Can We Predict the Start of an Economic Crisis?

In most cases, predicting the onset of an economic crisis is extremely difficult. A slide into recession often happens suddenly, making losses inevitable. However, certain economic indicators can signal the approach of crisis conditions, allowing for proactive measures to mitigate the impact. One such indicator is stagflation.

What is Stagflation?

The term “stagflation” refers to the simultaneous occurrence of two negative processes in the economy:

• A slowdown in growth, stagnation, accompanied by reduced consumption and rising unemployment (stagnation).
• Uncontrolled price increases, with inflation rising beyond target levels (inflation).

The term comes from a blend of the words “stagnation” and “inflation.” It’s believed to have first been used in the UK in the late 1960s and early 1970s by Finance Minister Iain Macleod during a speech to parliament.

The first significant occurrence of stagflation dates back to this time. Before then, economic crises (recessions), which were characterized by production decline, typically saw stable or slightly falling prices. However, at the turn of the 1960s and 1970s, this trend changed dramatically. Consider the following comparison between two periods:

• From 1945 to 1965, the U.S. experienced a price increase of 29%.
• In the similar timeframe from 1965 to 1982, inflation soared to 100%.

In essence, the rate of price increases quadrupled, while unemployment rose 2-3 times. Similar trends were seen in nearly all developed economies at that time.

In 2022, the U.S. and European countries once again saw prices hit multi-year highs. The situation became so severe that experts began to talk about the possibility of the most intense stagflation in history. While this didn’t materialize, the discussion resurfaced in the second half of 2024.

Causes of Stagflation

Stagflation is characterized by three main signs:

• Accelerating inflation, with levels significantly exceeding targets.
• A slowdown in economic growth, transitioning to stagnation.
• Declining employment levels, with rising unemployment.

The causes of stagflation are typically a combination of factors triggering all its components. Among the key causes are the following:

“Supply Shock”

A “supply shock” occurs when there is an unexpected and sharp increase or decrease in the supply of certain goods or services due to various reasons. One such example was the oil price surge in the 1970s caused by the OPEC embargo.

Currently, several factors contribute to supply shocks:

1. COVID-19 pandemic. It caused a significant decrease in economic activity across most countries, leading to reduced demand for raw materials and high-tech products derived from them. Additionally, lockdowns disrupted many supply chains.
2. Post-pandemic recovery. The end of the acute phase of the pandemic was expected to lead to economic recovery. This, in turn, caused an explosive rise in the prices of raw materials and energy resources.
3. Shift to green energy. The push by Europe and the U.S. towards “green” energy, lowering carbon emissions, and imposing penalties for carbon output led to increased consumption of energy resources for low-carbon technologies, especially natural gas. Naturally, its price surged as well. Simultaneously, renewable energy sources (RES) could not meet even average generation levels due to climate and weather conditions, further driving up fuel prices.
4. Disruption in the energy, fertilizer, and food markets.
5. Extreme weather conditions in many agricultural regions.

As a result, prices for energy resources, food, and raw materials on global exchanges are hitting record highs. Inflation in the U.S. has exceeded a 40-year high, and Europe is not far behind (with some countries already reaching double-digit inflation levels). Although raising interest rates sharply slowed price growth, the risk of another inflationary wave is still present.

Ineffective Economic Policy

Governments and regulators use tools that not only fail to stabilize prices but also fuel inflation. Meanwhile, the economic situation remains far from ideal, with minimal economic growth and serious unemployment issues.

Recently, the world faced just such a situation:

• Long-standing quantitative easing programs fueled inflation, with Western central banks printing as much money since 2020 as they had throughout their entire previous history.
• Central banks were late in implementing tightening monetary policy and rate hikes. Although this slowed inflation, interest rates rose sharply, creating the risk of a debt market collapse. Refusing to tighten would mean continuing to inflate the inflationary bubble.
• Massive economic stimulus packages did not promote production growth — speculative activities outpaced the real sector.
• Social assistance programs (the so-called “helicopter money”) caused a labor market imbalance, with job vacancies nearly double the number of applicants. As a result, many opted not to work, as welfare payments exceeded wages.

Economists predict that the global economy and developed nations will slow to a stagnation level. In 2024, major economies once again face a tough choice: high interest rates are leading to record government debt and increasing difficulties in servicing them. Lowering central bank rates will inevitably drive up prices again. Some experts believe that stagflation has already begun, and its logical conclusion could be the most significant global economic crisis yet.