BAKU, Azerbaijan, March 23. The rise in commodity prices due to the war in Ukraine will not drive a downturn in the real economy now similar to that of in 1970s, Trend reports with reference to the UK-based Capital Economics research and development company.
“Real GDP growth slowed sharply after the early 1970s oil price shock, with real GDP for the G7 as a whole falling outright by 2 percent between 1973 and 1975. At first sight, the current situation looks worryingly similar to the early 1970s oil price shock. In 1973, the Arab oil exporting countries stopped exports to many Western countries as punishment for providing aid to Israel during the Yom Kippur war. As a result, the prices of oil and other commodities rocketed. The scale of the rise in commodity prices seen then is close to that seen today,” said the company.
While the parallels with the 1970s have been building, Capital Economics remains unlikely to see the scale of stagflation witnessed back then.
“The main difference now is the apparent determination of central banks to prevent high inflation becoming persistent. There is a growing risk, though, that this policy tightening – coming on top of the cost of living squeeze – will come at the cost of a sharp slowdown in economic growth,” the company said.
First, Capital Economics notes that the world’s reliance on energy is lower than back then.
“Second, firms and households still have a buffer of “excess” savings accumulated during the pandemic that they can draw down. And third, the hit to private sector demand is also likely to be cushioned somewhat by looser fiscal policy (although note that fiscal policy was also generally stimulative throughout the 1970s). Not only will governments provide some extra support packages for those hit by rising energy prices, but the war is likely to lead to higher public sector spending than otherwise. That said, to the extent that there are risks to growth from the energy price shock, these are largest in the euro-zone, where the rise in energy costs has been more severe,” the company said.
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