World Bank warns of stagflation risk, says outlook could grow worse amid higher inflation
David Malpass, president of World Bank, said, “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.”
- Jun 7, 2022,
- Updated Jun 7, 2022 9:30 PM IST
The World Bank, on Tuesday, slashed its global growth forecast from 5.7 per cent in 2021 to 2.9 per cent for the year 2022 citing that the Russian invasion of Ukraine has magnified the slowdown in the global economy and has compounded the damage from the COVID-19 pandemic as many countries now faced recession.
This has ultimately led to the increased risk of stagflation, with potentially harmful consequences for middle and low-income economies alike, the World Bank said in its latest Global Economic Prospects report, warning that the outlook could still grow worse.
David Malpass, president of World Bank, said, “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.”
The pace of global growth between 2021 and 2024 is projected to slow by 2.7 percentage points, more than twice the deceleration seen between 1976 and 1979. The report also notes that global inflation is expected to moderate next year but it will likely remain above inflation targets in many economies.
“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,” Malpass added.
The World Bank had also revised India's economic growth forecast for the current fiscal to 7.5 per cent for the current fiscal 2022-23 (April 2022 to March 2023). In April, it had reduced the forecast from 8.7 per cent to 8 per cent.
"In India, growth is forecast to edge down to 7.5 per cent in the fiscal year 2022/23, with headwinds from rising inflation, supply chain disruptions, and geopolitical tensions offsetting buoyancy in the recovery of services consumption from the pandemic," said the World Bank in its latest report.
According to the report, growth in advanced economies is projected to decelerate to 2.6 per cent in 2022 and 2.2 per cent in 2023 after hitting 5.1 per cent in 2021. Growth in the US is likely to hit 2.5 per cent in 2022, down from 5.7 per cent in 2021, while the eurozone is expected to see a growth of 2.5 per cent after 5.4 per cent last year. China’s economy was seen expanding 4.3 per cent in 2022 after a growth of 8.1 per cent in 2021.
Moreover, Ukraine’s economy was expected to contract by 45.1 per cent and Russia's by 8.9 per cent. Growth in regional European and Central Asian economies, excluding Western Europe, was expected to contract 2.9 per cent after a growth of 6.5 per cent in 2021.
Emerging markets and developing economies were witnessing a growth of 3.4 per cent in 2022, down from 6.6 per cent in 2021. They were observing an annual average of 4.8 per cent from 2011 to 2019.
The report further added that the global growth is expected to be significantly lower than the 4.1 per cent that was anticipated in January 2022. ‘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, the level of per capita income in developing economies this year will be nearly 5 per cent below its pre-pandemic trend,’ it added.
Ayhan Kose, Director of the World Bank’s Prospects Group, said, “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.”
The World Bank’s Global Economic Prospects report for June 2022 offers a systematic assessment of how current global economic conditions compare with the stagflation of the 1970s, with an emphasis on how stagflation could affect the emerging market and developing economies.
“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,” Kose added.
As per the World Bank’s report, the current juncture resembles the 1970s in three key aspects — continuing supply-side disturbances fuelling inflation, preceded by highly accommodative monetary policy in major economies, prospects for weakening growth, and vulnerabilities that emerging market and developing economies face concerning the monetary policy tightening.
The report also offers insights on how the war in Ukraine has led to a surge in prices across a wide range of energy-related commodities as higher energy prices would lower incomes, increase production costs, tighten financial conditions, and constrain macroeconomic policy in energy-importing countries.
It further highlights the need for decisive global and national policy action to avert the worst consequences of the war in Ukraine for the global economy. “Policymakers, moreover, should refrain from distortionary policies such as price controls, subsidies, and export bans, which could worsen the recent increase in commodity prices. Against the challenging backdrop of higher inflation, weaker growth, tighter financial conditions, and limited fiscal policy space, governments will need to reprioritise spending toward targeted relief for vulnerable populations,” it reads.
The World Bank, on Tuesday, slashed its global growth forecast from 5.7 per cent in 2021 to 2.9 per cent for the year 2022 citing that the Russian invasion of Ukraine has magnified the slowdown in the global economy and has compounded the damage from the COVID-19 pandemic as many countries now faced recession.
This has ultimately led to the increased risk of stagflation, with potentially harmful consequences for middle and low-income economies alike, the World Bank said in its latest Global Economic Prospects report, warning that the outlook could still grow worse.
David Malpass, president of World Bank, said, “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.”
The pace of global growth between 2021 and 2024 is projected to slow by 2.7 percentage points, more than twice the deceleration seen between 1976 and 1979. The report also notes that global inflation is expected to moderate next year but it will likely remain above inflation targets in many economies.
“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,” Malpass added.
The World Bank had also revised India's economic growth forecast for the current fiscal to 7.5 per cent for the current fiscal 2022-23 (April 2022 to March 2023). In April, it had reduced the forecast from 8.7 per cent to 8 per cent.
"In India, growth is forecast to edge down to 7.5 per cent in the fiscal year 2022/23, with headwinds from rising inflation, supply chain disruptions, and geopolitical tensions offsetting buoyancy in the recovery of services consumption from the pandemic," said the World Bank in its latest report.
According to the report, growth in advanced economies is projected to decelerate to 2.6 per cent in 2022 and 2.2 per cent in 2023 after hitting 5.1 per cent in 2021. Growth in the US is likely to hit 2.5 per cent in 2022, down from 5.7 per cent in 2021, while the eurozone is expected to see a growth of 2.5 per cent after 5.4 per cent last year. China’s economy was seen expanding 4.3 per cent in 2022 after a growth of 8.1 per cent in 2021.
Moreover, Ukraine’s economy was expected to contract by 45.1 per cent and Russia's by 8.9 per cent. Growth in regional European and Central Asian economies, excluding Western Europe, was expected to contract 2.9 per cent after a growth of 6.5 per cent in 2021.
Emerging markets and developing economies were witnessing a growth of 3.4 per cent in 2022, down from 6.6 per cent in 2021. They were observing an annual average of 4.8 per cent from 2011 to 2019.
The report further added that the global growth is expected to be significantly lower than the 4.1 per cent that was anticipated in January 2022. ‘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, the level of per capita income in developing economies this year will be nearly 5 per cent below its pre-pandemic trend,’ it added.
Ayhan Kose, Director of the World Bank’s Prospects Group, said, “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.”
The World Bank’s Global Economic Prospects report for June 2022 offers a systematic assessment of how current global economic conditions compare with the stagflation of the 1970s, with an emphasis on how stagflation could affect the emerging market and developing economies.
“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,” Kose added.
As per the World Bank’s report, the current juncture resembles the 1970s in three key aspects — continuing supply-side disturbances fuelling inflation, preceded by highly accommodative monetary policy in major economies, prospects for weakening growth, and vulnerabilities that emerging market and developing economies face concerning the monetary policy tightening.
The report also offers insights on how the war in Ukraine has led to a surge in prices across a wide range of energy-related commodities as higher energy prices would lower incomes, increase production costs, tighten financial conditions, and constrain macroeconomic policy in energy-importing countries.
It further highlights the need for decisive global and national policy action to avert the worst consequences of the war in Ukraine for the global economy. “Policymakers, moreover, should refrain from distortionary policies such as price controls, subsidies, and export bans, which could worsen the recent increase in commodity prices. Against the challenging backdrop of higher inflation, weaker growth, tighter financial conditions, and limited fiscal policy space, governments will need to reprioritise spending toward targeted relief for vulnerable populations,” it reads.