“The situation is better than in the 1970s… Developing countries are likely to face an economic crisis”
As the warning that the world economy might be plunged into stagflation with rising prices and subsiding economy grows, interest in the 1970s, the last stagflation period, is on the rise.
Some observers say that the situation is better than it was then, but some point out that the central bank needs to strengthen policy credibility to solve the problem.
According to the latest economic forecast of the World Bank (WB) on the 12th, the global inflation rate soared to 16.9% amid supply shocks such as the oil shock during the 1974 stagflation.
Then, in the 1980s, extreme inflation subsided as a result of strong monetary tightening policies such as the US Federal Reserve (Fed).
However, in April this year, it reached 7.8%, the highest level since 2008, as the COVID-19 stimulus package, rising raw material prices including oil prices, the prolonged Russian invasion of Ukraine, and supply chain disruptions overlapped.
In addition, the Organization for Economic Cooperation and Development (OECD) lowered its global economic growth forecast for this year by 1.5 percentage points to 3.0%, while the World Bank lowered its economic growth forecast from 4.1% to 2.9%.
According to the World Bank, the current situation is similar to that of the 1970s in that major advanced countries faced a supply shock following long-term monetary expansion policies, and global growth slowed and inflation occurred together.
Moreover, developing countries struggling with debt are vulnerable to liquidity recovery from developed countries, including the United States, as they were at the time.
However, there are objections that the absolute value of the inflation rate is lower now than in the 1970s, and that the wage increase and unemployment rate are better than at the time.
In addition, the World Bank explains that central banks in each country have been building policy confidence as an ‘inflation fighter’ by announcing inflation targets.
Through this, the expectation that inflation will continue can be captured better than in the 1970s.
The OECD also observed that central banks understand and focus on the importance of stabilizing expected inflation better than in the past, and that most central banks operate independently and explicitly set price stability targets.
In addition, the strength of the shock from the rise in crude oil prices is weaker than in the 1970s, and the flexibility of the labor market is different.
In the past, then-Fed chairman Paul Volcker managed to reduce inflation by raising interest rates to a whopping 19% in 1981.
However, as the policy credibility of each country’s central banks has improved so far, there is an expectation that this time it will be possible to solve it without the same ‘drug prescription’.
In addition, the World Bank explains that the lessons learned from the stagflation of the 1970s were that central banks recognized the need to take preemptive measures to maintain market confidence in price stability.
The World Bank, however, cautioned once morest the possibility of further supply shocks spurring inflation expectations or losing confidence in the central bank’s ability to maintain price stability.
In fact, Fed Chairman Jerome Powell has been criticized for escalating the problem by sticking to a ‘temporary’ stance on inflation until last year, and US Treasury Secretary Janet Yellen recently admitted a misjudgment in its response to inflation. is in a damaged state.
While senior US officials continue to insist that inflation is a top policy priority, some in the market still expect the Fed to pull back from raising rates if economic conditions worsen.
Meanwhile, the World Bank was concerned that even if central banks in developed countries succeed in controlling inflation without a recession, the situation in developing countries will not be easy.
Inflation expectations in developing countries are still sensitive to the rise in prices, and in fact, inflation and expected inflation have risen since Corona 19 in developing countries in Europe and Central Asia as well as South Asia and Latin America.
The Sri Lankan government recently declared default (default) on external debt totaling $51 billion (regarding 65.2 trillion won), and faced a national default, and neighboring Pakistan was also engulfed in economic crisis.
The United Nations also predicted in its recently published Global Crisis Response Report that the livelihoods of 1.6 billion people in 94 countries will be threatened by the ‘perfect storm’ (a complex crisis in which several adverse events are intertwined at once).
/yunhap news