Iran war revives stagflation dangers for global economy

The cumulative global impact of seven weeks of war in the Middle East will begin to emerge in the coming week, in a second round of business surveys from multiple countries. 

Whether the twin blows affecting growth and inflation seen in purchasing manager indexes after the first month of the Iran conflict intensified during month two will be a key focus. 

The initial take for April in economies from Australia to the US will be published on April 23. Among those covered by Bloomberg forecasts, indexes in Germany, France, the euro zone and the UK are all anticipated to show broad deterioration, while the American indicators are seen little changed.

Ultimately, the numbers may point to the degree that stagflation is lurking. That ominous term – evoking the noxious mix of surging prices and stalling growth of the 1970s – was cited by Mr Chris Williamson, chief business economist at PMI-compiler S&P Global, when summing up risks highlighted by the overall global measure in March.

The survey numbers follow a week of bleak stock-taking in Washington, where finance chiefs were warned by the International Monetary Fund of a range of potential outcomes that included a near-recession for the world. Notwithstanding the current Middle East ceasefire, the damage to growth and inflation can’t be easily undone.

“Even if the war ends tomorrow, it would take quite some time for the recovery to kick in,” IMF Managing Director Kristalina Georgieva told Bloomberg Television. “The impact is already baked in.”

For all the gloom, multiple policymakers remain cautious about how to respond. European Central Bank chief economist Philip Lane described how he and his colleagues may treat reports such as the PMIs when they set interest rates later this month.

“We will have a rich set of survey data,” Mr Lane said in Washington. “Of course, the people who are answering those surveys are looking at the same world we are looking at.” And for now, not many will have a decisive idea about what’s going to happen, he added. 

ECB officials will also get French business confidence on April 23 and Germany’s closely watched Ifo business climate gauge on April 24. Their Federal Reserve peers will see the University of Michigan’s sentiment index, also at the end of the week.

But as Ms Georgieva warned, even the most holistic analysis of the global economy by policymakers has its limits for now. “We all need to learn to operate in an environment of high and permanent uncertainty,” she said.

Elsewhere, a possible war-driven pickup in inflation numbers from Canada to the UK to South Africa, plus interest-rate decisions from Turkey to Indonesia, may be among the highlights. 

Asia’s inflation risk

Inflation risks tied to the global energy shock will dominate Asia’s economic calendar in the coming week, with price data and business surveys set to test how quickly higher costs are feeding through. 

China’s loan prime rate decision on April 20 is expected to deliver no change, as policymakers balance support for growth against currency pressures. 

Trade data from New Zealand, Japan, Thailand and Malaysia over the week will offer an early read on external demand. India’s infrastructure output is also due.

Focus turns April 21 to New Zealand’s first-quarter inflation print, a key input for the central bank’s policy outlook.

Indonesia’s rate decision on April 22 is expected to see policymakers stand pat as they weigh currency stability against rising imported inflation.

April 23 brings the week’s heaviest data flow. PMI readings from Australia, Japan and India will provide a timely read on business conditions, while inflation data from Singapore, Hong Kong and Japan will offer early evidence of the pass-through from higher energy prices. 

The Philippines central bank is expected to raise its benchmark rate by 25 basis points to 4.5 per cent, underscoring a tightening bias in parts of the region. South Korea’s consumer confidence reading will also be closely watched for signs of strain on households.

Japan’s department store sales and leading indicators round out the week, offering a gauge of the resilience of domestic demand and the near-term outlook. BLOOMBERG