Stagflation is as a result of the sanctions against Russia

Stagflation sanctions Russia

Stagflation is as a result of the sanctions against Russia

LONDON, March 7 (Reuters Breakingviews) – Sanctions designed to hurt Russia for its invasion of Ukraine will also harm the world economy. Just the prospect of a ban on Western imports of Russian oil catapulted the price of a barrel of Brent crude to $139 on Monday, its highest since 2008. Surging energy and commodity costs mean high inflation is inevitable. Economic stagnation or recession, the other half of the “stagflation” spectre, is more avoidable.

Read Oil surges 10% in Asia, euro slides amid Russian-Ukraine war

The euro zone despite the sanctions, is particularly dependent on Russia energy and is therefore the most exposed to stagflation risks, though the United States isn’t immune. Goldman Sachs analysts estimate a sustained $20 rise in oil prices would erode euro zone GDP growth by 0.6 percentage points this year. If Russian natural gas stopped flowing, an additional 2.2 percentage points would be lopped off, they say. That would put paid to most of the economic expansion expected by the European Commission, which in February forecast growth of 4% for 2022.

Such an outcome wouldn’t be as bad as the pandemic-driven economic collapse in 2020. And governments can mitigate the shock, just as they did then. They can shield the poorest in society from surging food and heating costs by increasing payouts to the unemployed and to low-income households. Finance ministers can reduce taxes on energy and food products or on a range of consumer goods. They also have the option to defer tax hikes, like the one that’s planned in April by Britain’s Rishi Sunak.

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That said, governments face different challenges this time. First, high inflation means central banks are, for now, going to be raising interest rates to tighten financial conditions rather than easing them. Second, the public sector is already burdened with borrowing from Covid-19 measures. General government debt in advanced economies hit 122.7% of GDP in 2020, up nearly a fifth from the previous year, and has only retreated slightly since, according to the International Monetary Fund.

Stagflation, like worst of pandemic, is avoidable


Dean Nestor

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