Liam Dann: Stagflation fears stalk global economy - can NZ cope?

Global markets are on edge. Photo / AP

OPINION:

Oh no, now the global economy is going to hell in a handbasket too.

Or, if you'd rather ...

At least the global economy is going to hell in a handbasket as well.

There's a lot to worry about but it is fascinating and also diverting from the creeping madness of lockdown angst.

I'll admit, it's a bad sign when you start looking to distant bad news to lift your spirits and distract you from more immediate bad news.

It's like scrolling around the TV channels when you're depressed and landing on Al Jazeera news.

"Wow, I had no idea things were so bad in Boldovia," you think before flicking back to a Simpsons re-run, feeling sadder but also mildly relieved about your own predicament.

The stakes are a bit higher with the global economy right now, though.

If it takes a tumble we'll cop it regardless of how distracted we are by our own pandemic predicament.

All these issues are coming our way whether we are paying attention or not, precisely because we are not a "hermit kingdom".

We remain highly connected to the global economy and reliant on its strength for our relative wealth.

Here in New Zealand, we are turned inwards, obsessing over daily cases, sub-clusters and vaccination rates.

Whatever you think about the merits of our pandemic response, it has put us (and Australia) out of sync with the rest of the world.

But out in the world, those bad old inflationary issues have really started to hit with a vengeance.

Even worse - there are growing concerns about stagflation.

That's what economists call it when we have rising prices without the accompanying surge in economic growth.

To put it another way, imagine the big post-lockdown rebounds in economic activity pass through quickly but the supply chain issues linger and costs keep rising.

Stagflation is a horrible concept. It last plagued the world after the oil shocks of the 1970s.

It puts central bankers in a bind. Because they need to hike interest rates to head off the inflation but low growth rates require the opposite response.

Locally, moves by the Reserve Bank to head off inflation at a measured pace - beginning with a rate hike on Wednesday - seem very sensible.

If the economy can cope with more normal interest rate settings now, let's do it - because it gives us somewhere to go when we face another global shock.

The world's economy is under intense pressure as unresolved pandemic supply problems crash into surging recovery demand.

Wall Street and the rest of the financial markets are where all these global fears get hung out for all the world for all to see.

We've had two (at time of writing) harrowing slumps in the past two weeks and volatility is rising - as it has a habit of doing through September and October.

Wall Street's wobbles should, in a rational world, just be a symptom of the bigger underlying issues in the economy.

But as history tells us time and time again - it is not a rational world.

If investors panic, a market crash can becomes a cause of economic issues, sucking confidence from the financial world.

Meanwhile, in the real world of where things get made, energy shortages and price spikes are biting hard across the globe.

Brent crude oil touched US$80 a barrel this week.

That's not a historic high by any stretch but it is a return to pre-pandemic pricing.

In fact, it's the highest it has been in the past five years.

Used car prices have been rising both in the US and here - as reported by Trade Me.

That's just plain wrong.

But it's also a very pretty tangible example of what the pandemic has done to the global manufacturing supply chain.

When Covid hit and the world locked down, demand for new cars slumped.

The manufacturers paused production.

But turning the factories back on and getting them running at speeds to cope with surging demand has proved problematic.

They face shortages of crucial parts, such as computer chips.

Shipping new cars to market is also a problem.

There are waiting lists for new cars and price pressure is flowing through the second-hand market to where it hurts the poorest.

Cars are, of course, just one of many products facing these issues.

Used car prices are on the rise, in a reversal of the usual trend. Photo / NZME

Attempts in China to fire up factories to full speed have crashed the power grid and the country faces a pressing energy crisis.

Energy prices have also surged to new records in Europe.

However, an energy crisis is just one of the big issues China is grappling with as it tries to maintain growth targets.

The other is property debt.

Crumbling property giant Evergrande is getting all the headlines but economists have been warning about China's hidden debt levels for years.

Now would be a bad time for those warnings to prove prophetic.

There are bright spots that put us in better shape than the 1970s - strong demand for labour for example.

And perhaps strong leadership in the US and China can guide us through.

Clearly, many of the issues underpinning the world's woes are temporary.

But as Covid lingers, it's not quite clear what temporary means.

Right now it's hard to contemplate longer-term economic problems.

We're distracted, we're struggling and we're living day to day.

But it is vital that New Zealand's Government and businesses are braced for the shock of this when we emerge from the other side of lockdown.