Before 2022, most Americans under the age of 60 or so probably hadn’t heard of stagflation. The economic phrase that defined the 1970s—a particularly toxic economic combination of low growth and high inflation—wasn’t even a key risk in the minds of most economists on Wall Street until recently.
Over the past decade, many forecasters were actually more concerned that the global economy would experience persistent deflation rather than inflation.
But that all changed this year. Rising consumer prices and falling economic growth expectations have become a thorn in the side of central banks worldwide.
That’s left Wall Street face-to-face with a new economic reality.
A June survey from Bank of America Research found that 83% of fund managers expect below-trend growth and above-trend inflation—stagflation, in other words—as the most likely outcome for the global economy over the next 12 months.
That’s a six percentage point increase compared to last month, and it marks the highest percentage of fund managers expecting stagflation since the midst of the Great Financial Crisis in June 2008. (To put that in perspective, the epochal failures of Bear Stearns and Lehman Brothers occurred in March and September 2008, respectively.)
Of course, the fund managers were wrong in 2008, as stagnation ensued, but it was accompanied by deflation, as the inflation rate consistently stayed around or under the Federal Reserve’s target rate for most of the 2010s.
Still, the June 2022 survey marked an all-time low in global growth optimism from fund managers, and the odds of a so-called Goldilocks period—when inflation remains below trend while growth rises—are down from over 40% at the start of 2021 to just 1%.
That’s alarming news, given that 266 fund managers with over $745 billion in assets under management responded to Bank of America’s survey questions. The bank’s analysts, led by Michael Hartnett, wrote in a note accompanying the survey that the results show that “Wall Street sentiment is dire.”
Fund managers sing the same tune as top economists
Fund managers aren’t alone in their pessimistic outlooks for the global economy, either. The World Bank warned last week that a return to 1970s-style stagflation is likely for many countries around the world over the next few years.
“Several years of above-average inflation and below-average growth are now likely, with potentially destabilizing consequences for low- and middle-income economies. It’s a phenomenon—stagflation—that the world has not seen since the 1970s,” World Bank president David Malpass wrote in the international financing institution’s latest global economic forecast.
Top economists have also been sounding the alarm about the potential for stagflation to hinder the global economy in the coming years. Mohamed El-Erian, the chief economic adviser at Allianz and president of Cambridge’s Queens’ College, said in May that stagflation is now “unavoidable” due to the Fed’s decision to treat inflation as “transitory” for so long.
El-Erian has long criticized the Fed for being “behind the curve” when it comes to controlling rising consumer prices, and he said he now believes inflation could hit an annual rate of 9% in the coming months, despite predictions from investment banks including UBS that we’re past the peak.
In an interview on CBS’s Face the Nation on Sunday, El-Erian even said the effects of rising consumer prices have greatly increased the odds of a U.S. recession.
“Unfortunately, the balance of risks is tilted in the negative way right now,” he noted.
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