A repeat of the ’70s?
Rapid developments
Since the Russian army proceeded to invade neighbouring Ukraine, developments have followed each other in rapid succession. Not only on the battlefield, but also on the stock markets. Initially, stock prices began to rise as the guns began to roar. That was as expected. In fact, it has almost always been that way in history. Later, however, doubt crept back into investors’ minds. The unprecedented aggression of the Russians made many people flinch. Even a threat of the nuclear option was not avoided. Moreover, the prices of energy, metals, and grain exploded. And this is just at a time when the world is already way up in the air with far too high and stubborn inflation.
Yom Kippur War
This enormous increase in the prices of all kinds of raw materials, especially oil and natural gas, caused the markets to tremble. Comparisons are even being drawn with the 1970s, and are not entirely unjustified. The Yom Kippur War — a military conflict between Israel and Egypt and Syria — then led to an oil embargo by the Arab states. The big oil price hike that followed ushered in a very lean decade for investors. A slowdown in growth and later even a recession, combined with sky-high inflation and eventually even mass unemployment. For the economy and the stock markets, the 1970s were not very kind.
History is repeating itself
Just like then, a war seems to lead to a spectacular rise in energy prices. That was just at a time when the markets were already struggling with historically high inflation. Once again, stagflation — a slowdown in growth combined with inflation — lurks. Or worse, even a recession. A possible decision by the United States to stop buying Russian oil sent the price of oil briefly soaring to $139 a barrel. The price of gas in the European Union even rose to 335 euros per megawatt-hour. That was 16 euros a year ago. The European Union is a good 10% dependent on Russian oil and no less than 40% dependent on Russian gas.
The dollar rules again
While the United States is reasonably self-sufficient in energy, the European Union and Japan have a slightly more problematic situation. The terms stagflation or even recession are being used more and more often. Although the developments in this war follow each other in rapid succession, it can still be noted that the markets are perhaps predicting too black a scenario. Of course, economic growth will not be as exuberant as initially expected. And the expectation of many analysts that the less expensive European shares would do better this year than the expensive U.S. stock market can once again be scrapped. Not for the first time, by the way. The dollar rules again.
Less dependent on oil
But, unlike in 1973, dependence on oil has decreased considerably. Per barrel of oil, the Western world now produces twice as many goods and services as in 1973. Moreover, the price of oil — adjusted for inflation — is still not as high as in the 1970s. But more importantly, this time around, a response from governments and central banks will not fail to come to the aid of the economy and the affected citizens. After all, our economies are increasingly centrally controlled. After the corona support, governments will once again be deep in their pockets. If only to cope with the large influx of refugees from Ukraine and to increase military spending. The economy will benefit from this.
New emergency plan?
And lo and behold, as this stock market report is being written, Bloomberg announces that EU leaders will have a rescheduled summit in Versailles on March 10 and 11. A plan will be unfolded in which bonds will be issued on a large scale to finance the necessary spending on energy and defence. Further amounts are still to be announced. In reaction to this, the stock markets already rebounded a bit this morning. Although this is good news, the question is whether this will not eventually throw extra oil on the inflation wave.
