The World Bank warned Tuesday that the
global economy faces the risk of dreaded "stagflation," with this
combination of high inflation and low growth tipping some countries into
recession.
“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
President David Malpass.
In its updated Global Economic
Prospects report, the World Bank slashed its forecast for global growth this
year to 2.9%, down from the 4.1% forecast it published in January.
The World Bank said most of the downgrade
is attributed to the Russian invasion of Ukraine, which it had not accounted
for in its previous forecast. The international body said it expects
“essentially no rebound” next year, projecting only 3% growth for the world in
2023.
The report pointed to the persistence
of high energy and food prices — combined with higher interest rates from
central banks around the world — for the gloomier outlook.
“The global outlook faces significant
downside risks, including intensifying geopolitical tensions, an extended
period of stagflation reminiscent of the 1970s, widespread financial stress
caused by rising borrowing costs, and worsening food insecurity,” the report
reads.
In the United States, the World Bank
downgraded growth prospects for 2022 to 2.6% from the 3.8% it expected in its
January forecast.
Although the downgrade does not imply
a recession, Wall Street firms have already taken note of recessionary
warnings from markets. And rapid price increases are already driving
conversations about recession at American dinner tables.
But the World Bank report highlights
the fact that recessionary concerns are not a uniquely American phenomenon.
‘Avert
the worst consequences’
The World Bank called on governments
around the world to “avert the worst consequences” of this economic slowdown.
The World Bank urged governments to
“cushion the blow” from rising energy and food prices, ease financial burdens
by expanding debt relief, and dampen the impact of the ongoing pandemic by
increasing vaccinations in low-income countries.
The report specifically discouraged
governments from imposing price controls, subsidies, or export bans amid high
inflation.
The World Bank also said central banks
like the Federal Reserve have a role to play as well.
The Fed, the Bank of England, and the
Bank of Canada are among major central banks raising short-term borrowing
costs to dampen demand that may be empowering businesses to lift prices.
“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,” said Ayhan Kose, Director of the
World Bank’s Prospects Group.
The challenge: governments and central
banks can only do so much to address supply chain disruptions.
With China’s zero-COVID policy and a
war happening in Eastern Europe, the inability of trade to flow freely around
the world risks keeping prices elevated as growth slows.
The World Bank report warned that if
geopolitical conditions do not lighten up, “global growth could be
substantially weaker.”
Source: finance.yahoo.com