GOVERNMENTS LOW ON FISCAL AMMUNITION, POST-COVID-19
Politicians, meanwhile, will try to dampen the negative supply shock. In the US, policymakers will try to mitigate the rise in gasoline prices by drawing down its Strategic Petroleum Reserves, and by nudging Saudi Arabia to increase oil production. But these measures will have only a limited effect, because widespread fears of further price spikes will result in global energy hoarding.
Nor can Western leaders rely on fiscal policy to counter the growth-dampening effects of the stagflationary shock. For one thing, the US and many other advanced economies are running out of fiscal ammunition, having pulled out all the stops in response to the COVID-19 pandemic.
More to the point, a fiscal (demand) stimulus is the wrong policy response to a stagflationary supply shock. Though it may reduce the negative growth impact of the shock, it will add to inflationary pressure.
And if leaders rely on both monetary and fiscal policy in responding to the shock, the stagflationary consequences will become even more severe, owing to the heightened effect on inflation expectations.
A MASSIVE BLOW TO GLOBAL CONFIDENCE
It is tempting to think that the Russia-Ukraine conflict will have only a minor and temporary economic and financial impact. After all, Russia represents merely 3 per cent of the global economy (and Ukraine much less).
But the Arab states that imposed an oil embargo in 1973, and revolutionary Iran in 1979, represented an even smaller share of global gross domestic product than Russia does today.
Putin’s war will strike a massive blow to global confidence at a time when the fragile recovery was already entering a period of uncertainty and rising inflationary pressures.
The knock-on effects from the Ukraine crisis will be anything but transitory.
Nouriel Roubini, Professor Emeritus of Economics at New York University’s Stern School of Business, is Chief Economist at Atlas Capital Team, an asset-management and fintech firm specializing in hedging against inflation and other tail risks. PROJECT SYDNICATE
For all the latest world News Click Here
