Washington-based bank warns due to inflation surge and stagflation risk
The World Bank has slashed its global growth forecast by nearly a third to 2.9pc for 2022, warning that Russia’s invasion of Ukraine has compounded the damage from the Covid-19 pandemic, and many countries now faced recession.
The war in Ukraine had magnified the slowdown in the global economy, which was now entering what could become “a protracted period of feeble growth and elevated inflation”, the World Bank said, warning that the outlook could still grow worse.
The bank’s president David Malpass said global growth could fall to 2.1pc in 2022 and 1.5pc in 2023, driving per capita growth close to zero, if downside risks materialised.
Mr Malpass, a former Trump administration official, said global growth was being hammered by the war, fresh Covid lockdowns in China, supply-chain disruptions and the rising risk of stagflation – a period of weak growth and high inflation last seen in the 1970s.
“The danger of stagflation is considerable today,” Mr Malpass wrote.
“Subdued growth will likely persist throughout the decade because of weak investment in most of the world. With inflation now running at multi-decade highs in many countries and supply expected to grow slowly, there is a risk that inflation will remain higher for longer.”
Between 2021 and 2024, the pace of global growth is projected to slow by 2.7 percentage points, Mr Malpass said, more than twice the deceleration seen between 1976 and 1979.
The report warned that interest rate increases required to control inflation at the end of the 1970s were so steep that they touched off a global recession in 1982 and a string of financial crises in emerging market and developing economies.
Ayhan Kose, the director of the World Bank unit that prepares the forecast, said there was “a real threat” that faster than expected tightening of financial conditions could push some countries into the kind of debt crisis seen in the 1980s.
While there were similarities to conditions back then, there were also important differences, including the strength of the dollar and generally lower oil prices, as well as generally strong balance sheets at major financial institutions.
To reduce the risks, Mr Malpass said, policymakers should work to coordinate aid for Ukraine, boost production of food and energy, and avoid export and import restrictions that could lead to further spikes in oil and food prices.
He also called for efforts to step up debt relief, warning that some middle-income countries were potentially at risk; strengthen efforts to contain Covid; and speed the transition to a low-carbon economy.
The bank’s forecast for 2022 growth is a cut of 1.2 percentage points from its January forecast, and it said growth was likely to hover near that level in 2023 and 2024.
It said global inflation should moderate next year but would likely remain above targets in many economies.