Stagflation can manifest as a more painful version of a recession, where the economy is suffering with the addition of increased costs through inflation.
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Is it a risk now? Should we be worried?
The short answer is no. According to AMP chief economist and head of investment strategy Shane Oliver, the chance of stagflation in Australia is low. The bigger risk is in the United States, which is facing a “messy outlook” after imposing tariffs on trading partners.
“A tariff is basically a tax on consumers whenever they buy an imported product. It effectively raises the price of that imported product and that will show up as a measured inflation,” said Oliver.
Those same tariffs raising prices in the US are likely to knock consumer confidence, which could weaken economic growth.
While Oliver said that stagflation was not contagious, consumer confidence has dipped in Australia since Trump’s “Liberation Day” tariffs (according to ANZ-Roy Morgan), with the possibility that continued economic uncertainty could make Australians “feel poorer”, and weaken the economy.
“Less trade as a result of uncertainty and disruption caused by Trump’s tariffs leads to less economic activity in Australia, slower economic growth, potentially higher unemployment, but it’s hard to see it causing higher inflation,” said Oliver.
The upside for Australia in the trade war is that Chinese goods may be less competitive in America, and when they are sent en masse to Australia, domestic consumers could be paying less for the same products.
This all comes together as a picture of a potentially more stagnant economy, but not necessarily a more inflationary one.
What can you do about it as an investor?
In tense economic times, some investors turn to defensive assets such as consumer staples or gold – latter experienced its best quarter since the 1980s last month. According to Cameron Judd, gold fund manager at Victor Smorgon Partners, the asset’s boon is the product of “mounting investor anxiety over stagflation”.
“Gold remains the one global asset that has a low correlation to risk assets, no third-party or geopolitical risks, relatively low volatility, and a deep and liquid market. Given this, and where valuations currently sit across gold equities, we continue to see strong prospects for the Resources Gold Fund,” said Judd.
With Clancy Yeates
