Global | The war in Ukraine and the risks of stagflation

If second-round effects can be avoided through the necessary agreements, monetary and fiscal policy could still have sufficient room for maneuver to navigate its way through stagflation scenarios, and provide redistributive measures to minimize the impoverishment caused by the Ukraine war.

Key points

• Key points:
• The current situation has parallels with the energy crises of the 1970s and the resulting stagflation, characterized by high inflation and low economic growth or, even, recession.
• One possible equilibrium position could be that the war in Ukraine leads only to a change in relative prices. This would mean that oil, gas and other commodity prices continued to remain above the year-on-year level of those of other goods and services, without creating additional inflation beyond that of the initial adjustment.
• The problem is that this equilibrium is difficult to achieve in decentralized economies, where supply chains are not vertically integrated and, on the contrary, require the involvement of many firms (often from many countries) at various stages — from the provision of raw materials to supplying the end consumer.
• In those countries with a long tradition of these kinds of national agreements (e.g. in Scandinavia and parts of central Europe) or, at the other extreme, with more competitive markets, the risk of these high levels of inflation becoming deeply embedded is greatly reduced.
• Given the carry-over effects of the strong growth rates seen at the end of 2021 and the start of 2022, both the eurozone and Spain could ride out a couple of quarters with slight falls in GDP and continue to grow by a point or two below the pre-war forecast for the rest of the year.

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