TThe new reality that many advanced economies and emerging markets must reckon with is rising inflation and slowing economic growth. The main cause of the current bout of stagflation is a series of negative aggregate supply shocks that have reduced production and increased costs.
This should come as no surprise. The Covid-19 pandemic has forced many sectors to shut down and disrupt global supply chains, and has produced an apparently persistent decrease in the supply of labour, particularly in the United States. Then it came Russian invasion In Ukraine, which led to higher prices for energy, industrial minerals, food and fertilizers. And now, I ordered China The harsh lockdowns of Covid-19 In large economic centers such as Shanghai, causing additional supply chain disruptions and transportation bottlenecks.
But even without these important short-term factors, the medium-term outlook would be bleak. There are many reasons to worry that today stagflation conditions It will go on to characterize the global economy, resulting in higher inflation, lower growth, and possibly recession in many economies.
For starters, since the global financial crisis, there have been Undo globalization A return to various forms of protectionism. This reflects geopolitical factors and local political motives in countries where large groups of the population feel.”left behind“. Rising geopolitical tensions and supply chain shocks left by the pandemic are likely to lead to more Resettlement From manufacturing from China and emerging markets to advanced economies – or at least near the bolsters (or “friends support”) for groups of politically allied countries. In either case, production will be wrongly allocated to higher cost regions and countries.
Moreover, demographic aging In advanced economies and some major emerging markets (such as China, Russia and South Korea) will continue to reduce the supply of labor, causing wages economic inflation. Because the elderly tend to spend savings without working, the growth of this group will increase inflationary pressures while reducing the growth potential of the economy.
on the political and economic sustainable Backlash against immigration Likewise in advanced economies it will reduce the supply of labor and put upward pressure on wages. For decades, large-scale immigration has kept a lid on wage growth in advanced economies. But those days seem to be gone.
Likewise, the new Cold War between the United States and China will produce wide-ranging inflationary effects. The Sino-American decoupling involves the fragmentation of the global economy, the balkanization of supply chains, and the tightening of restrictions on trade in technology, data, and information—key elements of future trade patterns.
Climate change, too, will be stagflation. After all, droughts destroy crops, destroy crops, and raise food prices, just as hurricanes, floods and rising sea levels destroy capital stocks and disrupt economic activity. To make matters worse, policies of fossil fuel bashing and demands for strict decarbonization have resulted in underinvestment in carbon-based capabilities before renewables reach a level sufficient to offset the reduced supply of hydrocarbons. Under these circumstances, sharp rises in energy prices are inevitable. And with energy prices soaring,green inflation‘I’ll hit prices Raw materials They are used in solar panels, batteries, electric vehicles, and other clean technologies.
Public health is likely another factor. Little has been done to avoid the next infectious disease outbreak, and we already know that pandemics disrupt global supply chains and incite protectionism as countries rush to stockpile vital supplies such as food, pharmaceutical products and personal protective equipment.
We should also worry about electronic warfare, which can cause severe disruptions to production, such as the recent attacks on pipe lines And Meat Processors I showed. Such incidents are expected to become more frequent and severe over time. If businesses and governments are to protect themselves, they will need to spend hundreds of billions of dollars on cybersecurity, increasing costs that will be passed on to consumers.
These factors will add fuel to the political backlash against stark inequalities in income and wealth, leading to increased fiscal spending to support workers, the unemployed, vulnerable minorities, and “lagging behind.” Efforts to enhance the share of labor income in relation to capital, however well-intentioned, imply more labor strife and a whirlpool of wage price inflation.
Then there is Russia’s war on Ukraine, which signals the return of zero-sum superpower politics. For the first time in many decades, we must take into account the risks of large-scale military conflicts and disable Global trade and production. Moreover, the Penalties Used to deter and punish state aggression is the same as stagflation. Today it is Russia against Ukraine and the West. Tomorrow it could be Iran going nuclear, North Korea engaging in more nuclear brinkmanship, or China trying to seize Taiwan. Any of these scenarios could lead to a hot war with the United States.
Finally, the arming The US dollar – a central tool in sanctions enforcement – is also a stagflationary factor. Not only do they create severe frictions in international trade in goods, services, merchandise and capital; Encourages US competitors to diversification away from its foreign exchange reserves away from its dollar-denominated assets. Over time, this process could sharply weaken the dollar (making US imports more expensive and fuel inflation) and lead to the creation of regional monetary systems, further balkanizing global trade and finance.
Optimists might argue that we can still rely on technological innovation to put pressure on inflation over time. This may be true, but the technology factor is far outweighed by the 11 stagflation factors mentioned above. Moreover, the impact of technological change on overall productivity growth is still not clear in the data, and the decoupling of China from the West will constrain the global adoption of better or cheaper technologies, thus increasing costs. (For example, the western 5G system is currently a lot More expensive from Huawei.)
In any case, AI, automation, and robotics are not a pure commodity. If they improve to the point where they can create meaningful inflation, they will also likely disrupt entire professions and industries, widening already large disparities in wealth and income. This could lead to a stronger political reaction than we have already seen – with all the consequences of inflationary policy that is likely to produce.
Nouriel Roubini, Professor Emeritus of Economics at New York University’s Stern School of Business, has worked for the International Monetary Fund in the United States Federal Reserve and the World Bank