As U.S. gross domestic product (GDP) growth plummets and global oil prices surge, the risk of stagflation in the American economy has significantly increased.
Last weekend, the Bureau of Economic Analysis reported that the preliminary GDP figure for the fourth quarter of last year was a mere 0.7%.
This marks a substantial decline from the initial estimate of 1.4% and a dramatic slowdown from the previous quarter’s 4.4% growth.
The U.S. GDP is released in three stages: advance estimate, preliminary estimate, and final estimate.
The GDP growth rate has essentially halved, suggesting that the U.S. economic slowdown was already accelerating before the U.S.-Iran conflict.
In the wake of the U.S.-Iran hostilities, Iran’s blockade of the Strait of Hormuz, which handles 20% of global oil shipments, has triggered a sharp spike in international oil prices.
Last week, the benchmark Brent crude oil price surpassed 100 USD per barrel, while West Texas Intermediate (WTI) crude oil exceeded 98 USD, approaching the 100 USD mark.
Following the U.S. bombing of Iran’s Kharg Island oil facility last weekend, Iran retaliated by attacking the Fujairah oil facility in the United Arab Emirates. This escalation is expected to drive oil prices even higher.
Trading on the New York Mercantile Exchange, where WTI is traded, will resume this week at 6:00 p.m. Eastern Time.
The sharp contraction in U.S. GDP growth comes amid soaring global oil prices,
heightening the risk of stagflation. These concerns led to a broad sell-off in U.S. stock markets last weekend, with the Nasdaq falling about 1%.
The U.S. last grappled with chronic stagflation in the 1970s, exacerbated by skyrocketing oil prices due to Middle East conflicts. At that time, legendary Federal Reserve Chairman Paul Volcker managed to tame stagflation through aggressive interest rate hikes.
However, the current situation is complicated by President Donald Trump’s open pressure on the Federal Reserve to lower interest rates, potentially increasing the likelihood of the U.S. economy sinking into the quagmire of stagflation, one of the most challenging economic scenarios.