The World Bank has significantly downgraded its forecasts for global growth in 2022 while warning of the rising risk of stagflation similar to that seen in the 1970s.
In its latest Global Economic Prospects report, the World Bank said that growth would slow to 2.9 per cent this year, down from 5.7 per cent in 2021 and well below the 4.1 per cent growth predicted in January, amid surging inflation, rising rates and Russia’s invasion of Ukraine.
Growth is then expected to hover around this lower level through both 2023 and 2024 due to the near-term disruption to activity, investment and trade from the war in Ukraine, alongside fading demand and the withdrawal of fiscal and monetary policy accommodation.
Faced with the conflict in Europe, lockdowns in China, disruptions to supply chains and the risk of stagflation, World Bank president David Malpass warned that a recession would be difficult to avoid for many countries.
“Just over two years after COVID-19 caused the deepest global recession since World War II, the world economy is again in danger,” he said.
“This time it is facing high inflation and slow growth at the same time. Even if a global recession is averted, the pain of stagflation could persist for several years— unless major supply increases are set in motion.”
Above-average inflation and below-average growth are now likely to persist for several years, Mr Malpass said, with the potential for destabilising consequences across low and middle-income economies.
Emerging market and developing countries are forecasted to record growth of 3.4 per cent in 2022, 1.2 percentage points lower than predicted by the World Bank in January and down from 6.6 per cent growth in 2021.
Meanwhile, growth in advanced economies is expected to fall from 5.1 per cent last year to 2.6 per cent this year, down 1.2 percentage points on the World Bank’s earlier forecasts.
“The danger of stagflation is considerable today. Between 2021 and 2024, global growth is projected to have slowed by 2.7 percentage points—more than twice the deceleration between 1976 and 1979,” said Mr Malpass.
“Subdued growth will likely persist throughout the decade because of weak investment in most of the world. With inflation now running at multi-decade highs in many countries and supply expected to grow slowly, there is a risk that inflation will remain higher for longer than currently anticipated.”
Danger of stagflation
The World Bank said that its report included the first systematic assessment of how current global economic conditions compare with the stagflation of the 1970s.
In particular, this assessment looked at how stagflation may impact emerging market and developing economies.
“The insights are sobering: the interest rate increases that were required to control inflation at the end of the 1970s were so steep that they touched off a global recession, along with a string of debt crises in developing economies, ushering in a ‘lost decade’ in some of them,” said Mr Malpass.
Parallels between now and the 1970s identified by the World Bank include supply shocks and elevated global inflation over the near term, prospects for weakening growth over the longer term, and the vulnerability of developing economies to the monetary policy tightening needed to rein in inflation.
However, the World Bank also noted that there were a number of key differences including the strong dollar, smaller increases in commodity prices, generally stronger balance sheets of major financial institutions and more credible monetary policy frameworks.
“After multiple crises, long-term prosperity will depend on returning to faster growth and a more stable, rules-based policy environment. There is good reason to expect that, once the war in Ukraine stops, efforts will redouble—including by the World Bank Group—to rebuild the Ukrainian economy and revive global growth,” Mr Malpass said.
“In the meantime, policy makers everywhere must fight the world’s other development crises: the catastrophe of higher food and energy prices, the threat of stagflation, the rise in inequality and instability, climate change, and the growing overhang of debt.”
