Europe’s Stagflation is Different in Kind and Much Harder to Remedy

Bridgewater

Danny DeBois, Kevin Brennan

Research

12 Pages

Bridgewater Associates argues Europe’s energy supply shock is creating stagflation that is tougher to fix than a standard demand slowdown. With gas priced like oil above $350 a barrel, the paper expects rationing and targeted fiscal support to matter more than rate hikes. It also warns structurally higher energy costs could sap competitiveness, especially in Germany, and pressure the euro over time.

Date published: August 18, 2022

Source: Bridgewater

Key Takeaways

Supply shock policy: Rate hikes cool demand, but cannot create gas supply or prevent rationing driven output losses.
Fiscal cushioning: Targeted income support can reduce second order damage when industries shut and households face energy bills.
Competitiveness drag: Persistently high energy costs may shift production abroad and weigh on growth, margins, and currency.
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