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Why are Germans suddenly googling stagflation?

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Google Oneindia News

Berlin, Oct 14: What is stagflation? What does stagflation mean? Is stagflation coming? These are some of the questions many Germans have been looking up on Google over the past few days.

The sudden interest in a rather extreme economic phenomenon has been fanned by some recent investor and analyst commentaries that have flagged stagflation concerns, citing faltering economic growth and a steep rise in energy prices.

Why are Germans suddenly googling stagflation?

According to Google Trends data, the interest in the economic event has been trending at its highest level since the 2008-09 global financial crisis. It's no different in other major economies, including the US which is also seeing a steep rise in prices.

People in the United Kingdom are seemingly most worried, with interest in the term trending at an all-time high, spooked by long lines at gas stations over the past weeks which offered a grim reminder of the stagflation period of the 1970s.

What is stagflation?

Stagflation is an economic event characterized by high inflation and stagnating growth plus high levels of unemployment.

The term was first used by British politician Iain Macleod in 1965 to describe what he thought was "the worst of both worlds — not just inflation on the one side or stagnation on the other, but both of them together."

Stagflation can complicate matters for policymakers — governments and central banks — who are responsible for boosting growth and keeping prices in check. That's because policies aimed at reining in inflation could lead to slower growth and higher unemployment, and measures taken to boost output and jobs could end up driving up prices.

It is impossible to implement both sets of policies at once, so "there is no obvious macroeconomic policy response," said Andrew Kenningham, chief Europe economist at Capital Economics.

For people, the impact of stagflation is twofold. Firstly, it means fewer jobs as the economy enters a recession or growth slows. Secondly, rising prices lead to lower purchasing power. People end up paying a bigger chunk of their income on essentials like food and fuel, which reduces their spending power for other items.

What's fueling stagflation concerns?

Stagflation worries are mainly being fanned by supply chain bottlenecks and soaring energy prices. Supply disruptions have taken the steam out of the economic recovery from the COVID-19 pandemic. Industrial production in Germany saw its sharpest drop in August since April last year, driven by a 17.5% crash in auto manufacturing due to shortages of components and raw materials.

The raw material and input shortages, along with higher energy prices, sent inflation in Germany soaring to 4.1% in September — the highest in almost three decades. Inflation is expected to climb even higher in the coming next months as shipping snarls persist and natural gas, oil and coal remain in short supply.

Is Germany witnessing stagflation?

While German inflation is at a multiyear high and post-pandemic recovery is losing momentum, economists say Germany is a long way off from stagflation.

They argue that despite the slowdown, the German economy is growing and is expected to expand around 3% this year and close to 5% in 2022. Unemployment in the country remains relatively low.

Kenningham described the current period as "stagflation lite."

"The economy as a whole is still expanding because the services sector is reopening after the pandemic and we think that the current supply-driven bottlenecks will pass in time, after which the economic outlook is reasonably good," he told DW.

The G-7 group of major economies saw similar periods of "stagflation lite" in 2003, 2008 and 2015, driven largely by rising oil prices, but they didn't last long, according to Capital Economics.

IMF Chief Economist Gita Gopinath said the current situation doesn't look "remotely close like stagflation," pointing to robust underlying demand. She, however, warned of risks since prices were being driven by problems on the supply side.

"This complicates policymaking because as opposed to a demand-driven increase in inflation, which the monetary policy has the tools for, here it's supply shocks that are reducing activity and at the same time raising inflation," she told reporters on Tuesday.

Is a return of stagflation of the 70s imminent?

The global economy witnessed the worst period of stagflation in the 1970s which was marked by rising oil prices, largely owing to the OPEC oil embargo in 1973 and contracting economies in the developed world.

Inflation in many advanced economies climbed to double digits. Germany avoided the worst but still saw inflation soar a staggering 8%. Joblessness in the Western world surged during the period, including in Germany where unemployment rose to around 10% at the end of the decade from around 0% in 1970.

Carsten Brzeski, the chief economist at ING Germany, feels the current period is "in no way comparable to the 1970s" as the economy is far from contracting and the job market remains stable.

"The comparison also doesn't hold because the developed world has become much less dependent on energy. They are more energy-efficient now and have other sources of energy. So, they are much less exposed to energy prices than in the past," he told DW.

The inflationary pressures are unlikely to be as persistent and widespread as they were back then. The European Central Bank has been stressing that the current rise in inflation is being driven by temporary factorssuch as supply chain disruptions, pent-up demand and higher energy prices and that it would decrease noticeably next year.

Source: DW

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