‘Worst of all worlds’ looms as crisis deepens

Speaking with ABC’s The Business on Thursday, Dr Roubini said the “perfect storm” of high inflation and rising interest rates could trigger a cascade of recession and debt defaults this year.

“Stagflation” is a term for a rare economic phenomenon, first coined in the 1970s, which occurs when prices rise even as the economy shrinks.

In Australia, inflation rose to 7.4 per cent in the year to January, with the Reserve Bank raising rates again in February for the ninth consecutive month to 3.35 per cent.

The economy grew at a weaker-than-expected 0.5 per cent in the December quarter for an annual rate of 2.7 per cent, and wages data this week showed real household disposable income virtually unchanged from 2012.

“I do believe that this stagflation rate crisis is going to emerge this year,” Dr Roubini told The Business.

“The latest numbers on inflation coming from the US and Europe, and other advanced economies, showed that inflation now is quite sticky.

“Central banks are in a dilemma, because they have to raise rates more to fight inflation. But, if they do so, the economy is going to start to contract quite soon, and if they don’t then we could have a de-anchoring of inflation and inflation expectations,” he said.

“So I expect that we’re going to have a recession in the US and Europe, in other advanced economies, at a time where inflation is not back to 2 per cent.”

Dr Roubini predicts stagflation will collide head-on with a global debt crisis, combining the worst elements of the 1970s oil shock with the 2007 GFC.

“Now we’re facing the perfect storm – inflation, recession, stagflation and a potential debt crisis,” he warned.

“The debt ratio in advanced economies was only 100 per cent of GDP [in the 1970s]; today it is 420 per cent of GDP, in private and public debt.

“So, in this case, if we have those shocks to say oil prices, not only do you get inflation, not only do you get recession and stagflation, but you get what I call a great stagflationary debt crisis, because with interest rates so high, then that [debt] ratio has become unsustainable.”

In Australia, the RBA and the Federal Government expect inflation to have peaked at the end of 2022 and for it to gradually moderate over this year and the next.

But Dr Roubini believes the worst is yet to come, noting Goldman Sachs predicts commodity prices could soar 43 per cent this year.

He believes the US Federal Reserve and other central banks will keep raising rates until their economies fall into recession, leading to a “real hard landing”.

Financial markets will crash, borrowing costs will rise, defaults by households and businesses will rise and some financial institutions may go under – and ultimately working people will be hit the hardest.

“Stagflation is the worst, because loss of jobs, unemployment, weakness of the labour market and wages are growing less than inflation, because you have stagflation,” Dr Roubini said.

“So it’s across the board to even those who have a job, to their real wages, because prices are rising more than wages, and some people lose their jobs and their income.

“So stagflation is the worst of all worlds for workers.”

It comes as Australians continue to grapple with increasing costs, as rising interest rates and dwindling household savings leave many on the brink of crisis.

This week, major supermarkets Aldi, Coles and Metcash, which owns IGA, appeared before a Senate committee into cost of living.

Coles government and industry relations manager Vittoria Bon said the supermarket had worked to “absorb” cost increases passed on by suppliers battling with spikes in fuel and packaging prices.

“With fresh produce, we’ve certainly seen price increases,” Ms Bon said. “Floods have knocked out transport routes and it’s also meant products haven’t been as readily available.”

Aldi managing director for buying Oliver Bongardt told the committee cost of goods rose by 9.2 per cent in 2022, while the supermarket had increased its retail prices by 8 per cent.

Liberal Senator Jane Hume, who is chairing the inquiry, said the committee aimed to hear from diverse areas across the country to learn how cost of living pressures were impacting everyday Aussies.

“Cost of living is the number one issue facing Australians right now,” she said on Wednesday.

“I want this committee to go right around Australia, to hear from ordinary Australians about how they’re doing, where they’re finding it tough and find practical solutions to Labor’s cost of living crisis.”

– with NCA NewsWire