Why this oil shock is different
Governments and central banks are out of policy ammunition to contain the economic fallout
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THE outcome of the Iran war remains unclear, but the resulting oil shock has revealed a novel vulnerability in the global economy. Never has the world entered a crisis of any kind with such high deficits and debt levels. This burden will limit the ability of governments to cushion the impact of elevated energy prices.
The first post-World War II oil shocks hit in the 1970s and coincided with the dawn of a new era, when governments shifted from running budget deficits occasionally to constantly. But back then, the typical deficit in the US and other major countries was around 2 per cent of gross domestic product.
Today, the average deficit has more than doubled; as a result, the average government debt level for the Group of 7 countries has risen from 20 per cent of GDP to more than 100 per cent.
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