World Bank warns of risk of stagflation, says outlook could deteriorate amid rising inflation

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On Tuesday, the World Bank cut its forecast for global growth from 5.7% in 2021 to 2.9% for the year 2022, citing that the Russian invasion of Ukraine has amplified the slowdown in the global economy and compounded the damage caused by COVID-19. 19 pandemic as many countries now face recession.

This has ultimately led to an increased risk of stagflation, with potentially adverse consequences for middle-income and low-income economies, the World Bank said in its latest Global Economic Outlook report, warning that the outlook could worsen further. aggravate.

World Bank President David Malpass 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 difficult to avoid.

The pace of global growth between 2021 and 2024 is expected to slow by 2.7 percentage points, more than double the deceleration seen between 1976 and 1979. The report also notes that global inflation is expected to moderate next year, but that it is likely to remain above inflation targets. in many economies.

“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 address capital misallocation and inequality,” Malpass added.

The World Bank has also revised India’s economic growth forecast for the current fiscal year to 7.5% for the fiscal year 2022-23 (April 2022 to March 2023). In April, he had reduced the forecast from 8.7% to 8%.

“Growth in India is expected to fall to 7.5% in FY 2022/23 as headwinds from rising inflation, supply chain disruptions and geopolitical tensions offset economic momentum. the recovery of service consumption after the pandemic,” the World Bank said in its latest report.

According to the report, growth in advanced economies is expected to slow to 2.6% in 2022 and 2.2% in 2023 after reaching 5.1% in 2021. Growth in the United States is expected to reach 2.5% in 2022 , compared to 5.7% previously. % in 2021, while the Eurozone is expected to grow by 2.5% after 5.4% last year. China’s economy grew 4.3% in 2022 after growing 8.1% in 2021.

In addition, Ukraine’s economy is expected to contract by 45.1% and Russia’s by 8.9%. Growth in the regional economies of Europe and Central Asia, excluding Western Europe, is expected to contract 2.9% after growing 6.5% in 2021.

Emerging markets and developing economies grew by 3.4% in 2022, compared to 6.6% in 2021. They observed an annual average of 4.8% from 2011 to 2019.

The report further adds that global growth is expected to be significantly lower than the 4.1% forecast in January 2022. “It is expected to hover around this pace in 2023-24, as the war in Ukraine disrupts activity, and In the short term, pent-up demand fades and fiscal and monetary policy easing is withdrawn.Due to the damage caused by the pandemic and war, the level of per capita income in developing economies this year will be close to 5% below its pre-pandemic trend,” he added.

Ayhan Kose, Director of the World Bank’s Prospects Group, said: “Developing economies will need 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 to the stagflation of the 1970s, with a focus on how stagflation could affect emerging markets and developing economies.

“Clearly communicating monetary policy decisions, leveraging credible monetary policy frameworks, and protecting central bank independence can effectively anchor inflation expectations and reduce the degree of policy tightening needed to achieve the desired effects on the economy. inflation and activity,” Kose added.

According to the World Bank report, the current conjuncture resembles the 1970s in three key respects: persistent supply-side disruptions fueling inflation, preceded by very accommodative monetary policy in major economies, the outlook for growth and the vulnerabilities facing emerging and developing economies. regarding the tightening of monetary policy.

The report also provides insight into how the war in Ukraine has led to soaring prices for a wide range of energy-related commodities, as higher energy prices would reduce incomes, increase production costs, tighten financial conditions and constrain macroeconomic energy policy. importing countries.

It further underlines the need for decisive global and national political action to avoid the worst consequences of the war in Ukraine for the global economy. “Furthermore, policymakers should refrain from distorting policies such as price controls, subsidies and export bans, which could aggravate the recent rise in commodity prices. In the challenging environment of higher inflation, weaker growth, tighter financial conditions and limited fiscal space, governments will need to redefine their spending in favor of targeted relief for vulnerable populations. “, we read.

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