The World Bank has downgraded its global economic outlook, citing Russia’s war in Ukraine, the threat of widespread food shortages, and concerns about the return of “stagflation,” a toxic mix of high inflation and sluggish growth that hasn’t been seen in more than four decades.
The 189-country anti-poverty organization forecasted that the global economy will grow by 2.9 percent this year. That would be down from 5.7 percent global growth in 2021 and the 4.1 percent it predicted in January for 2022.
“Recession will be difficult to avoid for many countries,” said World Bank President David Malpass.
The agency doesn’t foresee a much brighter picture in 2023 and 2024: It forecasts only 3% global growth in both years.
The World Bank has lowered its growth forecast for the United States to 2.5 percent this year, down from 5.7 percent in 2021 and the 3.7 percent it predicted in January. It lowered the growth forecast for the 19 European countries that use the euro currency to 2.5 percent this year, down from 5.4 percent last year and 4.2 percent in January.
The World Bank expects growth in China, the world’s second-largest economy after the United States, to slow to 4.3 percent this year from 8.1 percent last year. China’s zero-COVID policies, which included draconian lockdowns in Shanghai and other cities, effectively halted the economic activity. The Chinese government is providing aid to ease the economic pain.
The growth rate of emerging market and developing economies is expected to slow to 3.4 percent this year, down from 6.6 percent in 2021.
Russia’s invasion of Ukraine has wreaked havoc on the global oil and wheat trade, wreaking havoc on an economy that had been bouncing back from the coronavirus pandemic. As a result, already-high commodity prices have risen, even more, jeopardizing the availability of cheap food in developing countries.
Malpass stated, “There is a serious risk of malnutrition, deepening hunger, and even famine.”
Oil prices are expected to rise 42 percent this year, while non-energy commodity prices are expected to rise about 18 percent, according to the World Bank. However, it forecasts an 8% reduction in oil and other commodity prices in 2023. It compared the current rise in energy and food prices to the oil shocks of the 1970s.
“Additional adverse shocks will increase the possibility that the global economy will experience a period of stagflation reminiscent of the 1970s,” the agency warned in its new Global Economic Prospects report.
The threat of stagflation presents a conundrum for the Federal Reserve and other central banks: they risk precipitating a recession if they continue to raise interest rates to battle inflation. However, if they try to stimulate their economies, they risk raising prices and making inflation an even more difficult problem to solve.
The previous period of stagflation, according to the World Bank, necessitated rate increases so large that they threw the world into recession and triggered a series of financial crises in developing countries.
