World Bank warns global economy may suffer 1970s-style stagflation

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The global economy may be headed for years of weak growth and rising prices, a toxic combination that will test the stability of dozens of countries still struggling to rebound from the pandemic, the World Bank warned Tuesday.

Not since the 1970s — when twin oil shocks sapped growth and lifted prices, giving rise to the malady known as “stagflation” — has the global economy faced such a challenge.

The bank slashed its annual global growth forecast to 2.9 percent from January’s 4.1 percent and said that “subdued growth will likely persist throughout the decade because of weak investment in most of the world.”

Fallout from Russia’s invasion of Ukraine has aggravated the global slowdown by driving up prices for a range of commodities, fueling inflation. Global growth this year will be roughly half of last year’s annualized rate and is expected to show little improvement in 2023 and 2024.

This will be the sharpest slump after an initial post-recession rebound that the global economy has suffered in more than 80 years, the bank said. And the situation could get even worse: The Ukraine war could fracture global trade and financial networks, and soaring food prices could spark social unrest in importing countries.

“The risk from stagflation is considerable with potentially destabilizing consequences for low- and middle-income economies,” said David Malpass, president of the multilateral development institution, based in Washington. “ … There’s a severe risk of malnutrition and of deepening hunger and even of famine in some areas.”

If the worst outcomes materialize, global growth over the next two years could fall “close to zero,” he added.

Policymakers must act quickly to mitigate the Ukraine war’s consequences, help countries pay for food and fuel, and accelerate promised debt relief, while avoiding “distortionary policies” such as price controls and export bans, the bank said.

The global stagflation threat could have particularly dire effects in the developing world, where per-person income this year remains nearly 5 percent below pre-pandemic levels, the bank said.

Persistent inflation raises the chances that the Federal Reserve and other central banks will sharply increase interest rates to cool off demand, as happened in the late 1970s. That could lead to a more punishing global slump and financial crises in some emerging markets, the bank said.

Developing countries as a group owe a record amount to foreign banks and other financial institutions. One-quarter of the typical poor country’s debt burden now carries variable interest rates, up from 11 percent in 2010. So as inflation-fighting central banks tighten credit, repayment costs will rise for cash-strapped borrowing nations, the bank said.

Sri Lanka last month defaulted on its foreign debts for the first time, and Malpass said he expects other highly-indebted countries will do the same.

But the world’s top economies will not escape damage. Bank economists now expect the United States to grow this year by just 2.5 percent, down from the 3.7 percent rate they projected in January.

China, the world’s second-largest economy, will fall short of the government’s annual growth target, expanding by 4.3 percent. That would be Beijing’s worst full-year figure since 1990, excluding 2020 when the pandemic depressed activity.

The global economy was expected to struggle this year as it adjusted to the loss of pandemic-era government spending and ultralow interest rates. But Russia’s invasion of Ukraine — and continued coronavirus flare-ups — have made the situation tougher.

The price of a barrel of Brent crude oil has jumped to nearly $120, up almost 50 percent this year. And wheat has staged a similar rally, leading the bank to call for urgent action to ease “worldwide food shortages.”

The bank’s downbeat forecast adds to concerns about global weakness. Most major stock markets, including those in the United States, are in the red so far this year. And the bank’s sister institution, the International Monetary Fund, lowered its global forecast in April.

Still, today’s global economy differs from the 1970s in important ways, the bank said. The run-up in commodity prices, though painful, pales alongside what happened almost five decades ago. Oil prices quadrupled in 1973-74 before doubling again in 1979-80 amid the overthrow of the shah of Iran.

Adjusted for inflation, today’s oil prices are one-third below their 1980 level, the bank said.

Read More: World Bank warns global economy may suffer 1970s-style stagflation

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