World Bank Warns of Stagflation Risk, Cuts Global Growth Forecast

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.

The U.S. and Chinese governments should take action to lower future borrowing, as a surge in their debts threatens to have “profound” effects on the global economy and the interest rates paid by other countries, the International Monetary Fund said Wednesday.

In its twice-yearly report on government borrowing, the Fund said many rich countries have adopted measures that will lead to a reduction in their debts relative to the size of their economies, although not to the levels seen before the Covid-19 pandemic.

However, that is not true of the U.S. and China, which will continue to see a surge in borrowing if current policies remain in place. The Fund projected that U.S. government debt relative to economic output will rise by 70% by 2053, while Chinese debt will more than double by the same year.

The Fund said both countries will lead a rise in global government debt to 98.8% of economic output in 2029 from 93.2% in 2023. The U.K. and Italy are among the other big contributors to that increase.

“The increase will be led by some large economies, for example, China, Italy, the United Kingdom, and the United States, which critically need to take policy action to address fundamental imbalances between spending and revenues,” the IMF said.

The IMF expects U.S. government debt to be 133.9% of annual gross domestic product in 2029, up from 122.1% in 2023. And it expects China’s debt to rise to 110.1% of GDP by the same year from 83.6%.

The Fund said there had been “large fiscal slippages” in the U.S. during 2023, with government spending exceeding revenues by 8.8% of GDP, up from 4.1% in the previous year. It expects the budget deficit to exceed 6% over the medium term.

That level of borrowing is slowing progress toward reducing inflation, the Fund said, and may also increase the interest rates paid by other governments.

“Loose US fiscal policy could make the last mile of disinflation harder to achieve while exacerbating the debt burden,” the Fund said. “Further, global interest rate spillovers could contribute to tighter financial conditions, increasing risks elsewhere.”

A series of weak auctions for U.S. Treasurys are stoking investors’ concerns that markets will struggle to absorb an incoming rush of government debt. The government is poised to sell another $386 billion or so of bonds in May—an onslaught that Wall Street expects to continue no matter who wins November’s presidential election.

While analysts don’t expect those sales to fail, a sharp rise in U.S. bond yields would likely have consequences for borrowers around the world. The IMF estimated that a rise of one percentage point in U.S. yields leads to a matching rise for developing economies and an increase of 90 basis points in other rich countries.

“Long-term government bond yields in the United States remain elevated and sensitive to inflation developments and monetary policy decisions,” the Fund said. “This could lead to volatile financing conditions in other economies.”

China’s budget deficit fell to 7.1% of GDP in 2023 from 7.5% the previous year, but the IMF projects a steady pickup from this year to 7.9% in 2029. It warned that a slowdown in the world’s second largest economy “exacerbated by unintended fiscal tightening” would likely weaken growth elsewhere, and reduce aid flows that have become a significant source of funding for governments in Africa and Latin America.

An unusually large number of elections is likely to push government borrowing higher this year, the Fund said. It estimates that 88 economies or economic areas are set for significant votes, and that budget deficits tend to be 0.3% of GDP higher in election years than in other years.

“What makes this year different is not only the confluence of elections, but the fact that they will happen amid higher demand for public spending,” the Fund said. “The bias toward higher spending is shared across the political spectrum, indicating substantial challenges in gathering support for consolidation in the years ahead, and particularly in a key election year like 2024.”

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.

Says U.S. and China, which will continue to see a surge in borrowing if current policies remain in place.