World Bank Warns of Stagflation Risk, Cuts Global Growth Forecast
Toll from Ukraine war and Covid-19 pandemic is likely to lead to years of slow growth and high inflation, bank says.
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WASHINGTON—The World Bank sharply lowered its growth forecast for the global economy for this year, warning of several years of high inflation and tepid growth reminiscent of the stagflation of the 1970s.
Citing the damage from the war in Ukraine and the Covid-19 pandemic, the bank said global growth is expected to slump to 2.9% in 2022 from 5.7% in 2021, significantly lower than its January forecast for 4.1% growth. Furthermore, growth is expected to hover around the reduced pace over 2023 and 2024 as the war disrupts human activity, investment and trade while governments withdraw fiscal and monetary support.
“Several years of above-average inflation and below-average growth now seem likely,” David Malpass, president of World Bank Group, told reporters. “The risk from stagflation is considerable.”
Mr. Malpass said recession will be hard to avoid for many countries as growth is hammered by the war in Ukraine, pandemic lockdowns in China and supply-chain disruptions. He urged policy makers to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policy are needed to counter capital misallocation and inequality, he said.
In its latest Global Economic Prospects report, the World Bank conducted a detailed assessment of how current global economic conditions compare with the high inflation and weak growth—so-called stagflation—of the 1970s, when oil shocks, high federal spending and loose monetary policy caused inflation to soar.
The bank said that recovery from the stagflation of the 1970s required steep increases in interest rates in major advanced economies, which in turn triggered a string of financial crises in emerging markets and developing economies.
Economists and policy makers are increasingly concerned about the risk of stagflation in the global economy, which could damage living standards for people around the world, particularly in lower and middle-income nations.
As a result of the damage from the pandemic and the war, the World Bank said the level of per capita income in developing economies this year will be nearly 5% below its prepandemic trend.
“Higher food and energy prices are having stagflationary effects, namely, depressing output and spending and raising inflation all around the world,” Treasury Secretary Janet Yellen said in May, noting that the economic outlook globally is challenging and uncertain.
Ms. Yellen appeared before lawmakers on Tuesday as she and the Biden administration face scrutiny over how they have addressed high inflation.
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: June 7 2022.
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