Top economist Daniel Stelter is skeptical about the prospects for the global economy. In an interview, he explains why Germany in particular is facing problems and why he expects a new wave of refugees.
Mr. Stelter, the Russia-Ukraine conflict has turned into a war. What does that mean for the global economy?
Daniel Stelter: The situation has deteriorated significantly. We are in a long-term conflict and we are also running out of important export goods from Ukraine such as agricultural commodities, semiconductors and neon gas. After all, no one steers to the Black Sea ports any more.
How do you assess the sanctions against Russia?
Stelter: The measures are stronger than I expected. Freezing Russian assets was a smart move. Still, not much changes. Russia remains autonomous and still has revenues from oil and gas exports. In the end there are now two options for what happens: a bad one and a very bad one.
What would be the bad option?
Stelter: We are getting stagflation, meaning rising prices while the economy is stagnating. The surge in inflation is already visible and we have a massive problem in the food sector. Russia and Ukraine are responsible for about 25 percent of wheat exports, Ukraine for around 90 percent of sunflowers. Corn and barley also come from there in significant quantities.
Bread is therefore significantly more expensive.
Stelter: Do you still remember the Arab Spring, which began at the end of 2010? At that time not everyone wanted to be free, but the uprisings began because the price of bread had risen sharply. We have to be careful that this doesn't happen again. Because one thing is clear: a farmer in the Ukraine currently has no time to till his field if he has to fight against Russia at the same time.
Are you afraid of a new wave of refugees?
Stelter: I wouldn't rule it out. The Middle East is one of the main importing countries. If these countries are destabilized again, the wave of refugees will be repeated. Perhaps we should even buy wheat at high prices and resell it to these countries at lower prices to counteract this. China did it cleverly, maybe they knew more. They have set up warehouses and secure raw materials, while we hardly have any reserves. You see: Gas, coal, food - the prices will rise significantly. That worries me.
And what is the worst possible scenario?
Stelter: If the world boycotts Russian oil and gas, we will get double-digit inflation rates and our economy will collapse massively. Sanctions always hurt both sides - it is ultimately a question of who can hold out longer. And Germany would be severely affected, because its dependence on Russia is disproportionately high.
With this variant, we slide into a recession.
Steller: Definitely. We therefore have a choice between stagflation and a stagflationary recession – the economy is contracting and inflation is rising at the same time. And there is also the risk of unrest in North Africa.
In this mixed situation, can the European Central Bank raise interest rates?
Stelter: Good question, but not easy to answer. Because we see an increase in some prices, but not in general. When the ECB raises interest rates, citizens save more and demand falls. That will deepen the recession.
Accordingly, it would be wrong if the monetary policy brake is pulled.
Stelter: The central banks have recently pumped a lot of money into the markets. If you don't do anything now, the inflation rate will stay up longer, but more money will be spent. Then the thought prevails: if my money is worth less tomorrow, then I'll treat myself to something today. The velocity of circulation of money increases, inflation gets a new boost.
How do you assess the geopolitical situation? Will we have two camps with USA/Europe and China/Russia?
Stelter: China's proximity to Russia is obvious, but India's position is not yet known exactly. But there is a great danger if more technology goes from China to Russia and more raw materials to China. I think the biggest winner of a destabilized world will be China. This is tragic because we should have done everything to bring Russia and Ukraine closer to Europe. That's no longer possible.
How should investors behave? Between stagflation and a recession with rising inflation, my prospects are bad either way.
Stelter: I don't think the capital markets have priced in the stagflationary recession, perhaps even the risks of stagflation. Investors need to be careful what happens if commodity prices get another big boost.
How should the small investor behave?
Stelter: He should stay calm. When he has spread more widely, close your eyes and through. There are a few days when the stock markets rise or fall massively. According to all research, private investors are underperforming the index because they are trying to be smarter than the market.
Russian stocks are speculative, you said in our last conversation. That turned out to be true, but the prices have certainly developed worse than you expected as a result of the war. How do you rate that today?
Stelter: As a normal investor, I wouldn't buy here, even if it were possible. However, the family offices also buy in Russia. From their point of view, however, only with a very small part of the assets. You have a lot of time, but here too there is now a risk of total loss.
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