Stagflation means stagnation, simply crisis, and high inflation.
"The bad news keeps coming for Europe's economy, and if you're in America resist the temptation to gloat.
Data released Tuesday suggest that the eurozone is in a recession or soon will be, and the timing couldn't be worse for the bloc of American allies and trading partners.
The composite purchasing managers' index (PMI) released by S&P Global came in at 49.2, down from 49.9 the month before. Anything below 50 signifies a decline, so business activity has been falling for two months, and now is at an 18-month low. Service firms registered a barely expansionary 50.2, the lowest in 17 months, and manufacturing output at 46.5 is in recession territory despite some recent improvement.
The trend is worse in Germany, the eurozone's largest economy and traditional motor. The overall PMI notched a 26-month low of 47.6, with manufacturing and services registering contractions. France is also struggling.
It's hard to see how things could improve for the eurozone before they get worse. Inflation is a big culprit in both declining business activity and consumer confidence, and some of the supply-chain problems that have exacerbated the price rises may be abating.
But whatever relief that offers is likely to prove small and transitory. Despite a surprisingly large 0.5-percentage-point interest-rate increase in July, the European Central Bank's monetary policy remains extremely accommodating, and energy prices will rise as cooler weather pushes up demand.
Europe often relies on the U.S. and Asia to provide an export bailout, but those cavalries aren't coming. Call it a recession or don't, but the U.S. is barely growing as interest rates rise. China is slipping more deeply into its own slow-growth trap amid property-market chaos and a political crackdown on productive private companies -- on top of chronic Covid lockdowns and now an energy shortage. A global recession looms.
These weaknesses put a new spin on the other threat to the eurozone -- the euro. The bloc's common currency fell to a new 20-year low, a little below 99 U.S. cents on Tuesday's bad economic news. This might once have boosted European (especially German) exports or at least the profits of exporting companies. But that works less well if Europe's major export markets are stagnating. The main effect instead may be more import-price inflation, especially for energy.
All of this puts a premium on pro-growth economic policy, but there aren't many glimmers of light. German Finance Minister Christian Lindner has proposed an income-tax reform that would reverse the tax-bracket creep created by inflation, returning some 10 billion euros to the private economy. Liz Truss is promising a raft of supply-side tax reforms that could start unsticking the frozen gears of the United Kingdom if she becomes Prime Minister, but the hole dug by Boris Johnson on energy, taxes and regulation is very deep.
All of this will make the coming cold winter of energy shortages even bleaker, and Vladimir Putin will keep the pressure on. The U.S. could help with supply-side policies, but that will require a GOP victory in the midterms and negotiation with a reluctant President Biden. The only good news for Europe will be if these difficult months persuade voters that they can no longer take prosperity for granted. This time Europe needs to revive its own growth engines." [1]
1. Europe Heads for Stagflation
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 24 Aug 2022: A.16.
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