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January 19, 2022

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Are We Heading For a New Era of «Stagflation»?

Due to unprecedented economic shock of Covid-19, there is now a prevailing concern across all countries about the threat of stagflation. According to Bloomberg, the number of news articles mentioning stagflation has soared, currently up more than 300% since 2019. Stagflation refers to a situation first identified in the 1970s where inflation is high, economic growth is stagnant and unemployment remains consistently high. It causes real incomes to stagnate or decline while destroying purchasing power. Our near-term macro scenario remains positive; while inflation has risen as economies have reopened, so has growth, and supply and demand will ultimately rebalance. Recent inflation is transitory, and will pass once post-pandemic supply chain pressures and labor market disruptions ease. Nevertheless the combination of supply chain disruption, high oil prices and labor shortages means the risks are worth taking seriously.

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Why is it Happening ?

  • Pandemic unemployment assistance and stimulus packages in the US and Europe in lockdowns meant more money in the system, combined with people ordering more goods instead of services like travel and others.
  • The developed world is opening up again nowadays after 1.5 years of lockdowns which is causing bottlenecks on the supply side;
  1.  On the production front: Power cuts have closed numerous factories across China due to lack of investment in coal, which runs a big portion of electricity plants in China, in addition to the shortage of investment in renewables.
  2. On the logistics front: shipping costs rose from $2k/container up to $15-20k due to ports not functioning at full capacity, which caused ships utilization to go down from 90% to ~45%).
  • The price spike in oil, natural gas, and coal by almost 95% since last May and it is expected to further increase where some speculate that crude oil prices will go up to 200$ per barrel.
  • Potential rise in fed interest rates on global borrowing rates especially for countries with low credit rating.

Khaled Akl, CEO at Halwani Brothers Egypt, recently spoke with LOGIC’s Ahmed Moharram and shared his views on how companies should navigate the upcoming stagflationary winds and the subsequent inflationary waves. Edited excerpts of their conversation follow;

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