Jeremy Grantham co-founded the investment company GMO in 1977.
Alison Yin/AP Images for DivestInvest
- Famed investor Jeremy Grantham has said that oil-price spikes like those today have always preceded recessions.
- Grantham warned a jump in food prices could destabilize economies and even political systems.
- Analysts say Europe will be hardest hit by Russia’s war on Ukraine, but worries are growing about the US economy.
Famed investor Jeremy Grantham has rung the recession alarm, saying oil-price spikes have always caused economic growth to slow dramatically.
“In the West, historically, major spikes in the price of oil like today’s have always preceded or triggered recession,” Grantham said Wednesday, in a new research note for his investment firm GMO.
Brent crude oil has risen to around $100 a barrel as a result of Russia’s invasion of Ukraine, having jumped as high as $139 in March. It stood at around $63 a barrel a year ago.
Metals and agricultural products and inputs have also risen sharply. Grantham said the gains in the prices of wheat, corn, vegetable oil and fertilizer were particularly worrying.
“We notice fuel the most, but food may be the most dangerous to global stability,” he wrote. “Whenever commodity prices rise, incomes are squeezed while costs rise, destabilizing economies and even political systems.”
Grantham is a veteran investor who is widely credited with having predicted the 2000 dotcom crash and 2008 global financial crisis. He co-founded the investment firm GMO in 1977. Earlier this year, he warned that markets were in a “superbubble” that is set to spectacularly implode.
In his latest note, Grantham said humanity is “faced with the urgent, even existential need to decarbonize the economy.”
He said humanity has been over-using its resources, and needs to think much more carefully about consumption.
“Although we live on a finite planet, we have been attempting for the last 250 years to do the impossible: to generate perpetual compound growth,” he said.
Grantham did not specify where he thought an economic downturn might happen. Analysts say it is more likely in Europe, which has close energy ties to Russia.
Yet Wall Street is increasingly focused on the question of whether a US recession is coming.
Deutsche Bank became the first major lender to predict one on Wednesday. It said the Federal Reserve will have to hike interest rates hard to tame the strongest inflation in 40 years, which will tip the economy into a recession by late 2023.
Many economists define a recession as two consecutive quarters of falls in a country’s gross domestic product. The National Bureau of Economic Research defines it as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Most analysts still think the US will avoid an economic slump, however. Many economists say the strength of the labor market and the savings that consumers have built up during the COVID-19 pandemic should cushion the economy.
Read more: UBS lays out the 3 hurdles the economy must clear to avoid recession, as well as why fears of a housing bubble are overdone — and shares 6 things you should invest in amid the uncertainty