Rising Oil Prices Intensify Global Stagflation

By Simos, Evangelos Otto | The Journal of Business Forecasting, Spring 2011 | Go to article overview

Rising Oil Prices Intensify Global Stagflation


Simos, Evangelos Otto, The Journal of Business Forecasting


I. GLOBAL ASSESSMENT AND OUTLOOK

In the International Economic Outlook entitled "The Great Stagflation of 2010-2011," published in the summer 2009 issue of this Journal, we had predicted "? the global economy will experience inflation, high interest rates, and economic stagnation-which is termed stagflation." We had pointed out "like private bubbles, government's bubbles are subject to correction. The twin-peaks of money and budget deficits are expected to adversely affect the global economy with one- to two-year lags."

Two years ago, we had forecasted oil prices "? to increase with rising energy demand," and "? non-oil powered generation for transportation will not easily be accepted by the consumers due to high acquisition prices and associated uncertainties." In addition, the expected "? low value of the dollar will also be a contributing factor in pushing up oil prices."

Latest evidence on economic growth, inflation, oil prices, and expected movements in interest rates are in line with the predictions made two years ago. Additionally, in the last couple of months oil prices have surged because of geopolitical factors. While increasing food prices had ignited social unrest in several developing countries, it took a protesting young man who set himself on fire to cause the toppling of the government in Tunisia.

This surprising event quickly resulted in regional political upheaval through many North African and Middle Eastern states. Regime change in Egypt and civil war in Libya have increased the probability that the dominos in the Middle East could continue to fall. Consequently, oil prices now reflect a "geopolitical risk premium," which may continue to further increase and result in even higher oil prices if political instability in the region spreads to other major oil producing states like Saudi Arabia and Iran.

The surge in oil prices has intensified the stagflation scenario, which has been slowly developing since the summer of 2010. We now forecast global inflation to average 3.8 percent this year, compared to 3.4 percent in 2010 and 2.3 percent in 2009. Global economic growth is forecast to decelerate to 4.3 percent this year from 4.8 percent in 2010.

Looking at high-frequency indicators, e-forecasting 's global leading economic index suggests that the worldwide expansion will continue at a slower pace in the first half of 2011. The forward-looking global leading index-a composite index of 34 countrywide leading indicators tracking economic conditions five to six months in advancerose in December for the fifth consecutive month. However, the indicator's six-month annual growth rate-designed to provide early signals of changing directions in global economic activity between expansions and slowdownscontinued to decelerate, registering a positive reading of 1.7 percent in December of 2010, which is the smallest growth rate since its recent peak of 14.7 percent posted in November 2009.

Signals from e-forecasting 's country-leading indicators for a global slowdown were almost uniform around the globe. In the leading indicators of the North America region, the group of BRIC (Brazil, Russia, India, China), Australia, Japan, Sweden, Switzerland, Poland, Czech Republic, Hungary, Turkey, Indonesia, South Korea, Taiwan, Hong Kong, Chile, and Dubai, there was evidence of positive six-month annual growth rates but continually decelerating towards the zero growth line.

Negative six-month annual growth rates-continually decelerating rates from their positive peak that have now crossed the zero growth line-were evidenced in the leading indicators of the regional Euro Area indicator and the country specific indicators of the United Kingdom, Denmark, and New Zealand.

The economies of Singapore, Thailand, Argentina, Uruguay, and South Africa are expected to stay on their expansion path as they have registered accelerating or steady positive six-month annual growth rates in their leading index in the latest months. …

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