The World Bank lowers its growth forecasts and warns of the risk of stagflation

The World Bank on Tuesday significantly lowered its global growth forecast for this year due to the war in Ukraine and warned of the risks of “stagflation”, i.e. an “extended period of weak growth and high inflation”, especially for low-income countries. The Washington institution is now forecasting a 2.9% increase in global gross domestic product, up from an earlier forecast of 4.1% published in January.

“The global economy is expected to experience the sharpest slowdown after a recovery (…) in more than 80 years,” the World Bank said in its report on the global economic outlook on Tuesday. “The consequence is an increased risk of stagflation,” she warned. This slowdown follows a sustained economic recovery last year (+5.7%) after the deep recession caused by the Covid-19 pandemic.

“In addition to the damage caused by the Covid-19 pandemic, the Russian invasion of Ukraine has compounded the slowdown in the global economy,” the bank summarizes in a press release. And the “increasing” risk of stagflation would have “harmful consequences” for low-income and middle-income countries alike.

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Growth can be interrupted until 2024

World Bank economists expect this pace of growth to continue into 2023-2024, with the war in Ukraine severely disrupting activity, investment and trade in the short term. Added to this is the weakening demand and the gradual lifting of government aid measures.

“Due to the combined damage of the pandemic and war, the level of per capita income in developing countries this year will be almost 5% lower than the trend forecast before the Covid,” the institution’s report laments in a press Publication.

“It will be difficult for many countries to exit the recession,” said World Bank President David Malpass. She urges avoiding trade restrictions while recommending changes in tax, monetary, climate and debt policies (…) “to address the inappropriate allocation of capital” and to fight inequality.

The World Bank has revised down growth forecasts for many economies, starting with the big two: the United States (+2.5%) down 1.2 percentage points and China (+4.3%) down -0.8 points. The revision is even stronger for the euro zone: -1.7 points to 2.5%. On the other hand, growth in the Middle East and North Africa region has been revised upwards (+0.9 points to 5.3%), the latter benefiting from the rise in oil prices (+42% expected this year).

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Parallels to the stagflation of the 1970s

In its report, the Washington institution also presents the first comparison of current global economic conditions with the stagflation of the 1970s. In particular, the economists assessed how stagflation could affect emerging and developing countries.

They note that the current situation is comparable to that of the 1970s in three respects: “protracted supply disruptions fueling inflation, preceded by a prolonged period of very accommodating monetary policy in the major advanced economies; projections of slower growth; Emerging and developing economies are vulnerable to the need for tighter monetary policies to control inflation.

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However, there are big differences as the dollar is strong while at that time it was very weak. In addition, the magnitude of commodity price increases is more subdued and the balance sheets of major financial institutions “are generally strong”. More importantly, and unlike in the 1970s, central banks in advanced economies and many developing countries now have clear mandates for price stability.

The World Bank expects inflation to finally slow next year, but remains “probably” above targets set in many countries. “If inflation remains high, the repetition of the solutions adopted during the previous stagflation could lead to a sharp global recession, as well as financial crises in some emerging and developing countries,” warns the bank.

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