The Russian invasion of Ukraine continues to worry global economic growth and has already led the International Monetary Fund (IMF) to revise its growth forecasts downwards. The global economy is expected to grow by only 3.2% this year, while inflation has been revised upwards. “As inflation spreads to the whole of the American economy and to the euro zone, particularly accelerated since the beginning of the year by the invasion of Ukraine by Russia, the consequences of the shutdown of this same rise in prices will penalize the economy”, he begins by saying to Sunrise, Paulo Rosa, economist at Banco Carregosa. And, therefore, he has no doubt: “Stagflation[estagnação económica associada a elevada inflação]is increasingly a reality”, noting that the 2nd quarter figures of GDP in the United States showed an economic contraction of 0.9% and dictated a technical recession of the American economy, since in the 1st quarter the economy fell 1.6%.
The economist recalls that the macroeconomic data “continue to deteriorate”, recalling that the American economy fell by 0.9% in the second quarter and entered a technical recession, after contracting by 1.6% in the first trimester. This comes on top of weekly jobless claims hitting their highest level in eight months, which “starts to reveal some weakness in the US labor market.” Consumer confidence data for July also “was weaker than expected and set 17-month lows.” He adds: “Weaker data also accompanied new home sales in the United States, raising fears of a recession led by higher interest rates to curb high inflation. German consumer confidence also hit a new all-time low in August as fears of an impending recession and high inflation weighed on economic expectations and household disposable incomes, according to GfK market data.
And, the penalizing sentiment has also been, according to Paulo Rosa, “the fragile energy situation in Europe, with gas flows from the Russian Nord Stream 1 pipeline more than halving this week from already reduced levels”.
For the manager, there is no doubt: “Right now, we are increasingly worried about a recession. And little by little the question is no longer whether or not there is a recession, but its extent (more or less light, more or less deep)”. And he argues that “worse than a recession is persistently high inflation driven by the dynamics of rising prices and the ingrained vices of rising prices without increased competition.”
And he leaves examples: “Hoarding, for example, is a pernicious reality in a context of high inflation such as the one we are currently experiencing. Everyone wants to take advantage of inflation and maintain their margins. But the current inflation is above all on the supply side, in particular the rise in fuel prices, of which Europe’s dependence on foreign countries is very important and, in fact, subtracts GDP from almost all European economies”.
It is therefore essential, according to him, to stop this inflation. “Inflation is worse than recession. And central banks, such as the ECB and the US Federal Reserve, know this and will try to stop it by adjusting current demand to lower supply, continuing to increase interest rates”.
Oil shock ?
The IMF says that, in a pessimistic but “plausible” scenario, the oil shock of 1970 can be repeated. And for the economist of Banco Carregosa there is no doubt: the current energy crisis “looks more and more like the period of the oil shock”. of the 1970s”. Thus, he maintains that “stagflation is increasingly a reality”, adding that “current inflation is mainly on the supply side, in particular the rise in fuel prices, whose dependence vis-à-vis foreign countries is very important and, in truth, subtracts the GDP from almost every economy in Europe”.
But Paulo Rosa says that at the moment there are other questions: “The question is no longer whether or not there is a recession, but its dimension (more or less light or more or less deep )”.
