Unexpectedly excessive inflation, wars in key commodity-producing areas, declining actual wages, slowing financial development, fears of tightening financial coverage and turbulence in inventory markets — we see all of this stuff in right this moment’s world economic system. These have been additionally the dominant options of the world economic system within the Seventies. That interval ended within the early Nineteen Eighties, with a brutal financial tightening within the US, a pointy discount in inflation and a wave of debt crises in growing international locations, particularly in these of Latin America. It was additionally adopted by big adjustments in financial coverage: standard Keynesian economics was buried, labour markets have been liberalised, state-owned enterprises have been privatised and economies have been opened as much as commerce.

Line chart of CPI inflation (annual % change) showing Inflation came under control everywhere in recent decades

How shut are the parallels, particularly to the Seventies? What are the variations? And what can we be taught from these errors? The World Financial institution’s World Financial Prospects report, out final week, addresses these questions. The parallels are clear, as are variations. Not least, there are errors to be averted: don’t be over-optimistic; don’t take excessive inflation frivolously; and don’t go away weak folks and economies unprotected towards the shocks themselves and their painful legacies.

Does what we’re seeing already quantity to stagflation — outlined as a chronic interval of upper than anticipated inflation and decrease than initially anticipated development? The reply is “not but”, however it’s a danger.

Line chart of CPI inflation (annual % change) showing Inflation has risen unexpectedly strongly everywhere since 2020

Inflation is properly above goal virtually all over the place. As within the Seventies, that is partly resulting from one-off shocks — then two wars within the Center East (the Yom Kippur struggle of 1973 and the Iran-Iraq struggle which started in 1980), this time Covid and Russia’s invasion of Ukraine. Most necessary is the hazard that this inflation will turn into embedded in expectations and so in economies. A part of the explanation this danger intensified within the Seventies was the failure to recognise in time the slowdown within the charge of potential development. In the present day, too, optimists assume pre-pandemic development developments will proceed. But the World Financial institution argues: “Over the 2020s as a complete, potential world development is predicted to gradual 0.6 proportion factors beneath the 2010s common.”

The echoes of the Seventies are loud then: larger than anticipated inflation, massive shocks and weakening development. However the variations are additionally encouraging. The actual worth of oil jumped considerably extra between 1973 and 1981 than this time. World inflation can also be a lot much less broad-based than it grew to become within the Seventies. That is very true of “core” inflation. But this can be as a result of we’re at an early stage within the inflationary course of. Inflation is prone to turn into broader the extra persistent it’s.

Line chart of Real coal and oil prices (constant 2022 $) showing Energy prices have jumped, but not to unprecedented levels

Financial coverage frameworks are additionally extra credible and extra centered on worth stability than these of the Seventies. However the latter, too, has turn into much less true just lately, particularly within the US. Furthermore, inflation expectations in, say, 1970 have been actually not for the inflation that subsequently occurred. Policymakers tended in charge inflation on short-term components then, too, simply as we have now seen extra just lately. Economies are, it’s true, extra versatile now than within the Seventies. However the upsurge in protectionism might result in a reversal on this respect. Vitality depth has actually fallen since then, too. However vitality costs are nonetheless necessary. Lastly, fiscal coverage is predicted to be much less expansionary this time, although it was very a lot so in 2020 and 2021.

In all, the idea that issues will likely be very completely different this time has plausibility however is much from sure.

Line chart of Real natural gas prices (constant 2022 $ per mn btu) showing Gas prices have soared upwards in Europe

Above all, whether or not it proves true relies on what policymakers do. They should keep away from the error of permitting inflation to get uncontrolled, as they did within the Seventies. They need to nonetheless have time to do that. However performing decisively creates risks too, most clearly of an unnecessarily sharp slowdown, with the financial prices that may comply with. Towards this, it’s potential that demographic shifts, slowing technological change, deglobalisation, exhaustion of necessary previous alternatives for development and rising populism will weaken disinflationary forces in the long run. That might make reaching and sustaining low inflation even tougher.

Line chart of Debt in emerging & developing economies (% of GDP) showing Debts of developing countries are much bigger than in the 1970s

An apparent hazard arises within the one respect wherein the world economic system seems to be extra fragile than 40 years in the past: the scale of the debt inventory, particularly the inventory denominated in foreign currency. Crucially, that isn’t solely true of rising and growing international locations. The euro, too, is in essence a international forex for a crisis-hit eurozone member.

If financial coverage tightening have been substantial and extended, messy and dear debt crises are prone to emerge. It’s extensively believed that the lenders are higher positioned to take such hits than the worldwide banks within the early Nineteen Eighties. However the debtors won’t be: one should assume that these with a option to make between imports of meals and vitality, on the one hand, and debt service, on the opposite, will usually select the previous.

Line chart of Emerging market & developing economies' external debt & foreign currency share of government debt showing Foreign currency and external debt of developing countries has risen

It’s also too optimistic even to make certain that the shocks to the true economic system themselves are over. The virus might need extra ghastly tips up its sleeve. Furthermore, no person is aware of how the struggle will unfold. What’s extra, a few of the measures being mentioned, notably a ban on marine insurance coverage on shipments of Russian oil, would possibly generate additional jumps in world oil costs. Russia may additionally minimize off exports of gasoline to Europe, producing additional disturbance.

I labored as an economist on the World Financial institution within the Seventies. What I bear in mind most about that interval was the pervasive uncertainty: we didn’t have any concept what would occur subsequent. Many errors have been made, some out of over-optimism and others out of panic. The previous doesn’t repeat itself. However it’s rhyming. Don’t ignore time’s poetry.


Comply with Martin Wolf with myFT and on Twitter

Letters in response to this column:

Fed can navigate uneven waters on meals provides / From Danny Leipziger, Professor of Worldwide Enterprise, George Washington College, Managing Director, Development Dialogue, Washington, DC

Defending the euro is as essential as combating inflation / From Giovanni Farese, Professor of Financial Historical past, European College of Rome, Italy


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