PM — What is stagflation and what could it mean for us in the 2020s?

One more working day left until the Eid break, ladies and gentlemen. We can imagine how productivity is going to look like tomorrow.

Late to the party, but always welcome: The EGX (pdf) joined the central bank (pdf) and the Manpower Ministry in a week-long observance of Eid Al Adha. Private and private sector workers are taking the week off from Sunday 10 July to Thursday 14 July. This follows the cabinet, which said on Monday that the public sector will take the full week off.

The House of Representatives beat all of us to the break, but to their credit, they still held on after schools closed (thank God for small miracles). MPs spent yesterday scrambling to get as many bills approved as possible before heading for their annual two-month break in Sahel. Check out our summary of yesterday's session here.

THE BIG STORY TODAY-

Activity in Egypt’s non-oil private sector saw its biggest slump in two years in June, falling further into negative territory as supply-side pressures increased along with rising inflation and the impacts of the devalued EGP, according to the S&P Global purchasing managers’ index (pdf). Business activity contracted at its fastest pace since the first wave of the covid-19 pandemic, with the index falling to 45.2, down from 47.0 in May.

THE BIG STORY ABROAD-

Game over for Boris Johnson? Key ministers have resigned from the British government, saying that Prime Minister Boris Johnson is not fit to govern. The move comes amid calls by a growing number of lawmakers calling for him to step down. John Glen, the city minister and economic secretary to the Treasury, was the most recent minister to resign, writing that he can “no longer reconcile my commitment to the role . . . with the complete lack of confidence I have in your continuing leadership of our country.” Glen’s decision is another blow to Johnson after finance minister Rishi Sunak and health minister Sajid Javid sent resignation letters within minutes of each other last night.

Johnson remains defiant: The PM appears determined to stay in office and immediately appointed education minister Nadhim Zahawi as his new finance minister, and continued to fill in other vacant roles. Foreign minister Liz Truss, who is widely considered a main contender to replace Johnson as the Tory leader, asserted that she was "100% behind the PM".

The story is leading coverage in the international press, including in Reuters | Financial Times | Wall Street Journal | France 24 | DW | CNN

IN OTHER GLOBAL NEWS- Outgoing OPEC’s Secretary General Mohammad Barkindo passed away at 63, Reuters reports.

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HAPPENING NOW- President Abdel Fattah El Sisi has officially launched the “Digital Egypt Platform” during the inauguration of several telecom and digital infrastructure projects, including the submarine cable landing stations along with the Telecom Egypt Regional Data Hub, according to an Ittihadiya statement. The platform, which has received EGP 10 bn in investments so far, offers online services like e-payment, car license renewals, and booking appointments for civil services, CIT Minister Amr Talaat said, state news agency MENA reported. All you need to register for the platform is your national ID and a cell phone number.

Happening tomorrow (maybe): The fuel pricing committee could meet today or tomorrow to review fuel prices for the third quarter.

^^We’ll have more on these stories and others in tomorrow’s EnterpriseAM.

** CATCH UP QUICK on the top stories from today’s EnterpriseAM:

• SODIC makes a play for MNHD: SODIC submitted a non-binding offer to acquire up to 100% of state-owned developer Madinet Nasr Housing and Development in a potential all-cash transaction that could value the company at as much as EGP 6.36 bn.
• Economic growth accelerates in FY2021-2022: The Egyptian economy grew at a 6.2% clip in FY2021-2022, up from 3.3% the previous year.
• Another big wheat buy: Egypt purchased 444k tons of Russian, French and Romanian wheat directly from traders yesterday, sidestepping its usual method of purchasing wheat through international tenders.

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???? CIRCLE YOUR CALENDAR-

Egypt and the UAE will sign an agreement to establish 10 GW in wind projects following the Eid Al Adha holiday, the Madbouly cabinet said yesterday. The statement offered little information on the project but said that the details have already been worked out and a formal agreement will be signed after the break.

Public consultations on the state ownership policy document that outlines its privatization plans will resume on Sunday, 17 July, with air transport industry players taking center stage. Every Sunday and Tuesday sees workshops on how privatization plans will affect specific industries. You can find more details on the schedule of the meetings here.

National Dialogue meetings to resume 19 July: The board overseeing the National Dialogue will hold its second meeting on 19 July, during which it will discuss the agenda and form subcommittees. Board members met for the first time yesterday.

Need a refresher on the national dialogue? We’ve got you covered.

Other news triggers to keep an eye on this month:

• Foreign reserves: Foreign reserves figures will be out sometime this week.
• Inflation: Inflation data for June will likely land as early as this week.

Check out our full calendar on the web for a comprehensive listing of upcoming news events, national holidays and news triggers.

☀️ TOMORROW’S WEATHER- Expect a daytime high of 38°C tomorrow in Cairo, before the mercury falls to 23°C at night, our favorite weather app tells us.

Good news: You can be lazy all week long — as long as you get up off the couch at the weekend. One or two long workouts on the weekend can give you the same health benefits as exercising regularly throughout the week, according to new research. The findings of a study published in the JAMA Internal Medicine journal indicate that adults who perform 150 minutes or more of moderate intensity exercise per week get the same health benefits whether they choose to spread out their exercise sessions throughout the week or pack it all into two sessions on the weekend. And your weekend workouts don’t have to be high-intensity boot camps, either: they could include a brisk walk, playing doubles in a padel game, or swimming laps.

It’s official: Optimists live longer: There’s scientific evidence now apparently proving that wive’s tale that optimists live longer courtesy of a study published in the US’s National Library of Medicine linking optimism with better health. Researchers monitored the lifespan of around 160k women aged 50 to 79 over a 26-year period. Results showed that the most optimistic 25% saw their lifespan increase 5.4% longer than the rest. 53% of those women achieved “exceptional longevity,” surviving to the ripe old age of 90.

Why are they so lucky? Optimists simply live better: The study showed optimists having a tendency to live longer, thanks to better health, sleep and minor stress levels. “Higher optimism was associated with longer lifespan and a greater likelihood of achieving exceptional longevity overall and across racial and ethnic groups,” the study said.

???? ON THE TUBE TONIGHT-
(all times CLT)

Shahid’s Wesh Wa Dahr starring Eyad Nassar and Riham Abdel Ghaffour is most definitely a charming watch. The series follows a lowly employee at a pharma company (Nassar) who in a spate of rebellion and out of frustration with his life steals some money and moves to Tanta (who wouldn’t sympathize). He starts a medical practice there and hires an assistant (Abdel Ghaffour), who too, is fleeing from a past. The pair play a game of cat and mouse out of fear that one would expose the other’s fake identity. If you’re a sucker for attention to details, drama, and a bit of comedy along the line, this series is not to miss. (watch trailer, runtime: 1:21).

It’s unfortunate that you can’t binge: We’re still at Episode 4 of the 10-episode series (Shahid releases two episodes weekly) and it’s still holding up strong.

⚽ A little local football watch: The Egypt Cup’s Round 16 continues tonight, with Talea El Geish clashing with Suez at 6pm, while Pyramids FC going head to head with Ceramica Cleopatra at 9pm.

???? OUT AND ABOUT-
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Get transported to the streets of mid-century Rio de Janeiro through the big screen: Fernando Meirelles and Katia Lund’s 2002 classic City of God is screening tonight at 8pm at Founders Spaces in Downtown Cairo. The screening marks the final installment of Kino Cairo’s Cinema & The City series, which showed five urban classics across the city. We don’t know much about these guys yet, but we’re intrigued and we ‘ll definitely be following to see what they do next.

Our firm favorites the Mazaher Ensemble are back with their Zar music in time for Eid. Um Sameh, Um Hassan and Nour El Sabah are among the last remaining performers of Zar in the country. The event will take place from 8pm at Makan (Egyptian Center for Culture and Arts) in Downtown.

Hip-hop ft mahraganat at CJC 610: Brace yourself for the Softat collective tonight at 9pm at CJC 610 in Sheikh Zayed. The first round of Softat’s club night features big names in the local producing scene: Collective members Molotof, Besh, and SoloFan are all in the line-up, with 200 Shams and Brooklyn-based Egyptian DJ Yas Meen Selectress dropping their beats as guests.

???? UNDER THE LAMPLIGHT-

A slightly different world with all the same problems: As the long holiday approaches, it’s the perfect moment to put down the business books and turn to some fiction. The best lit, in our opinion, takes you to another world in order to shine a fresh light on what’s going on in our own — and Japanese author Yoko Tawada does exactly that in her latest novel, Scattered All Over The Earth. In Tawada’s not-too-distant future, Japan has been swallowed by rising sea levels and US migrants flock to Mexico’s booming economy in search of work. Our protagonist in this topsy-turvy world is Hiruko, who may be the last surviving Japanese person on Earth and goes on a quest through Europe to find another native speaker of her lost language. The author lives in Berlin and writes in both Japanese and German, and this novel, translated from the Japanese by Margaret Mitsutani, both plays with language and asks how and why it is so central to our identities. If it sounds tough, it isn’t: Tawada’s wry humor that keeps you turning the pages. See what the New York Times and the Financial Times had to say.

The EGX30 rose 0.2% at today’s close on turnover of EGP 486.02 mn (41.5% below the 90-day average). Foreign investors were net sellers. The index is down 27.4% YTD.

In the green: GB Auto (+10%), ElSewedy Electric (+6.4%) and EFG Hermes (+4%).

In the red: Cleopatra Hospitals (-4.6%), Housing and Development Bank (-4.5%) and Credit Agricole Egypt (-4.1%).

What is stagflation, and what could it look like in the 2020s? Russia’s invasion of Ukraine has exacerbated the slowdown in global economic recovery, as well as disruptions in the global supply chain, both of which the world has already been coping with since the onset of the covid-19 pandemic. Developed and developing economies alike are now experiencing their highest inflation rates in decades, and global prices of commodities are soaring. This toxic combination of global crises is affecting global output levels and provoking fears of a bout of stagnation reminiscent of the 1970s.

The dictionary definition: The term “stagflation” was first used in the 1960s by British politician Ian Macleod, when he was describing the parallel crises of inflation and economic stagnation during a time of economic stress in the UK. Since then, it has been used to describe periods of heightened inflation that coincides with slowing economic growth. This is usually accompanied with higher unemployment and tighter monetary conditions.

How it feels to be in a period of stagflation: For business owners, it’s a nightmare. Prices rise but consumers’ purchasing power dwindles, and low economic growth hits business confidence. It’s equally bad for the consumer, who faces both a rise in the cost of living and increased job insecurity.

It also puts policymakers in a tough spot…: Few monetary tools are available to address stagflation. While the conventional wisdom for countering high inflation is for central banks to hike interest rates, high borrowing costs will further depress consumer demand and make running a business even more expensive. On the other hand, keeping monetary policies loose risks pushing prices even higher.

…especially when global debt levels are already high: “Central bankers can take policy normalization only so far before risking a financial crash in debt and equity markets,” with debt levels at record levels, Nouriel Roubini, professor of economics and international business at New York University Stern School of Business, tells the Financial Times.The World Bank echoed the warning in a report (pdf) last month, where it explained that unlike in the ‘70s, stagflation today would occur against the backdrop of “heightened financial vulnerabilities, including stretched asset prices and high debt levels, which could magnify any growth slowdown.”

How worried should we be? Fairly worried. The last time the global economy suffered from stagflation, things looked eerily similar to how they look now. In the ‘70s, the trigger for stagflation was a spike in oil prices after the Arab oil embargo following the 1973 war. Inflation hit double-digits and settled for almost a decade and the US — along with much of the world — underwent a recession that lasted for more than a year.

But there are also notable differences between how the economy is now and how it was back then: Most analysts and economists, including the World Bank, do not expect an exact rerun of the 1970s. To summarize the reasons why we’re — slightly — better off, according to a the World Bank and the analysts who spoke with the FT and CNBC:

• Inflation and commodity prices are not yet as high as they were back then;
• The world is less reliant on fossil fuels than it was in the ‘70s due to the rise of renewables, which could help keep oil prices from rising further;
• The USD and the balance sheets of major financial institutions are both generally strong;
• Governments are offering more fiscal support for the most vulnerable through measures like subsidies and social safety nets, which supports real income;
• High unemployment will likely trigger a slowdown in inflation, which would cancel out one of the precursors of stagflation (of high unemployment and inflation happening in parallel);
• Most central banks now have clear mandates for price stability, and, over the past three decades, have maintained credibility by achieving their inflation targets.

Still, most expect slower growth (and heightened inflation) next year: The World Bank slashed its global economic growth forecast from 4.1% to 2.9% for 2022, citing stagflation risks. Similarly, the IMF downgraded their forecast for 143 economies this year — accounting for 86% of global GDP. The OECD also recently forecast a “sharp” slowdown of global growth this year, revising downwards its forecast to 3% from 4.5%.

Unsurprisingly, EMs are in the worst position: Consumer price inflation in EMs is more exposed to volatile food and energy prices, and currencies are more vulnerable to a strengthening greenback as the Fed continues to raise interest rates. Stalling growth, high prices and tighter monetary policy in developed economies is already hitting emerging-market bonds, assets and currencies. EMs are also heavily dependent on foreign investment, but the current turbulent global conditions have triggered risk aversion among investors, with businesses likely to pull back from developing countries whose economies are more risk-prone.

Egypt is definitely not safe: Our reliance on wheat imports from Russia and Ukraine (which usually account for more than 80% of our imported grain) makes us extremely vulnerable to rising food prices. Inflation rose to a three-year-high in May as rising global commodity prices and the devaluation of the EGP put upwards pressure on consumer prices. Three financial institutions have slashed our growth forecast for next year, with Fitch predicting 4.4% growth, the World Bank seeing a 4.8% growth clip, and the IMF sees our economy growing 5%. Moody’s also turned its outlook on Egypt negative amid “rising downside risks” that could hinder our ability to meet debt repayments.

But seriously: what can policymakers do? Trigger a recession, for one. The conventional wisdom on solving stagflation is to get a handle on inflation by raising rates and sacrificing economic growth and higher unemployment, an economist tells the Washington Post. The rationale is that the market recovers faster from unemployment than it does from persistently high consumer prices. Recessions typically last a little less than a year.

And for EMs, investments could be the magic bullet: Besides taking the necessary monetary and fiscal policy actions, the key for governments — particularly in emerging markets, including Egypt — is to focus on investments that spur growth and avoid stagflation, IMF Executive Director Mahmoud Mohieldin said recently.

It’s a balancing act: “Developing economies will have to balance the need to ensure fiscal sustainability with the need to mitigate the effects of today’s overlapping crises on their poorest citizens,” said Ayhan Kose, director of the World Bank’s Prospects Group. “Communicating monetary policy decisions clearly, leveraging credible monetary policy frameworks, and protecting central bank independence can effectively anchor inflation expectations and reduce the amount of policy tightening required to achieve the desired effects on inflation and activity.”