Mar 30, 2011

Political Turmoil In The Middle East Increases The Risk Of Stagflation

Political turmoil in the Middle East has powerful economic and financial implications, particularly as it increases the risk of stagflation, a lethal combination of slowing growth and sharply rising inflation. Should stagflation emerge, there is a serious risk of a double-dip recession for a global economy that has barely emerged from its worst crisis in decades.

Severe unrest in the Middle East has historically been a source of oil-price spikes, which in turn have triggered three of the past five global recessions. The Yom Kippur war in 1973 caused a sharp increase in oil prices, leading to the global stagflation of 1974- 75. The Iranian revolution in 1979 led to a similar stagflationary increase in oil prices, which culminated in the recession of 1980- 81. And Iraq’s invasion of Kuwait in August 1990 led to a spike in oil prices at a time when a US banking crisis was already tipping America into recession. - in Business Day

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