Spain leads the poverty index in the developed world: this is how the stagflation thermometer works

The 1970s were such a global economic shock that now every time inflation rears its head, similarities with that time are sought. Based on the data, the current moment is the closest to that time, characterized by high inflation and a lacerating economic stagnation. A global pandemic and a war on European soil 70 years later, the similarities are obvious. This return to the past brings back the economic tools that marked that period. One of them is the Poverty Index, which adds the rate of inflation and unemployment of each country, serving as a thermometer for stagflation.

According to data from Ned Davis Research, 87% of the countries in which the index is compiled are above their maximum of the last five years. In the case of Spain, the trend is, to say the least, worrying. It is difficult to find a more damaging combination than rising prices and high levels of unemployment. This combination supposes the direct erosion of the purchasing power of the families.

Precisely in the 70’s economist Arthur Okun created the aforementioned misery index to have a fixed picture of the economic situation of a population shaken by high levels of inflation and unemployment. “Without taking sides on whether inflation or unemployment was the most important battering ram of public sentiment, Okun simply added them together to compile the index. The higher it went, the more miserable people felt, regardless of the cause, and vice versa when the index was down, dragged down by lower unemployment or inflation, or better yet, both,” said Bob Schwartz, senior US economist at Oxford Economics.

Spain, at the head of ‘misery’

Spain occupies the first position of this index within developed countries with a score of 19.83. The economists of the Fraser Institute publish the results of this ranking annually, grouping together advanced countries and excluding developing and underdeveloped economies, since they usually present extremely high data that would distort the analysis and comparison between more homogeneous economies.

If an index were compiled in real time (the latest unemployment and inflation data), Spain’s score would exceed 20 points and widen its gap with the rest of the developed countries. Inflation is presenting variation rates in Spain that are at the head of European countries (except the Baltics and some Eastern economies), while the unemployment rate continues to be the second highest in the Old Continent (only behind from Greece).

Developed countries traditionally occupy the lowest positions in this index, largely thanks to low inflation rates as a result of the independence and credibility of their institutions, mainly central banks, and to favorable demographics and less tolerant of price increases.

This forgotten index in recent decades is once again relevant now that inflation is rising almost across the board globally and the purchasing power of workers is in serious danger. The Canadian Fraser Institute highlights in its latest report on this index that “fortunately, the misery index almost disappeared in the early 1990s when inflation was controlled and remained low, and unemployment in most countries tended to However, there are now real concerns about rising inflation and unemployment in industrialized countries, so the Misery Index is back in the debates.”

Chris Iggo, CIO Core Investments at AXA IM, emphasizes the reading given by the indicator right now: “According to consensus forecasts for 2022, the misery index will continue to be above recent annual averages.” “The effects of the energy crisis will be felt throughout the world,” adds the expert, who warns: “The forecasts are being cut and in our last quarterly review the recession was mentioned for the first time.”

Iggo explains that “the current macroeconomic environment is difficult”, since “investors had not had to face both inflation and weakening growth for a long time”, a situation “baptized as a period of stagflation” about which he comments that “the index of misery is higher when there is stagflation”. However, Iggo points out that “the misery could be worse if it were unemployment that increased in addition to inflation.”

the peak of the 90s

It is not the first time that this index has sent alarming signals, and less so in the case of Spain, which has historically been a country that has suffered large movements in inflation. During the crisis of the 1990s, the level of ‘misery’ in Spain shot up in two ways: a strong rise in unemployment (which was close to 25%) and a powerful rise in inflation (it reached 6.5%) due to of the devaluations of the peseta in 1992 and 1995.

These devaluations occurred due to the difficulty of the Spanish peseta to remain in the fluctuation range agreed with the German mark in the convergence project to lay the pillars of what would later be the euro. Devaluations tend to push up domestic prices in the face of a relative increase in the cost of exports: more pesetas were needed to import goods and services denominated in other currencies. The index touched 29.55 points (as can be seen in the chart below)the second highest level in history.

the 70’s high

However, it was between the mid and late 1970s when Spain reached its maximum in the misery index with a peak of over 33 points in 1977. The country, immersed in the Transition after 40 years of Franco’s dictatorship, was facing an unstable political situation and at the same time economic difficulties, a mixture of international problems and the expiration of the national economic model.

As soon as he won the constitutional elections in June 1977, Adolfo Suárez and his single-color government with the UCD found, in addition to the share of social conflict that accompanied the Transition, a fragile economic situation derived, not only but above all, from the oil crisis of 1973. Spain took longer to suffer the effects of this global scourge that was the decision of the Arab countries of OPEC not to export oil to the US and its Western European partners for having supported Israel in the War of Yom Kippur that same year.

With inflation that had already exceeded the rate of 26% and approached 30% during the year, interest rates that would exceed 20%, the threat of capital flight and unemployment that had gone from 300,000 people to more than 700,000 in four years, Suárez sounded out the PCE of Santiago Carrillo and the PSOE of Felipe González – order is important – to seek a framework of stability between the main political forces while his vice president, Enrique Fuentes Quintana, advised him and explored the existing options.

After lengthy negotiations, on October 25, 1977, two major agreements were signed at the Palacio de la Moncloa. The economic pact included measures such as a salary increase limit of 22% (inflation rate forecast for 1978), free dismissal for a maximum of 5% of company staff, the right to unionize, an effective monetary policy for contain the galloping rise in prices, the bases of a modern tax system that would lead to personal income tax or the implementation of a new financial system structuring the action of the Bank of Spain.

In terms of public freedoms, the agreement contemplated the elimination of legislative aspects that had prevailed in the Franco regime: prior censorship in the press was eliminated, the crime of torture was created and rights such as assembly, political association or freedom of association were extended. expression.

The measures had an effect by 1979 the misery index had clearly fallen. In the first half of the 1980s it would rise again -not as much as in the previous decade- in the midst of the industrial reconversion policies led by the Government of Felipe González, which initially increased unemployment in the sector in view of the entry in 1986 into the European Economic Community, prelude to the current European Union. Between the end of the 1980s and the beginning of the 1990s, the index clearly fell again.

The case of the USA

The relevance of the misery index was made clear by the harshness that the 1970s also meant for Americans. The aforementioned Arab oil boycott and the consequent increase in crude oil prices caused the index to shoot up twice during a period in which alternated episodes of rising inflation and unemployment, and sometimes both.

At the peak of the index, 19.9, in mid-1975, inflation was 11.8%, combined with a high unemployment rate of 8.1%. The intense level of misery extended into the early 1980s, when the index peaked at 21.9%, thanks to an inflation rate of 14.4% coupled with a still high unemployment rate of 7.8%.

Although subsequent shocks such as the Gulf War At the beginning of the 90s, the bursting of the dotcom bubble or the great financial crisis, it has been the covid pandemic that has propelled the index to the highest of previous times. The spike in 2020 was much sharper and faster than any previous increase, going from 5.9 to a peak of 15.1 in just one month – from March to April – in contrast to the roughly three-year period from the valley to the peak that marked the index’s two increases more than four decades ago.

The impact of the pandemic caused the economy to crash abruptly and led the unemployment rate at a Great Depression high, 14.4% in April 2020 from a 50-year low, 3.5%, just two months earlier. Unlike previous increases, this time inflation did not play a role. The curious thing has come later. After weathering the worst of the pandemic. The US has subscribed to the recovery and unemployment is already at 3.8%, very close to pre-pandemic levels.

What is now driving the index higher is a runaway inflation that finds its precedent in the early 1980s and that not only does not abate, but threatens to crust over as the war in Ukraine continues to push oil prices higher.