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Stagflation: some hope

There’s much talk of a return of stagflation – that mix of high inflation and slow growth reminiscent of the 1970s. This is both too optimistic, and too pessimistic.

It’s too optimistic because growth will have to accelerate a lot if we are to emulate the 1970s. Between the first oil shock in 1973 and the election of the Thatcher government in 1979, real GDP per person in the UK grew at an annualised rate of 2.1 per cent. That’s twice the rate it has grown in the past 10 years. And this isn’t because of the pandemic; in the 10 years to 2019, growth was only 1.3 per cent a year.

We’ve had the “stag” part of stagflation, then, for years – and not just in the UK: Larry Summers was talking about it in 2016. A big reason for it was pointed out way back in 2005 by then Fed chairman Ben Bernanke – that there is a "dearth of domestic investment opportunities" in developed economies. There are many reasons why this should be. Robert Gordon says there is a shortage of revolutionary new ideas. Nick Bloom and colleagues point out that the productivity of researchers and scientists “is declining sharply.” Michael Roberts says there has been a worldwide downward trend in returns on capital which has sapped the motive to invest. Or it could be that companies have learned from William Nordhaus’s finding that only a “minuscule fraction” of the total returns to innovation go to corporate profits and so are doing less of it. And low wages and a lack of wage militancy mean there’s less incentive to invest in labour-saving technologies.

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