By the end of the third quarter of 2022, inflation will have pushed through 8% in almost every major economy except China and Japan. Nominal GDP growth remains firm, at between 2% and 6%, except in China, where GDP growth is flat. Nevertheless there are signs in many economies that GDP is about to head south, as either higher interest rates or higher prices or both sink several economies.

Interest rates have been rising in many countries, with ten year yields often more than double their levels last year and approaching 3% or more in most of the developed world. Finally stock markets, having peaked at the end of 2021, at least in dollar terms, have generally fallen some 20% before recovering briefly in recent months. In local currency terms, many stock markets are broadly flat, since the dollar has rallied strongly against most currencies to reach a 20 year high. This is a novel experience for a new generation that has only ever know 40 years of falling interest rates and very low levels of inflation.

Travelling back in time

Because of this, the current situation has been compared to the 1970s. Chart 01 (based on quarterly data. Red dot starting point; black dot final point) reminds us of economic conditions at the time. From the end of the 1970s, through to the mid 1980s, inflation in the US wandered upwards from around 6% to closer to 16% at its peak. At the same time, real GDP collapsed by almost 10% compared to its potential at full capacity. This long, counter clockwise spiral of inflation and GDP characterised the 1970s.