The global economy is at risk of slipping into a damaging period of 1970s-style “stagflation,” fueled largely by Russia’s invasion of Ukraine, the World Bank warned on Tuesday as it cut its annual growth forecast.
The toxic combination of weak growth and soaring prices could unleash widespread distress in dozens of poorer countries still struggling to recover from the turmoil of the Covid-19 pandemic.
The bleak forecast came as the international development lender cut its global growth estimate to 2.9 percent, 1.2 percentage points below the January forecast, due to the severe war-induced downturn.
“The risk of stagflation is significant, with potentially destabilizing consequences for low- and middle-income economies,” World Bank President David Malpass told reporters.
“For many countries, a recession will be difficult to avoid.”
And if risks to the outlook materialize, global growth could slow even more — triggering a global recession, Malpass warned.
The bank’s Global Economic Prospects report says the Ukraine war is worsening the damage from the pandemic and compounding the slowdown in the global economy “as it enters what may be a protracted period of weak growth and elevated inflation.”
The slump comes after growth recovered to 5.7 percent from the pandemic downturn in 2021 — marking the “strongest slowdown since an initial recovery from the global recession in more than 80 years.”
The report notes similarities to the 1970s, when growth faltered and inflation soared, with supply factors fueling price increases and a long period of low interest rates.
But unlike this period, the US dollar is strong and major financial institutions are in a solid position.
– Global recession risk –
The Russian invasion and Western sanctions against Moscow have pushed up grain and oil prices, threatening to worsen hunger in poor countries and leaving motorists around the world with staggering prices at the pump.
The World Bank chief stressed the need to increase production to counter rising prices, particularly for energy, as tight supplies of natural gas and fertilizers hurt food production.
Malpass also said it was “crucial” to avoid export restrictions and subsidies that “amplify price increases and distort markets.”
Likewise, the bank warned against trying to solve the inflationary spike with price controls or export restrictions, which would only worsen the damage.
Amid widespread uncertainty, the situation could deteriorate further on a number of “intertwined” risks, including the possibility of further geopolitical tensions, steep rate hikes to curb inflation and rising wages, and the possibility of Covid-19 regaining traction, according to the forecast.
The US Federal Reserve has made an aggressive attempt to raise lending rates to dampen demand and combat rising prices, and the World Bank notes that higher interest rates have played a prominent role in previous financial crises in emerging and developing countries (EMDEs). have and have been a drain on resources and is leading to outflows of funds from these countries.
The simultaneous occurrence of these risks could result in a much sharper and longer-lasting global slowdown.
If faster US interest rate hikes caused “acute financial stress” in EMDEs, the European Union faced a sudden ban on energy imports, and China suffered renewed pandemic-related lockdowns, “global growth could fall more sharply in 2022 and almost half in 2023 – down to 2.1 percent and 1.5 percent, respectively,” the report said.
Malpass said this would cause per capita income growth to drop to zero and “certainly that would count as a global recession.”
Even absent this dire outcome, per capita income in developing countries this year will be nearly 5 percent below pre-pandemic trends.
The report cut the US growth estimate by 1.2 points to 2.5 percent and the forecast for China was cut 0.8 points to an unusually low 4.3 percent.
Meanwhile, the forecast for the euro area was lowered to 2.5 percent and for Japan to 1.7 percent.
Russia’s economy is expected to shrink by 11.3 percent this year.
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