Guy Stephens: Markets have ingredients for stagflation cocktail

Rowan Dartington technical investment director Guy Stephens said the US, UK and eurozone tick two of the three boxes that point to a stagflationary resurgence.

Guy Stephens: Markets have ingredients for stagflation cocktail

Stephens says the stagflation ingredients – relatively high unemployment, inflation and low growth – are present or could develop in western markets.

He said the risk came despite appearances that the current economic environment is “settled and resilient”, with the Vix hitting a 25-year low this month.

Although both the US and UK are reporting “virtually full employment, controlled inflation and weak but acceptable economic growth”, inflation is still on the rise “and neither case is due to an excess of demand”, he noted.

The implementation of protectionist trade policies from Trump in the US and higher import costs in the UK post-Brexit have the potential to exacerbate inflation in both economies, he said.

This could lead to a decrease in disposable spending power, slower growth and higher unemployment, or “the exact economic cocktail of stagflation”.

On the other hand the eurozone, with the exception of Germany, is already suffering from excessive unemployment, sluggish growth. And inflation in the region has begun to climb, hitting the European Central Bank’s 2% target in March and hovering just below it currently.

The eurozone has an additional thorn in its side – an imminent end to quantitative easing, the investment director said.

Stephens said: “At some point, the Draghi put option has to be taken away and the Eurozone has to stand on its own feet. So, although stagflation is not in place in the eurozone, if inflation rises much more, this will present the exact same policy dilemma whereby prices are rising beyond an acceptable target level but the authorities cannot raise interest rates to combat it because economic growth is not strong enough.” 

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