[Interview] "Worsession differs from stagflation... simultaneous inflation and production decline"

Bob Miki, Chief Economist at Independent Strategy
War-Induced Supply Shock Adds to 'Warcession' Warning...Global Central Banks Face Monetary Tightening Dilemma

[Asia Economy New York=Special Correspondent Seulgina Jo] "The current situation, which we call ‘War-cession,’ is different from the stagflation of the 1970s. What is currently concerning is that major countries are suffering from high inflation alongside a blatant decline in production."

Bob Mickey, Chief Economist at global investment firm Independent Strategy, who warned that the world economy could enter a ‘War-cession’ phase?a combination of the Ukraine war-induced supply shock rather than a typical recession?stated in a written interview with Asia Economy on the 17th (local time), "War-cession is different from stagflation."

First, Economist Mickey defined War-cession, as presented by Independent Strategy, as "an economic collapse of supply caused by war, where production decreases and inflation rises." Unlike a typical recession where both production and demand decline and inflation falls, War-cession is characterized by soaring inflation due to the added supply shock from war.

This is also different from the stagflation confirmed in the 1970s. Economist Mickey, who mentioned that he clearly remembers the situation at that time, drew a line by saying, "Stagflation means ‘very slow real Gross Domestic Product (GDP) growth’ along with high inflation." He pointed out that "War-cession is a supply shock, not a demand shock," highlighting that recently major countries are simultaneously suffering from high inflation and production decline. He added, "Stagflation occurs in the process where loose monetary policy or excessive demand shifts nominal GDP rather than real GDP."

Economist Mickey agreed with the forecasts of many experts that inflation will remain at a high level for a long time even after peaking within this year. He also mentioned that recent inflation is seeping into basket prices and corporate prices, expressing concern about the "second round effect." If the Ukraine situation prolongs, supply disruptions will worsen further, leading to an analysis that "inflation will remain high throughout this year."

He also warned that all central banks, including the U.S. Federal Reserve (Fed), are "caught in a dilemma," stating, "If interest rates are raised too quickly or too high, it will lead to a recession." Emphasizing that current inflation is accelerated by the war-induced supply shock, he expressed concern that "monetary tightening will be less effective on inflation and more effective in reducing production." This explains why, unlike the Fed, which has announced quantitative tightening (QT) following interest rate hikes, the European Central Bank (ECB) has recently become cautious about the pace of tightening due to this dilemma.

As a past case comparable to the current War-cession, he cited the period immediately after World War I. This was when the Spanish flu spread rapidly like COVID-19, and the supply disruptions at the end of the war led to a recession from 1919 to 1921. He also mentioned that some might refer to 1945, after World War II, as a brief War-cession, noting that the U.S. economic aid plan for Western Europe, the "Marshall Plan," ended it.

Along with this, Economist Mickey diagnosed that the possibility of Russia’s debt default has "become closer" as the Ukraine situation prolongs. He predicted that Russia’s real GDP will plummet by more than 10-15% this year, a decline not seen since the collapse of the former Soviet Union in the early 1990s. However, he said, "Compared to the shock to the Ukrainian economy, it is nothing," estimating that Ukraine’s economy could decline by 45-75%.

Regarding the sanctions imposed by the U.S. and other Western countries on Russia, he described them as "unprecedented," stating, "The current sanctions are undoubtedly dealing a heavy blow to the Russian economy." He anticipated that if the war prolongs, additional measures such as gas pipeline closures and energy sanctions will be implemented.