Advanced Economies Navigate Away from Immediate Stagflation Threat: BNY Mellon

Despite concerns over recent economic data, advanced economies appear to be moving away from the immediate threat of stagflation, according to a new report by BNY Mellon. The report highlights positive trends in real wage growth and productivity, suggesting a more favorable economic environment compared to the previous year.

The bank acknowledges that Q1 2024 GDP growth slowed in some regions, while core inflation remained elevated, raising concerns about potential stagflation risks. However, several key indicators point towards a more optimistic outlook.

In the US, real wage growth has remained positive for 11 consecutive months, indicating an improvement in purchasing power for consumers and a more balanced economic landscape. The report notes that US real wages increased by 0.7% year-over-year in March 2024, following a period of decline between 2021 and 2023 due to high inflation. Additionally, the US maintains advantages in productivity growth, which further supports its ability to avoid stagflationary pressures.

The risk of stagflation is also receding for other advanced econoimes. While the European Central Bank has expressed concerns about lower-than-expected productivity growth in the Eurozone, weaker demand is expected to help manage inflation and mitigate the risk of stagnation. The Eurozone's GDP grew by 0.1% quarter-over-quarter in Q1 2024, indicating a modest recovery from the previous quarter's contraction.

BNY Mellon's analysis of OECD forecasts suggests that within the G7 economies, only the UK faces a clear risk of stagflation. The remaining major economies, including the US, Eurozone, and Japan, appear capable of bringing inflation back towards target levels while maintaining moderate economic growth. The OECD projects US GDP growth of 1.6% in 2024 and 1.0% in 2025, with inflation gradually declining towards the 2% target.

"Most global economies have managed to move away from the extreme stagflation risk of the past two years and their central banks continue to seek an opening to cut interest rates," concludes BNY Mellon. "The ‘healthiest’ mix, whereby growth is relatively strong but without high inflation, remains in North America, with the US leading the way."