricter trade restrictions in the areas of technology and information are also having a stagflationary effect.
According to Nouriel Roubini, climate change will also result in higher food prices and regionally in reduced economic activity caused by disasters. A switch to renewable energies has so far not been possible to a sufficient extent, so that, as Roubini writes, premature decarbonization is now driving up energy prices and promoting “green” inflation.
Also in the field of public health, according to Dr. Doom has done too little to break previous patterns or take precautions. A new pandemic is therefore likely to have similar consequences for the economy as the corona pandemic: supply chain and supply problems as well as protectionist measures by the individual countries are pre-programmed.
Furthermore, the expert fears that cyber attacks will increase in the future. Cyber security will thus become even more of a spending factor for companies and governments, with additional costs being passed on to consumers.
Technological innovations that might have a deflationary effect would be neutralized by the stagflation factors mentioned above and, according to Roubini, would in turn have their own risks. The income and wealth gap will widen further and lead to more support from the state. “Efforts to increase the income share of labor relative to capital, no matter how well-intentioned, lead to more labor unrest and a spiral of wage-price inflation,” Roubini cautions.
Military conflicts and strong US dollar
The risk of major military conflicts is higher than it has been in decades. Not only Russia’s war against Ukraine, but also nuclear threats from Iran and North Korea or a further escalation in the conflict over Taiwan could throw the US into a military conflict. But deterrent or punitive sanctions also have a stagflationary effect. According to Roubini, US sanctions would prompt some countries to diversify their currency reserves in order to reduce their dependency on the US dollar. So, weaponizing the US dollar would also be stagflationary as it would weaken the US dollar and affect the global financial system to the detriment of the US dollar.
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