The Stagflation Spectre Looms – LBS Executive Breakfast Session (October 2019)

Nigeria’s Net FX Inflow Rises to USD6.43 billion in April
REUTERS/Akintunde Akinleye

Unlikely But Probable Stagflation

Stagflation is a combination of undesirable economic outcomes – stagnant growth and rising inflation. It is such a rare occurrence with very few examples.

The last incident of global stagflation was between 1974-1976* when oil prices quadrupled, inflation spiked to 25%, growth slumped and interest rates jumped.

Today, the global economy is teetering on the brink of a recession while Nigeria faces the unlikely spectre of stagflation due to a combination of factors including vulnerability to exogenous shocks and a rising import bill.

The CBN seems to be leaning towards a combination of options that will keep interest rates high until inflation falls below the upper limit of its 6-9% target. However, this looks most unlikely if you consider the full implications of the border closure on prices.

External Imbalances Are Growing

As if things were not already complicated, the price of Brent crashed today below $57pb. This is at a time when Nigeria’s external buffers are dwindling.

External reserves lost 4.04% in September (now at $41.77bn). With pale GDP growth of 1.94% (Q2’19), there is a good reason for fiscal stimulus with an attendant multiplier effect on national income.

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That is why to some, the prudent, conservative and contractionary budget of N9.79trn proposed for 2020 is difficult to justify.

In this edition of the LBS Breakfast session, Bismarck Rewane and the FDC Think Tank put these economic and political issues in perspective for the benefit of your business and portfolio strategy.

Download: The LBS Executive Breakfast Session – October 2019  

The one word with a chilling effect – stagflation – is best known from its 1970s incarnation, when it wrought havoc throughout the UK. The combination of stagnant GDP growth and high inflation pushed the UK to the edge of bankruptcy and forced the then chancellor, Denis Healey, to call the International Monetary Fund for a bailout loan. The resurrection of the word can only spell bad news.”