Recently, inflation has risen significantly in the United States and the European Union, with US CPI above 7.5 percent for six consecutive months and Eurozone CPI at a new high of 10.7 percent. Over the past year, global inflation levels have continued to rise, reaching the highest level in nearly 40 years and becoming the most severe round, due to the impact of extremely loose global liquidity and supply chain bottlenecks, along with the Russia-Ukraine troubles. Stagflation since the 1970s. At the same time, this has continued to slow economic growth, along with the withdrawal of temporary global COVID-19 relief measures, as well as the implementation of tight monetary and fiscal policies adopted in response to inflation.
Compared to the 1970s, the current round of global stagflation involves a larger number of countries, with the major developed countries represented by the Organization for Economic Co-operation and Development experiencing varying degrees of stagflation. Among them, the US, United Kingdom, Germany, Italy and Russia have the most significant stagflation. Moreover, the level of inflation is very high. The current level of inflation in OECD countries is above 8 percent, reaching the level of the “oil crisis” of the 1970s.
In addition, global liquidity is enormous. Following the outbreak of COVID-19, global interest rates in developed countries have fallen to their lowest levels since World War II.
Following are the main factors contributing to the current round of global stagflation patterns.
First, commodity prices have increased. Comparing the period before the outbreak of Covid-19 with the end of August this year – crude oil prices rose by 31 percent, natural gas by 296 percent, wheat by 48 percent and copper by 33 percent. Prices of energy, food and other commodities have increased significantly. Under pressure from carbon reduction efforts, EU countries have increased their use of natural gas and other energy resources and eventually phased out coal-fired power, resulting in dramatic increases in natural gas, crude oil and other commodities.
Second is global expansion policies. In response to the impact of COVID-19, around 40 central banks around the world have cut interest rates more than 50 times since March 2020, with the Federal Reserve, Bank of England and Bank of Canada cutting their policy rates close to zero, and emerging economies also cutting interest rates. A rate cut is being implemented. US, European and Japanese central banks have taken steps to expand the scale of monetary policy operations, restart or ramp up asset purchase programs and create targeted support liquidity tools. According to data from central banks, the Fed, ECB and BOJ balance sheets expanded by 77 percent, 46 percent and 23 percent respectively in 2020. The global ease of liquidity has pushed the global leverage ratio to a record high of 267 percent. For countries providing statistics at the end of 2021, a sharp increase of 25 percentage points compared to 2019.
Third, economic growth lacks momentum. Policy stimulus is the main factor currently strengthening the pace of global growth. However, its effect was not significantly observed. Take the US for example. None of the major stimulus packages launched under the administrations of current and previous presidents have done anything to address current global supply chain issues or long-term growth drivers in the US.
Finally there is the problem of geopolitical upheaval. The current round of global stagflation has been fueled by geopolitical turmoil, such as the Russia-Ukraine conflict, which has profoundly affected global trade, investment, technology and talent exchanges. In particular, the rise in commodity prices due to the conflict has worsened the global stagflation situation.
Unlike major developed countries that experience varying levels of stagflation, China’s economic growth has slowed, but inflation levels are relatively moderate. By the end of October, the cumulative year-on-year increase in China’s 2022 consumer price index was just 1.9 percent – significantly lower than 8.3 percent in the US and 7.6 percent in the eurozone.
China’s inflation rate is much lower than that of major developed economies, which is mainly due to the following three aspects. First, the divergence between China’s economic cycle and that of Europe and the US, and the slowdown in China’s domestic demand, which restrains overall price increases. Second, the current round of high global inflation is primarily driven by a sharp rise in commodity prices, which is impacting the Chinese economy in the form of imported inflation, which reflects a significant rise in the producer price index. Finally, China’s CPI composition and the CPI composition of major developed economies differ significantly. In China’s CPI basket, sectors such as housing and food are heavily weighted, but price increases are not burdensome.
At the same time, due to China’s expansionary fiscal and monetary policies, China’s economy is experiencing slow stabilization. From January to October, the value added of China’s enterprises above the threshold of 20 million yuan ($2.84 million) in revenue rose 4 percent year-on-year, 0.1 percent faster than in January to September. In October, the value added of such enterprises rose 5 percent year-on-year, 0.2 percent faster than in the third quarter and 0.33 percent higher month-on-month. Most importantly, as China updates its Covid-19 prevention and control measures, a strong response in China’s capital markets will provide a stronger boost to the Chinese economy.
Conversely, hyperinflation would force the US, UK and EU to adopt increasingly tight monetary policies, which could also have negative effects such as puncturing the global asset bubble and triggering an international debt crisis. Affected by tight liquidity, rising global interest rates and low economic growth, highly indebted countries are likely to erupt into economic crises. Among them, emerging markets with fragile domestic economies, sharp exchange rate depreciation, high short-term debt and political instability are more prone to debt crises.
Recently, the World Trade Organization projected global trade to slow further in 2023, with expansion of just 1 percent, and warned that “some major countries are at risk of slipping into recession.” In summary, the global economy has experienced a stagflation crisis, and China’s economy is slowly recovering. China’s role in the global economy will be crucial. At the G20 summit meeting in November, China and the US jointly pointed out that the two countries should strengthen cooperation, coordinate macroeconomic policies and promote the recovery and development of the world economy. The history of economic development shows that the painful effect of stagflation is very significant. Coming out of economic recession due to stagflation requires concerted efforts of all countries.
Views do not necessarily reflect those of China Daily.
The authors are Han Bing, a senior research fellow at the Institute of World Economics and Politics, Chinese Academy of Social Sciences, and Liu Rui, an institute postdoctoral fellow at CASS.