The World Bank on Tuesday sharply lowered its forecast for global growth for this year, due to the war in Ukraine, and it warns of the risks of “stagflation”, that is to say a “prolonged period of growth low and high inflation.
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The Washington institution now forecasts an increase in global gross domestic product of 2.9%, against 4.1% estimated in January.
“The world economy is expected to experience its strongest deceleration following a recovery (…) in more than 80 years”, underlined Tuesday the World Bank, in its report on the world economic prospects.
The result is a “considerable risk of stagflation with potentially destabilizing consequences for low- and middle-income economies,” David Malpass, its chairman, told reporters.
This sharp slowdown comes after a sustained economic recovery last year (5.7%), following the deep recession caused by the COVID-19 pandemic.
“In addition to the damage caused by the COVID-19 pandemic, the Russian invasion of Ukraine has accentuated the slowdown in the world economy”, sums up the Bank, which in January had already lowered its forecasts due to the Omicron variant.
Russia’s February 24 invasion of Ukraine and Western sanctions against Moscow have driven up grain and oil prices, threatening to deepen hunger in poor countries.
World Bank economists expect this pace of growth to continue until 2023-2024, with the war in Ukraine severely disrupting activity, investment and trade in the short term.
“Due to the combined damage of the pandemic and the war, the level of per capita income in developing countries will this year be almost 5% lower than the trend that was projected before the COVID”, deplores also the ‘institution.
Recession on the horizon
“For many countries, it will be difficult to escape the recession,” said the president of the World Bank.
Mr. Malpass urges avoiding trade restrictions, while recommending changes to fiscal, monetary, climate and debt policies (…) “to address the inappropriate allocation of capital”.
The World Bank has revised down growth forecasts for many economies, starting with the big two: the United States (2.5%), down 1.2 percentage points, and China (4. 3%) at -0.8 points.
For the euro zone, the revision is even stronger: -1.7 points to 2.5%.
On the other hand, growth in the Middle East and North Africa region was revised upwards (0.9 points, to 5.3%), the latter benefiting from the rise in oil prices (42% scheduled for this year).
In its report, the institution also provides the first comparison of current global economic conditions with the stagflation of the 1970s.
Economists assessed in particular how stagflation could affect emerging market and developing economies.
They note that the current situation is comparable to that of the 1970s in three respects: “persistent supply disruptions that fuel inflation, preceded by a prolonged period of very accommodative monetary policy in major advanced economies; projections of slower growth; emerging and developing economies vulnerable to the need for tighter monetary policy to control inflation.
However, there are major distinctions since the dollar is strong whereas it was very weak at the time. Moreover, the magnitude of commodity price increases is more subdued, and the balance sheets of major financial institutions “are generally strong.”
More importantly, and unlike the 1970s, central banks in advanced economies and many developing economies now have clear mandates for price stability.
The World Bank is finally predicting a slowdown in inflation next year.
“If inflation remains high, the repetition of the solutions adopted during the previous stagflation could result in a sharp global recession, as well as financial crises in some emerging and developing economies”, warns the Bank.
It also predicted a worst-case scenario, which would include faster rate hikes in the United States causing “acute financial stress” in emerging countries and further lockdowns in China. Global growth could then fall “more sharply in 2022 and almost halve in 2023 falling to 2.1% and 1.5% respectively”.
