Essential Business

Stagflation off the cards — for now

 In Economy, News

Portuguese economists have ruled out, for the time being, a situation of stagflation in Portugal’s economy.

Stagflation is characterised by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (i.e. inflation). Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).
According to the economists consulted by the news agency Lusa, classic periods of stagflation were seen in the 1970s and the start of the 1980s, which saw rising fuel prices and high inflation rates in excess of 10% in some countries, while economic growth was sluggish and unemployment was high. A good example then was Great Britain between 1977 and 1982.
More recently this hypothesis for a return of stagflation has been debated because of supply chain problems and the high costs of gas, driving up energy costs.
According to the chief economist at Allianz Global Investors, Stefan Hofrichter, stagflation is not on the horizon and actual probability of a recession is close to zero. However, inflation levels will remain relatively high until mid-2022.
The ISCTE economist Sofia Vale (pictured) says it is premature to talk of stagflation since the academic definition is a combination of high inflation and growing unemployment, whereas the data shows unemployment is going down.
According to the economist, disruptive phenomena that are affecting economic recovery are also viewed as temporary, so inflation is not likely to continue.
The analyst Ricardo Evangelista from ActivTrades thinks that stagflation could be a real possibility taking into consideration a rise in inflation and the fact that the European Central Bank (ECB) is “hostage to the stimulus policies that it had adopted”, and if they are changed now, there would be an even greater economic shock. “Then we would face stagflation” he said.
Henrique Tomé, an XTB trader says “we cannot yet say that we are facing a real stagflation scenario” but warned “if the current situation continue the same long term, then there will be serious risks of this happening”.
“At the moment, whilst inflation is going up, while the economy is growing, risks can be controlled and offset against stagflation”, he said.
“If the economy starts to show signs of cooling, then the risk of stagflation increases substantially. If there is a recession with slow economic growth in the medium to long term we could see a period of stagflation associated with a fall in demand for certain products because of inflation,” adds Tomé.


Read More