Auditing and consulting firm KPMG has issued a stark warning as the global economy once again faces the risk of stagflation due to rising geopolitical tensions.
Diane Swonk, the firm’s chief economist, said a war with Iran in particular could seriously upset the economic balance and force central banks to take unexpected action.
Swonk said the risk of stagflation is becoming increasingly pronounced when you consider rising global energy prices combined with the economic slowdown. Stagflation is a situation where high inflation and weak economic growth occur simultaneously, making it an extremely difficult scenario for policymakers to resolve. Swonk warned that if this process is not brought under control, the U.S. economy could be dragged into a “deep recession.”
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Swonk pointed out that the closure of the Strait of Hormuz in particular led to a sharp rise in oil prices, adding that the developments go far beyond a classic oil shock. He said rising energy costs have increased production and logistics costs, creating sustained pressure on the overall price level, and companies have significantly reduced employment in this environment.
All these developments have combined to cause both high inflation and slowing economic growth, and investors appear to share similar concerns. In his assessment of the current situation, Swonk said the Fed could be forced to raise rates in the second half of this year. He added that the measures may not be limited to the United States, and that other major central banks may adopt tightening policies as well.
*This is not investment advice.
