What if the Strait of Hormuz crisis continues?

 

What if the crisis continues and lasts for more than two quarters of a year, i.e., another six months... and assuming the worst... could the world enter stagflation?

Stagflation is a state of weak economic growth and high unemployment, i.e., economic stagnation, accompanied by inflation.  This situation occurs when there is no economic growth but prices are rising, and it is considered an undesirable state. The current crisis is casting a shadow on the increased costs of every product worldwide, from the energy costs within factories needed to operate production lines, to the rising prices of raw materials used in production, the increased costs of transporting them to the factory, and finally, the increased costs of transporting the final product from production sites or factories to retail outlets for the consumer.

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Stagflation occurs when the economy faces a shock, such as a rapid increase in oil prices, as is happening now in the Strait of Hormuz crisis.  This situation drives up prices at a time when economic growth slows, purchasing power declines, and production becomes more expensive than usual and less profitable. Manufacturers may reduce their profit margins to keep their factories afloat. This is because higher prices are met with lower sales as a segment of consumers—those with low or middle incomes—are no longer interested in purchasing their products due to the increased cost and their inability to afford them.

Factory owners may resort to laying off workers in an attempt to reduce costs and lower production rates due to decreased sales and accumulated inventory. This leads to increased unemployment, and then people take to the streets to demand support and unemployment benefits from already impoverished governments.

The rising unemployment levels and the consumer's fear that worse is yet to come cause higher-income consumers to cut back on spending and prioritize their needs for fear of joining the ranks of the unemployed. Consequently, we are facing a devastating blow to purchasing power and a sharp decline in demand for goods and services.

And the rise in oil prices  This leads to higher transportation costs both within and outside cities, as well as increased air and sea travel prices. Consequently, the number of travelers and tourists worldwide decreases, as a segment of consumers shifts their focus away from travel and tourism, prioritizing only basic living expenses. This results in postponing vacation plans until future years, awaiting a resolution to the crisis. As a result, profits for tourism, aviation, and shipping companies decline. Furthermore, agricultural product prices will rise due to increased diesel fuel costs for tractors and irrigation equipment, and higher fertilizer prices for exports from the Arabian Gulf region. Negotiators must consider this pessimistic scenario when making decisions to resolve the crisis. The global economy is emerging from the COVID-19 pandemic, followed by the Russian-Ukrainian conflict and the Strait of Hormuz crisis. How will the planet withstand all these successive and severe crises? The disappearance or decline in profits for companies and factories leads to a decrease in tax revenue for governments.  Generally speaking, wealthy governments have cash reserves to cover this deficit. However, it's a major catastrophe for the governments of Third World countries, especially those burdened with debt, whose budgets cannot withstand any decrease in revenues, of which tax revenue is a key component. We all hope—all the inhabitants of this planet—that we don't descend into stagflation. Continued stagnation leads to depression if the crisis persists for years. A swift end to the crisis would spare the entire world from stagnation and depression, allowing for a rapid global recovery.

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