Stagflation, like worst of pandemic, is avoidable

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Traffic travels past a sign displaying current gas prices in San Diego, California, U.S., February 28, 2022. REUTERS/Mike Blake/

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LONDON, March 7 (Reuters Breakingviews) - Sanctions designed to hurt Russia for its invasion of Ukraine will also harm the world economy. Just the prospect of a ban on Western imports of Russian oil catapulted the price of a barrel of Brent crude to $139 on Monday, its highest since 2008. Surging energy and commodity costs mean high inflation is inevitable. Economic stagnation or recession, the other half of the "stagflation" spectre, is more avoidable.

The euro zone is particularly dependent on Russian energy and is therefore the most exposed to stagflation risks, though the United States isn't immune. Goldman Sachs analysts estimate a sustained $20 rise in oil prices would erode euro zone GDP growth by 0.6 percentage points this year. If Russian natural gas stopped flowing, an additional 2.2 percentage points would be lopped off, they say. That would put paid to most of the economic expansion expected by the European Commission, which in February forecast growth of 4% for 2022.

Such an outcome wouldn’t be as bad as the pandemic-driven economic collapse in 2020. And governments can mitigate the shock, just as they did then. They can shield the poorest in society from surging food and heating costs by increasing payouts to the unemployed and to low-income households. Finance ministers can reduce taxes on energy and food products or on a range of consumer goods. They also have the option to defer tax hikes, like the one that’s planned in April by Britain’s Rishi Sunak.

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That said, governments face different challenges this time. First, high inflation means central banks are, for now, going to be raising interest rates to tighten financial conditions rather than easing them. Second, the public sector is already burdened with borrowing from Covid-19 measures. General government debt in advanced economies hit 122.7% of GDP in 2020, up nearly a fifth from the previous year, and has only retreated slightly since, according to the International Monetary Fund.

There’s also a cost to doing nothing: lower growth and rising unemployment would mean more people in economic distress and higher welfare outlays. Meanwhile, governments would pay a political price in forthcoming elections for high fuel prices if they do nothing, though more borrowing may also be unwelcome. Resisting economic stagnation means accepting yet more Big Government.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

Crises past and present


- Oil prices on March 7 surged to their highest levels since 2008 as the United States and its European allies considered banning Russian oil imports. The price of Brent crude reached $139.13 a barrel while that of U.S. West Texas Intermediate hit $130.50.

- The International Monetary Fund said on March 5 that the war in Ukraine and associated sanctions would have a severe impact on the global economy, noting that the crisis was creating an adverse shock to inflation and economic activity at a time when price pressures were already high.

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Editing by Richard Beales and Pranav Kiran

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Swaha Pattanaik is Global Economics Editor at Reuters Breakingviews, based in London. Previously Reuters’ EMEA financial markets editor, she writes about global financial markets, macroeconomics, and policymaking. She was posted to Paris as Reuters’ senior economics correspondent and to Brussels as its European economic and monetary affairs correspondent. Before then she was the head of the Reuters FX reporting desk in London. Prior to joining Reuters, she worked for Bloomberg, Euromoney, and consulting firm IDEA. She has an MSc in Political Theory and Political Sociology from Birkbeck and a BSc (Econ) in Mathematical Economics and Econometrics from the London School of Economics.