The West has already started to feel the stagflation blowback from Russia's war on Ukraine, Mohamed El-Erian says

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Mohamed El-Erian
Mohamed El-ErianREUTERS/Lucy Nicholson
  • The economic fallout from the Russia-Ukraine war is building to "stagflation" in the West, Mohammed El-Erian said.

  • The major economic disruption from the conflict will affect countries beyond Ukraine and Russia, he said.

  • Analysts have increasingly warned about stagflation, a combination of high inflation and low or negative growth.

The economic fallout from the Russia-Ukraine war is already putting "stagflationary" pressure on the US and its allies, leading economist Mohamed El-Erian has warned.

El-Erian, the chief economic adviser to Allianz, urged countries' policymakers to develop recovery plans to counter the longer-term and widespread economic impact of the conflict.

"(The) economic consequences of the war will not be confined to the countries fighting it," he said in a Project Syndicate article published Monday.

"Already, the West has started to feel the 'stagflationary' blowback."

Wall Street analysts have become increasingly concerned about the risk of stagflation, which is when high inflation occurs at the same time as stagnant economic growth.

US inflation jumped to a 40-year high of 7.5% in January. The Federal Reserve is ready to start raising interest rates in March, despite the Russia-Ukraine war, in an effort to reduce borrowing, spending and demand in the economy.

Rising commodity prices, driven higher by the war, have sparked concerns that the already red-hot inflation in the US and elsewhere could soar further.

"Existing inflationary pressures will be compounded by the surging prices of commodities, including energy and wheat," El-Erian said.

"Meanwhile, another round of supply-chain disruptions has begun, and transportation costs are again increasing. Disrupted trade routes are likely to place further downward pressure on growth," he added.

That said, the extent of the damage will differ from country to country, according to El-Erian. He expects the US economy to be more resilient and do better than Europe's, which he believes will go into recession.

But the Fed's failure to act quickly enough against inflation last year means it has less flexibility on policy now, according to the economist, a longtime critic of the US central bank.

Investors are worried that central banks could raise interest rates quicker and higher to tackle inflation, causing greater uncertainty for financial markets. The Russia-Ukraine conflict is adding to this, El-Erian suggested.

"On both sides of the Atlantic, one can expect increased — and, at times, unsettling — market volatility," he said.

"The financial losses will be greater in Europe, with certain sectors — notably, certain banks and energy companies — being hit very hard."

At the same time, he emphasized that Russia's economy would suffer the most damage, set to shrink by one-third thanks to the tough sanctions it faces. Ukraine, too, will be severly hit, he noted.

"Even if the war ended tomorrow, it would take years for these economies to recover; and the longer the war continues, the greater the damage, the larger the potential for vicious interactions and adverse cycles, and the deeper the consequences."

Read more: Will Federal Reserve rate rises be knocked back by the oil price spike? Macro strategists at a $900 billion firm weigh in — and reveal which countries' stock markets should ride out the storm best

Read the original article on Business Insider