The World Bank has lowered its global growth projection and warned that the economy might enter a period of stagflation similar to the 1970s.
Based on the bank’s latest Global Economic Prospects report, global economic growth would slow to 2.9% this year from 5.7% in 2021, 1.2% points lower than the 4.1% forecast in January.
Economic growth is expected to then hover around that level through 2023 to 2024 while inflation remains above target in most economies, the report said, pointing to stagflation risks.
What the World Bank is saying
The Bank said “Global growth is expected to slump from 5.7% in 2021 to 2.9% in 2022— significantly lower than 4.1% that was anticipated in January. It is expected to hover around that pace over 2023-24, as the war in Ukraine disrupts activity, investment, and trade in the near term, pent-up demand fades, and fiscal and monetary policy accommodation is withdrawn”
World Bank President, David Malpass raised concerns about stagflation and possible recession.
He said, “The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are Hamm growth. For many countries, recession will be hard to avoid.”
He added that “Markets look forward, so it is urgent to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality.”
The Bank added that “The June Global Economic Prospects report offers the first systematic assessment of how current global economic conditions compare with the stagflation of the 1970s—with a particular emphasis on how stagflation could affect emerging market and developing economies.”
The Bank also mentioned how hawkish monetary policies could disrupt emerging markets. The bank said, “The recovery from the stagflation of the 1970s required steep increases in interest rates in major advanced economies, which played a prominent role in triggering a string of financial crises in emerging market and developing economies.”
What you should know
- The current environment of high inflation and slow development has drawn comparisons to the 1970s, a period of extreme stagflation that necessitated significant hikes in interest rates in advanced economies and sparked a series of financial crises in emerging market and developing economies.
- The World Bank’s June report offers the “first systematic” comparison of today’s position to that of 50 years ago.
- The Bank stated that there are clear parallels between then and now. Supply-side disruptions, the prospect of weaker growth, and the vulnerabilities emerging economies confront in terms of the monetary policy tightening that will be required to control inflation are among them.
- However, there are now a number of changes, such as the strength of the US currency, reduced oil prices, and usually robust balance sheets at key financial institutions, which provide room for maneuvering.
- To reduce the risks of history repeating itself, the World Bank urged policymakers to coordinate aid for Ukraine, counter the spike in oil and food prices, and set up debt relief for developing economies.
