World Bank Group President_David Malpass

World Bank warns on increasing risks of stagflation as expects global growth sinking to 2.9% in 2022 amid high inflation pressures

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activity, investment, and trade in the near term, pent-up demand fades, and fiscal and monetary policy accommodation is withdrawn.

As a result of the damage from the pandemic and the war, global economy is entering what could become a protracted period of feeble growth and elevated inflation which raises the risk of stagflation, with potentially harmful consequences for middle- and low-income economies alike.
The level of per capita income in developing economies this year will be nearly 5% below its pre-pandemic trend. These among other facts are anticipated in World Bank’s latest Global Economic Prospects report published today.

“The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation are hammering growth. For many countries, recession will be hard to avoid,” said World Bank Group President David Malpass. “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.

First systematic comparison with the stagflation episode in the 70’s: Some similarities but also some differences

The current juncture resembles the 1970s in three key aspects: persistent supply-side disturbances fueling inflation, preceded by a protracted period of highly accommodative monetary policy in major advanced economies, prospects for weakening growth, and vulnerabilities that emerging market and developing economies face with respect to the monetary policy tightening that will be needed to rein in inflation.

Worl Bank Global Prospects_June 2022_table growth graphics
© World Bank

However, the ongoing episode also differs from the 1970s in multiple dimensions: the dollar is strong, a sharp contrast with its severe weakness in the 1970s; the percentage increases in commodity prices are smaller; and the balance sheets of major financial institutions are generally strong. More importantly, unlike the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability, and, over the past three decades, they have established a credible track record of achieving their inflation targets.

Controlling the rise in prices, key to avoid another 70’s like global crisis

Global inflation is expected to moderate next year but it will likely remain above inflation targets in many economies. The report notes that if inflation remains elevated, a repeat of the resolution of the earlier stagflation episode could translate into a sharp global downturn along with financial crises in some emerging market and developing economies.

Sharp deceleration: growth at 2.6% for advanced economies and at 3.4% for emerging economies

The war in Ukraine has led to a surge in prices across a wide range of energy-related commodities.
Higher energy prices will lower real incomes, raise production costs, tighten financial conditions, and constrain macroeconomic policy especially in energy-importing countries, the Report explains.

Growth in advanced economies is projected to sharply decelerate from 5.% in 2021 to 2.6% in 2022, 1.2 percentage point below projections in January. Growth is expected to further moderate to 2.2% in 2023, largely reflecting the further unwinding of the fiscal and monetary policy support provided during the pandemic.

Worl Bank Global Prospects_June 2022_table growth real GDP
© World Bank

Among emerging market and developing economies, growth is also projected to fall from 6.6 percent in 2021 to 3.4% in 2022, well below the annual average of 4.8% over 2011-2019. The negative spillovers from the war will more than offset any near-term boost to some commodity exporters from higher energy prices. Forecasts for 2022 growth have been revised down in nearly 70% of EMDEs (emerging market and developing economies), including most commodity importing countries as well as four-fifths of low-income countries. Those are the prospects included in World Bank’s Report.

“Developing economies will have to balance the need to ensure fiscal sustainability with the need to mitigate the effects of today’s overlapping crises on their poorest citizens,” said Ayhan Kose, Director of the World Bank’s Prospects Group. “Communicating monetary policy decisions clearly, leveraging credible monetary policy frameworks, and protecting central bank independence can effectively anchor inflation expectations and reduce the amount of policy tightening required to achieve the desired effects on inflation and activity.”

Price controls, subsidies, and export bans, not recommended to wave the inflation rise and the supplies crisis

Policymakers should refrain from distortionary policies such as price controls, subsidies, and export bans, which could worsen the recent increase in commodity prices, says World Bank.

Worl Bank Global Prospects_June 2022_growth scenarios_graphics
© World Bank

Against the challenging backdrop of higher inflation, weaker growth, tighter financial conditions, and limited fiscal policy space, governments will need to reprioritize spending toward targeted relief for vulnerable populations, the Financial Institution explains.

Image over the headline.- World Bank Group President David Malpass. Photo: Jacek Waszkiewicz / World Bank Group

Related external links:

World Bank Global Economic Prospects, June 2022

Regional Prospects East Asia and Pacific: Growth is projected to decelerate to 4.4% in 2022 before increasing to 5.2% in 2023. For the whole outlook click here

Regional Prospects South Asia: Growth is projected to slow to 6.8% in 2022 and 5.8% in 2023.For the whole outlook click here

Regional Prospects Middle East and North Africa: Growth is forecast to accelerate to 5.3% in 2022 before. For the whole outlook click here

Regional Prospects Sub-Saharan Africa: Growth is forecast to moderate to 3.7% in 2022 and rise to 3.8% in 2023. For the whole outlook click here

Regional Prospects Latin America and the Caribbean: Growth is projected to slow to 2.5% in 2022 and 1.9%. For the whole outlook click here

Regional Prospects Europe and Central Asia: The regional economy is expected to shrink by 2.9% in 2022 year before growing by 1.5% in 2023.. For the whole outlook click here

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