My Data Analytics exam was to run a regression analysis of the impact of macroeconomic variables on firm performance in the FMCG sector in Nigeria and South Africa. The data was for ten companies over ten years. I worked with one dependent variable (Market to Book Value (x) and four independent variables (GDP growth, Inflation, Exchange rate, Interest rate). My regression analysis showed similar results for both countries. Noteworthy from my result is that interest rate and Exchange rate both had negative coefficients which suggests an increase will cause a decrease in the dependent variable. However, GDP growth and Inflation both had positive coefficients.
So, thought to blog about an economic phenomenon that speaks to two of my independent variables (Interest Rate and GDP growth) and a third variable called unemployment. This is phenomenon is called Stagflation.
Stagflation may be described as a situation where a country experiences relatively slow growth, a high inflation rate, and an elevated rate of unemployment. Whenever stagflation is experienced in any country, policymakers face serious challenges when attempting to redirect their economy. This is because attempts made to curb inflationary problems could escalate the unemployment rate, leaving the country in a more terrible state.
Similarly, policies designed to curb unemployment are likely going to worsen inflation. It is worthy of note that during Stagflation, a country does not necessarily experience slow growth. The gross domestic product may experience a decline due to the combined effects of inflation and the unemployment rate, both of which would disrupt the demand and consumption of goods and services.
Causes of Stagflation.
According to the Phillips curve economic concept which was developed by A. W. Phillips, there exists an inverse relationship between employment and the rate of inflation within an economy. However, the emergence of stagflation has proven that this relationship may not always hold.
While the concept of stagflation is a historical phenomenon, economists are yet to agree on the possible reasons why it might occur. Nonetheless, two of the most common reasons would be discussed below:
- Supply Shock: This is premised on the fact that when there is a sudden change in the production or supply of a major commodity, the impact would be a surge in prices which would, in turn, lead to a higher cost of production which slows down consumption. Therefore, this results in laying off workers due to slim margins. As a result, an economy experiences price surges and a higher level of unemployment.
What are the Possible Solutions to Stagflation?
The occurrence of Stagflation represents a huge dilemma for most policy-makers since an attempt to curb rising prices worsens the position of a high unemployment rate and vice versa. How then do countries get out of it? Let us examine the following popular strategies to exit stagflation.
- Pay the price: One strategy is to face the fact that unemployment and rising inflation cannot be easily tamed at the same time. Consequently, a monetary authority may choose to rein in inflation.
- Diversifying the Economy: An economy would be less prone to Stagflation when it is less dependent on volatile commodities such as oil.
- Enhancing Productivity: Providing policies that would help to bolster productivity can help an economy to witness sustainable growth without having to deal with high inflation.
- Low Rate Environment: Policies that facilitate a low cost of borrowing would have a positive impact on production as well as the level of consumption.
