Stagflation is a very real economic threat, says World Bank’s downgraded global forecast

The World Bank has drastically cut its forecast for global growth, saying that following the damage caused by the COVID-19 pandemic, the Russian-Ukrainian war has amplified the slowdown in the global economy – an economy that is entering this which could become a long period of low growth and high inflation (stagflation).

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The World Bank’s latest report on the global economic outlook indicates that global growth is expected to decline to 2.9% in 2022, a steep drop from 5.7% growth in 2021 and significantly below 4 .1% that was expected in January. It should hover around this rate in 2023-2024.

“The war in Ukraine, lockdowns in China, supply chain disruptions and the risk of stagflation are hammering growth. For many countries, recession will be difficult to avoid,” World Bank President David Malpass said in a press release. “Markets look to the future, so there is an urgent need to encourage production and avoid trade restrictions. Changes in fiscal, monetary, climate and debt policies are needed to tackle capital misallocation and inequality.

Soaring energy and food prices, as well as supply and trade disruptions triggered by the war in Ukraine (and the necessary normalization of interest rates currently underway) account for most of the degradation, according to the report.

“One of the main risks to the outlook is the possibility of high global inflation accompanied by sluggish growth, reminiscent of the stagflation of the 1970s,” reads a preface to the World Bank report. “This could eventually lead to sharp monetary policy tightening in advanced economies, which could lead to financial stress in some emerging markets and developing economies. A strong and far-reaching policy response is needed to boost growth, strengthen macroeconomic frameworks, reduce financial vulnerabilities and support vulnerable groups,” the preface continues.

Maya Adly, CEO and Founder of ROAR, told GOBankingRates that the June report has clear parallels to the economic crisis experienced in the 1970s, when the decelerating rates of emerging market expansion and economic development – as well as a decline in the labor market – are clear. indicate that the environment is ripe for a potential recession.

“The first signs of a systematic comparison between the current situation and that of 50 years ago are apparent in this month’s report,” Adly said. “What remains to be known is the role that technological advances will play in potentially mitigating the partial effects of the emerging recession. Technology, because of its ability to reduce operating costs and increase efficiency, has the ability to slow or even counter some inflationary reactions and has not played a significant role in economic history; however, debt relief for developing economies will be likely.

Other experts are a bit more optimistic, at least when it comes to the outlook for the United States, including Rusty Vanneman, chief investment strategist at Orion Advisor Solutions. Vanneman told GOBankingRates that due to the Federal Reserve’s hawkish stance (two rate hikes of 25 and 50 basis points in March and May), as well as negative GDP growth in the first quarter of 2022, he It’s no surprise that worries around the world of stagflation are on the rise.

“Despite continued 2022 rate hikes in the US market, US equities have been holding the lead lately relative to early 2022 expectations for weakness,” Vanneman said, adding that when it comes to the market for US employment, unemployment in May remained at a very low 3.6%. “[This jobs market] gives us optimism about the ability of the economy to continue growing despite a high CPI [consumer price index] readings.

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“While the impact of Fed rate hikes may dampen growth relative to what we’ve seen in the second half of 2020 and 2021, a steep yield curve, corporate earnings in line with five-year averages, and a market strong American labor gives us reluctance to wave the flag for fear of global stagflation right now,” he added.

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