One on One with Brian Fabbri, Chief North America Economist for BNP Paribas
Tuesday, April 03, 2007
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SUSIE GHARIB: Despite today`s market rally, fears of stagflation are creeping into conversations with economists and Wall Street market experts. Is stagflation, that deadly phenomenon of sluggish economic growth, coupled with a high rate of inflation making a comeback? Joining us now with his analysis, Brian Fabbri, chief North America economist for BNP Paribas. Hi, Brian.
BRIAN FABBRI, CHIEF ECONOMIST, BNP PARIBAS: Hello, Susie.
GHARIB: Is stagflation a possibility?
FABBRI: Well, it`s a possibility, but I think we have to be reminded that it`s not the same bad news that it was back in the `70s when we truly did have stagflation, stagflation being double digit inflation and much weaker than trend growth in our economy.
GHARIB: But we do have slowing economy. We do have uncomfortable inflation. Is some kind of modern day version of stagflation possible against today`s economic back drop?
FABBRI: It sure looks that way. I mean, when we take a look at the inflation sources, presently high gasoline prices and crude oil prices and especially high food prices. High food prices meaning corn and ethanol and so the price of livestock and all of those things that we`re buying is drawing up inflation indicators and then on the other hand, we`ve already seen the economy slow down in the second half of last year. It only grew 2.25 percent, about one full percentage point less than potential and that`s not the end of the story. This year it looks to me as though real GDP is going to grow only 1.5 percent, really well below potential and really well below what the Fed`s predicting right now as well.
GHARIB: So it sounds like you`re not willing to use the word stagflation but you do have a very weak prognosis for the economy. Am I getting you right?
FABBRI: Let`s call it baby-flation because it`s certainly not what we experienced in the `70s, but for the moment I think we are burdened by this crux of higher-than-desired inflation, especially from the Fed`s point of view and much weaker economic growth than anybody would like to see. At least the Fed is in a very difficult position, I think.
GHARIB: Do you see a recession Brian? Is that a possibility?
FABBRI: Well, let`s put it this way. If the Fed`s too concerned, overly concerned about inflation being higher than what they would like to see and they sit on their hands and pause, then I think recession really does come into play because credit consciousness, tighter lending standards I think are going to drive a weakening kind of economy into very desperate situation. However, I think all is not lost. I really believe the Fed will become very aggressive in the second half of this year and move much more closely to watching what the economy is doing rather than what the disappointing inflation news is saying. And thus they`ll ease and lower interest rates just in time.
GHARIB: So how bad does the economy have to get for the Fed to do that easing, to cut rates?
FABBRI: Well, I think there`s two very key indicators for them. One is, of course, payrolls and very serious reductions in payroll growth. We`ve been looking at very strong growth last year. It started to moderate in the first couple of months of this year but, frankly, I think we may have to see a couple of negative monthly payroll prints for the Fed to become unnerved and then real GDP growth in Q1 and Q2 at 1.5 percent is enough.
GHARIB: All right, well, we`ll leave it there. Thank you so much, Brian, appreciate you coming on the program this evening.
FABBRI: Thank you, Susie.
GHARIB: My guest tonight, Brian Fabbri, chief North America economist for BNP Paribas.
