Rising oil prices driven by the conflict in Iran and the Strait of Hormuz threaten an already darkened global economy. Danny Leipziger, a professor of international business and director of The Growth Dialogue at the GW School of Business, talks about the possible return of late 1970s-style stagflation and why China holds the power to help stabilize—or undermine—the global economic landscape.
Q. Why do you worry about inflation and fear that stagflation—high inflation combined with weak economic growth—is a possibility?
A. There is little doubt that inflation is rising. The real question is whether this is a temporary spike or a harbinger of what’s to come. When we look at the Brent Crude price per barrel—the global benchmark for oil prices—we can see that the price has risen at a pace not seen since the OPEC actions decades ago. Not only does that disrupt energy supplies, but it also affects important commodities like fertilizers and then food. So, inflation is being re-ignited.
Q. What about economic growth?
A. Look at the futures price of Brent Crude. It shows a lot of volatility depending on the outlook for the Strait of Hormuz. Whether this will cause a recession is another matter. It depends on how long the disruption lasts and how governments respond. Since inflation reduces people’s real purchasing power, it can put a damper on growth. We shall see what happens, but one thing is clear, the chances for stagflation have increased, and that is a policymakers nightmare since central banks in particular don’t know which of these two economic evils to attack.
Q. Before joining academia, you worked on developing market economics as a vice president at the World Bank. The IMF-World Bank Spring Meetings just concluded. What is the International Monetary Fund saying about global prospects?
A. The Fund is ringing early alarm bells, worried that the situation could get much worse. The IMF is, of course, very concerned about emerging markets and developing economies that are oil-import dependent. For them, additional external borrowing is inadvisable. The Fund has also cautioned countries against spending public monies to subsidize the price of fuel because while this can help in the short run, it makes future fiscal problems much more likely.
Q. You have expressed concern about how China is positioned in this skittish global economy.
A. China is still growing at close to 5 percent per year, and it recorded the largest trade surplus in its history at $1.2 trillion last year. On the one hand, this helps global economic growth, as it did in the aftermath of the 2009 global financial crisis. But the question is how that growth is being generated.
In China, domestic consumption is not driving growth. Much of its growth comes from exports. This is an issue that the IMF has signaled as a problem. The United States and Europe have accused China of improper trade practices, so many of China’s exports are now headed for countries in ASEAN—the Association of Southeast Asian Nations. As a result, Malaysia, Cambodia, Indonesia and Vietnam are seeing their local manufacturing driven out by low-cost and subsidized Chinese consumer goods.
Q. What about Chinese inroads on technology, such as electric vehicles and solar panels?
A. At the tech frontier, China is making huge investments, and Europe, in particular, has now decided to respond, perhaps belatedly, to the loss of higher-end manufacturing. The automobile industry in Germany is a prime example. Equally worrying is the trend inside Southeast Asia, where Chinese exports have risen more than 50 percent since 2020—and are up nearly 20 percent in 2025 alone. These exports drive out local industries that cannot compete with Chinese subsidized manufacturing and they make these countries more dependent on Chinese inputs. Countries in the region are alarmed at these trends.
Q. We hear talk about China’s concern with “involution.” What is that exactly—and how is it playing out?
A. This is a Chinese concept that refers to excessive competition that drives down prices. It occurs when there is excess production capacity and firms need to sell their output at whatever price they can. Chinese policymakers don’t much care for this cut-throat competition because it can lead to deflation, a fall in prices.
Q. Isn’t deflation a good thing?
A. Well, governments really worry about deflation. It leads to a downward spiral. The Japanese have been trying for a long time to avoid it because it puts a damper on the economy as people defer purchases, expecting lower prices. It also causes a fall in asset prices, which has implications for collateral and the health of banks. For this reason, deflation is anathema to central banks.
Q. So what is going to happen?
A. Economists don’t have a crystal ball, but here is one plausible scenario. We avoid global recession, but inflation remains above target levels. This means central banks halt their interest rate reduction plans. At the same time, emerging market and developing economies have to pay more to import and their exports will suffer due a short-term shock to the global system. The temptation to borrow their way out of this scenario is one many countries cannot resist. The IMF will have many more countries knocking at its door.
Europe will try to deal with its energy dependency—I would look again at small nuclear power plants appearing alongside renewables. Europe will also have to manage the Chinese threat to its basic industries, as outlined in the Draghi Report on Competitiveness, by the former European Central Bank president. The U.S. will bring manufacturing back home, but U.S. politics will make the dollar weaker and the cost of debt servicing higher. The U.S. national debt will continue rising. If tariffs persist, that will fuel inflation.
As for China, it will likely ignore some of its major structural problems and continue to rely excessively on exports to achieve its growth targets, although other countries in Southeast Asia may decide to ban together to protect themselves. An alternative route would be for China to promote more domestic consumption, something the IMF has urged. However, this will require a re-think of its hukou policy that limits where people can live and a shift away from exports and toward other domestic priorities.
In the end, one might say that neither of the two economic superpowers is doing the world any favors right now—and the fallout is hurting many other countries, the so-called innocent bystanders.